Council Tree Investors Inc v. FCC , 863 F.3d 237 ( 2017 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 15-3754
___________
COUNCIL TREE INVESTORS, INC.,
Petitioner
v.
FEDERAL COMMUNICATIONS COMMISSION;
UNITED STATES OF AMERICA,
Respondents
__________
On Petition for Review of Orders of
the Federal Communications Commission
(FCC 15-80 & DA 15-1183)
___________
Argued March 7, 2017
Before: SMITH, Chief Judge, HARDIMAN, and KRAUSE,
Circuit Judges.
(Filed: July 13, 2017)
Kevin Russell [Argued]
Goldstein & Russell
7475 Wisconsin Avenue, Suite 850
Bethesda, MD 20814
Attorney for Petitioner
Jacob M. Lewis
Clifford G. Pash, Jr. [Argued]
Federal Communications Commission
445 12th Street, S.W.
Washington, DC 20554
Attorneys for Respondent Federal Communications
Commission
Robert B. Nicholson
Robert J. Wiggers
United States Department of Justice, Appellate Section
950 Pennsylvania Avenue, N.W.
Washington, DC 20530
Attorneys for Respondent United States of America
Carl W. Northrop
Telecommunications Law Professionals
1025 Connecticut Avenue, N.W., Suite 1011
Washington, DC 20036
Attorney for Amicus Petitioners
____________
OPINION OF THE COURT
____________
2
HARDIMAN, Circuit Judge.
This case involves the regulation of electromagnetic
spectrum by the Federal Communications Commission. In
1993, Congress amended the Communications Act of 1934,
47 U.S.C. §§ 151–622, to allow the FCC to grant spectrum
licenses through a system of competitive bidding. 47 U.S.C.
§ 309(j)(1), (3). The Act requires the FCC to pursue certain
objectives required by statute, including
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.
47 U.S.C. § 309(j)(3)(B). In FCC parlance, these groups are
known as designated entities (DEs). 47 C.F.R. § 1.2110(a). At
this time, the FCC’s “principal means of fulfilling the
statutory objectives for DEs” is to confer bidding credits upon
small and rural businesses that participate in FCC auctions.
Updating Competitive Bidding Rules, 80 Fed. Reg. 56764,
56766 (September 18, 2015). Bidding credits operate as a
discount on the spectrum DEs purchase, allowing them
sometimes to outbid companies that make higher bids.
3
Council Tree Comm’ns, Inc. v. FCC, 619 F.3d 235, 239 (3d
Cir. 2010) (Council Tree III).1
The question presented here is whether the FCC acted
legally when it limited the bidding credits available to DEs.
We hold that it did.
I
In 2014, the FCC began a rulemaking proceeding in
advance of a special 2016–17 Incentive Auction of “scarce
low-band radio spectrum.” FCC Br. 13. According to its
Notice of Proposed Rulemaking, the FCC thought it
appropriate to
revisit the Commission’s small business
eligibility rules and evaluate whether to
rebalance our competing goals in order to
provide small businesses additional
opportunities to gain access to new sources of
capital necessary for participation in the
provision of spectrum-based services in today’s
marketplace, while guarding against unjust
enrichment of ineligible entities.
1
Like the parties, we refer to our 2010 decision as
Council Tree III as it was preceded by two prior challenges to
the same rulemaking. See Council Tree Commc’ns v. FCC,
324 F. App’x 3 (D.C. Cir. 2009) (Council Tree II); Council
Tree Commc’ns v. FCC, 503 F.3d 284 (3d Cir. 2007)
(Council Tree I).
4
29 FCC Rcd. 12426 (2014), 2014 WL 5088195 at *7. The
FCC later indicated in April 2015 that it was specifically
considering a proposal to cap available DE credits within
“any given auction” in order to “ensure that DEs cannot
acquire spectrum in a manner that is wildly disproportionate
to the concept of a small business.” Request for Further
Comment, 30 FCC Rcd. 4153, 4158 (2015) (citations
omitted).
On July 21, 2015, the FCC concluded its rulemaking
and released a final Report and Order entitled In the Matter of
Updating Part I Competitive Bidding Rules, et al., 30 FCC
Rcd. 7493 (2015) (hereinafter Order), published at 80 Fed.
Reg. 56764 (Sept. 18, 2015). In the Order, the FCC issued a
series of new rules, some designed to assist DEs and others
intended to rein in perceived abuses of the DE program. New
rules designed to assist DEs included: “greater flexibility” as
to certain eligibility requirements, 30 FCC Rcd. at 7504, the
creation of a “new bidding credit for eligible rural service
providers,” id. at 7521, and raising the revenue ceiling to
qualify for DE credits. New measures intended to curb abuses
included: revenue attribution rules designed to “restric[t]
certain large carriers or companies from . . . exercising
control over a DE,” id. at 7511, limitations on joint bidding
arrangements, and the rule at issue in this case: caps on
bidding credits.
Though the FCC determined generally that small
business credits should be capped in future auctions, it did not
mandate a particular dollar value for those caps. Rather, it
determined that any future cap would be at least $25 million
per auction. In doing so, the FCC noted that most DEs in
three recent auctions would not have qualified for more than
$25 million in bidding credits. The FCC also determined that
5
the $25 million minimum would “allow bona fide small
businesses” to participate meaningfully in auctions,
particularly “taking into account the changes we make today
to increase a DE’s flexibility in other respects.” Id. at 7541.
Looking to the special 2016–17 Incentive Auction, the FCC
decided to cap bidding credits at $150 million (well over the
$25 million minimum) because of the “significant difference
in value between low-band and higher-band spectrum.” Id. at
7545. Based on data from prior auctions,2 the FCC predicted
that the “cap would give small businesses a meaningful
opportunity to compete” for available licenses in both large
and small areas. Id.
On November 13, 2015, Appellant Council Tree—a
DE which had opposed caps during the rulemaking—filed a
petition in this Court for review of the Order, claiming
violations of the Administrative Procedure Act and the
Communications Act.
II
We have jurisdiction over Council Tree’s petition
under 47 U.S.C. § 402(a) and 28 U.S.C. § 2342(1). We
2
The FCC noted that in the three recent auctions
previously discussed, nearly all DE bids would have been
unaffected by this cap. Furthermore, reviewing the most
recent of those three auctions and making appropriate price
adjustments, the FCC predicted “a $150 million cap would
not affect a 15 percent or 25 percent bidding credit discount
for any individual license bid except in the top two markets
(NY and LA).” 30 FCC Rcd. at 7545.
6
review “agency action, findings, and conclusions” to
determine whether they are “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.” 5 U.S.C.
§ 706(2). Agency action is not arbitrary and capricious when
the agency “examine[d] the relevant data and articulate[d] a
satisfactory explanation for its action including a rational
connection between the facts found and the choice made.”
Council Tree III, 619 F.3d at 250 (quoting Motor Vehicle
Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins. Co., 463
U.S. 29, 43 (1983)).
III
Council Tree seeks review of the FCC’s Order for
three reasons. First, it claims the FCC’s explanation of its
new rule ignored its statutory obligation to promote
competition and avoid excessive concentration of licenses.
Second, it argues the imposition of any cap on bidding credits
was arbitrary and capricious because the FCC lacked
evidence that the DE designation was being abused. Third, it
contends the FCC set both its general minimum cap and the
specific Incentive Auction cap in an arbitrary and capricious
manner because these particular caps are unsupported by the
data. We examine each argument in turn.
A
In designing its competitive bidding process, the FCC
is bound by statute to “promot[e] economic opportunity and
competition . . . by avoiding excessive concentration of
licenses.” 47 U.S.C. § 309(j)(3)(B). Council Tree claims the
FCC violated its obligation to promote these two objectives
by not “considering the caps’ anti-competitive effects” or
“explaining the agency’s reasoning” in how it balanced
7
concern for competition against its other statutory objectives.
Council Tree Br. 28.
In Council Tree III, we considered a similar challenge
to the FCC’s imposition of a rule restricting the ability of DEs
to lease or resell their spectrum capacity, which also was
aimed at addressing abuse of the DE designation. See Council
Tree III, 619 F.3d at 251. As part of its challenge in that case,
Council Tree claimed the FCC had violated its statutory duty
to promote “economic opportunity and competition . . . by
avoiding excessive concentration of licenses and by
disseminating licenses among a wide variety of applicants”—
since such a rule was likely to impede DEs’ profits and
growth. Id. at 249 n.7 (alteration in original) (quoting 47
U.S.C. § 309(j)(3)(B)).
We rejected that argument. We noted the FCC’s new
policy served other statutory objectives, including its
obligation to “recover a portion of the value of the spectrum
and prevent unjust enrichment.” Id. (citing 47 U.S.C.
§ 309(j)(3)(C)). Citing both “the general agreement that the
DE program can be abused, [and] the continuing participation
by DEs in auctions held under the new rules,” we could not
“conclude that the FCC has failed to promote small-business
participation at all.” Id. We also recognized that the
administrative “record reflect[ed] the FCC’s cognizance of
the capitalization issue, and that it engaged in a line-drawing
exercise in an attempt to prevent unjust enrichment without
unduly impairing DEs’ capital access.” Id. at 251–52.
The FCC’s Order at issue in this appeal did more than
take cognizance of the issue of DEs’ competitiveness. It
reviewed data from past auctions before concluding that the
cap would not significantly impair the ability of DEs (in the
8
aggregate) to compete in auctions. See, e.g., 30 FCC Rcd. at
7541 (explaining the cap floor with reference to prior DE
auction participation); id. at 7545–46 (justifying the $150
million cap with reference to past auction results and pricing
in different markets). The FCC also noted its bidding credit
cap was paired with regulations that increased flexibility for
DEs seeking to obtain capital, bolstering its conclusion that
DEs would still be able to compete in the spectrum license
market. See id. at 7541 (referring to the adjusted policy of
when an investor’s revenue will be attributed to a DE,
detailed at 30 FCC Rcd. 7502–21). The FCC therefore not
only set forth a policy that is likely to allow continued
participation by DEs, but also rationally explained why it
expected no significant loss of DE participation. As such,
under the standard we articulated in Council Tree III, the FCC
did not fail to consider DEs’ ability to compete for licenses.
Council Tree responds that the statements just noted
did not relate to the FCC’s obligations to promote
competition or avoid excessive concentration of licenses at
all. Rather, they related only to the FCC’s obligation to
“promote economic opportunity” for DEs. Council Tree Br.
37. This strikes us as an artificial distinction. The relevant
statutory language (47 U.S.C. § 309(j)(3)(B)) links these
goals together because they are inextricable. When the FCC
helps small businesses compete in the marketplace against
large telecommunications providers, it necessarily increases
competition for licenses and reduces license concentration.
What Council Tree seems to suggest is that an
appropriate analysis by the FCC would not have assessed
only whether DEs could continue to participate at near-
current levels, but also would have considered whether their
current level of competition is adequate to challenge our
9
telecommunications quadropoly. See, e.g., Council Tree Br.
15 & n.31 (referring to the “Big Four” of AT&T, Verizon,
Sprint, and T-Mobile); id. at 37 (explaining that “the caps’
effect on the amount of spectrum,” rather than the number of
DEs affected by the cap, is “far more relevant” to assessing
competition); id. at 38 (using auction data to show a mid-level
DE capped at the minimum of $25 million in bidding credits
would more than exhaust its credits to win a single license in
most major markets). The problem with this approach is that
it adds requirements to the statute not found in the text. The
FCC’s statutory obligation is to ensure that its bidding system
promotes competition and the broad dissemination of
licenses, while also abiding by its obligations to, inter alia,
“recove[r] for the public a portion of the value” of the
spectrum licenses sold, avoid “unjust enrichment,” and ensure
efficient use of spectrum. 47 U.S.C. § 309(j)(3)(B)–(D). As
much as Council Tree would like the FCC to not merely
promote, but maximize, competition against the Big Four,
§ 309 creates no such obligation. And insofar as Council Tree
comes close to defining “competition” as “competition to [the
market share of] incumbents in large urban markets, or on a
regional or national scale,” Council Tree Br. 37, we will not
insert this limiting language into the statute. See Alabama v.
North Carolina, 560 U.S. 330, 352 (2010) (“We do not—we
cannot—add provisions to a federal statute.”)
The FCC’s Order: (1) preserved a significant bidding
credit program; (2) reviewed data suggesting DE participation
would continue despite the proposed caps; and (3) altered
other rules to make DEs more competitive. We therefore
“cannot conclude that the FCC has failed to promote small-
business participation at all,” Council Tree III, 619 F.3d at
249 n.7, or that the Order at issue in this case failed to
10
promote the FCC’s dual objectives of competition and
reduced concentration of licenses, see 47 U.S.C.
§ 309(j)(3)(B).
B
Council Tree argues that even if the FCC considered
its statutory objectives under 47 U.S.C. § 309(j), it violated 5
U.S.C. § 706 by arbitrarily and capriciously imposing caps on
bidding credits. According to Council Tree, the FCC was
chasing a phantom because its Order provides no evidence
that DEs are “gaming the rules” or that DE investors are
“unjustly enriched.” Council Tree Br. 28–29.
It is true that the FCC’s Order did little to assess the
scope and substantiality of the harm posed by large
companies abusing the DE process. See 30 FCC Rcd. at
7540–41 (discussing concern for “discourag[ing] entities that
seek to game the Commission’s rules at taxpayer expense”
without estimating that expense). However, as we stated in
Council Tree III, there is at least “general agreement that the
DE program can be abused” by larger companies. 619 F.3d at
249 n.7. Council Tree itself acknowledges, though it
minimizes, complaints made to the FCC about one
telecommunications company—DISH—abusing the DE
program in a recent auction by allegedly exercising control
over DE bidders. And the FCC articulated a concern
regarding increased incentives for abuse, noting “that, as the
cost of spectrum continues to grow, the incentives for
structuring transactions to obtain bidding discounts increase[]
significantly.” 30 FCC Rcd. at 7540.
In reviewing the FCC’s explanation for imposing its
caps, we do not ask whether it would persuade us to impose
11
the same policy. We instead consider whether the agency
“examine[d] the relevant data and articulate[d] a satisfactory
explanation for its action including a rational connection
between the facts found and the choice made.” Council Tree
III, 619 F.3d at 250 (quoting State Farm, 463 U.S. at 43).
Here, the FCC identified a threat (abuse of the DE
designation) to one of its statutory objectives (preventing
unjust enrichment), and adopted a prophylactic measure. We
see no reason to bar such measures as a general matter. See
Stillwell v. Office of Thrift Supervision, 569 F.3d 514, 519
(D.C. Cir. 2009) (“[A]gencies can, of course, adopt
prophylactic rules to prevent potential problems before they
arise.”).
It would, of course, be preferable to have some
estimate of the unjust enrichment that would have been
anticipated had the FCC not capped bidding credits. And
perhaps a prophylactic rule could be irrational if an agency
(1) made no effort to measure its benefits, and (2) its impact
on other statutory obligations was also unassessed (or
negative). See, e.g., Prometheus Radio Project v. FCC, 652
F.3d 431, 469-72 (3d Cir. 2011). But as explained in Part III-
A, supra, the FCC articulated a rational explanation, based on
relevant data, as to why it believed its bidding credit caps
would have only a minor impact on DEs’ ability to compete
in the spectrum license marketplace.
Though Council Tree objects that the FCC did not
truly balance its obligations here, Council Tree III is again
instructive. In that case we found the question of whether the
rule restricting spectrum leasing was arbitrary and capricious
“a close one” on first review, because “the FCC made few
factual findings on the impact of the new rules on DE
12
financing.” Council Tree III, 619 F.3d at 251. But despite the
lack of concrete findings, we found “enough consideration of
[the negative impact on] DE capitalization to pass the
arbitrary and capricious threshold.” Id. at 253.
We reached this conclusion for two reasons. First, the
FCC’s notice of proposed rulemaking “reflect[ed] the FCC’s
cognizance of the capitalization issue” based on its stated
concern for a “delicate balance” between avoiding abuse and
allowing small businesses to access flexible sources of
capital. Id. at 251–52 (citation omitted). Second, we noted
that predictions about the future impact of rules were
“inherently speculative.” Id. at 252. Under our “necessarily
deferential” review of “line-drawing determinations,” id. at
250–51 (citation omitted), we found it unnecessary to demand
more despite the FCC’s consideration being “neither as clear
nor as thorough as would be ideal,” id. at 252–53.
Unlike the rulemaking in Council Tree III, the FCC in
this matter made factual findings on the likely impact of this
new rule on DE auction competitiveness. Whether the FCC is
right or wrong that the impact will be minimal, we cannot say
its prediction is irrational based on the relevant data of record.
The FCC’s balancing here was not arbitrary and capricious.3
3
As a subsidiary argument, Council Tree suggests that
the Order actually reflects an FCC determination “that DEs
should be nothing more than bit players in the wireless
industry.” Council Tree Br. 28. Because “[t]he caps only
apply to businesses the FCC has already deemed to be bona
fide DEs,” Council Tree reasons that “there can be no claim
that the caps are necessary to limit bidding credits to the kinds
13
C
Finally, we consider Council Tree’s challenge to the
specific caps imposed. Council Tree raises three related
arguments contesting the rationality of these caps, none of
which we find persuasive.
First, Council Tree complains that focusing on the
number of affected DEs, instead of on their ability to break
into major markets, is a poor way to measure the impact of a
cap on competition. As discussed, we review the FCC’s
reasoning to confirm that it used relevant data—not that it
applied the most rigorous analysis available. Here, the FCC
reviewed relevant auction data before evaluating whether the
caps on bidding credits would reduce competition.
Second, Council Tree argues that DEs were so
hampered by old rules in two of the auctions that those
of small businesses Congress had in mind.” Id. at 45. Leaving
aside the term “necessary,” which is irrelevant to a review for
rationality, the FCC’s Order explains that its cap acts as “an
important additional safeguard—or backstop” when its other
measures for assessing bona fide DE status have failed. 30
FCC Rcd. at 7540. Council Tree’s related argument on
efficacy—including that the penalties in place are sufficiently
“extensive,” Council Tree Br. 49, and that the caps “do not
eliminate the alleged incentives for gamesmanship,” id. at
51—are by and large policy disagreements that do not
undercut the rationality of the FCC’s determination that
bidding credit caps would serve as a safeguard against
gamesmanship.
14
auctions should not have been used in estimates, and that
even the third (ostensibly adequate) auction cannot be
compared to the “once-in-a-generation” Incentive Auction.
Council Tree Br. 58 (quoting Order ¶ 95). Here again, we
review only for the use of relevant, not perfect, data. Council
Tree III, 619 F.3d at 250. And Council Tree has not offered,
in briefing or at argument, any alternative data that the FCC
should have considered in its estimates.
Finally, Council Tree argues that the FCC’s
justifications in support of the $25 million minimum on
bidding credit caps and its $150 million cap for the Incentive
Auction would be as consistent with limits of “$200 million,
$500 million, or more,” making its explanation inadequate.
Council Tree Br. 58. In support of this argument, Council
Tree points to Bluewater Network v. EPA, where the Court of
Appeals for the D.C. Circuit ordered the EPA to clarify the
basis of its determination that only 70% of new snowmobiles
in eight years could be fitted with emission reduction
technology. 370 F.3d 1, 21 (D.C. Cir. 2004). The Bluewater
court held the EPA’s statements regarding cost concerns for
manufacturers—that design takes time and manufacturers
have finite resources—were too vague. See id. (“The
Agency’s explanation of its reasoning could just as well
support standards corresponding to 30% or 100% application
in that time frame.”). By contrast, the FCC’s analysis here
would not be consistent with a bidding credit cap of any
value. For example, the FCC rejected caps of $10 million and
$25 million for the Incentive Auction as less consistent with
historical bidding thresholds. While the FCC did not
explicitly reject any upper boundary as too high, we note that
it set the $150 million cap such that, while “nearly all of the
small businesses that claimed bidding credits . . . would have
15
fallen under” the cap, 30 FCC Rcd. at 7545, two successful
DEs in one of the previous auctions would have exceeded it.
Council Tree admits those two DEs, allegedly “financed in
large part by investments from DISH,” prompted the concern
that led to this rulemaking, allowing us to infer grounds for an
upper bound in the record. Council Tree Br. 20. Even
excluding that inference, however, the sources underlying the
decision here are much more concrete than those in
Bluewater. Besides, setting a reasonable cap is a
quintessential “line-drawing determination[]” calling for
“necessarily deferential” review in this Court. Council Tree
III, 619 F.3d at 250–51 (citation omitted).
In sum, the FCC made a “rational connection” between
“relevant data” and the caps on bidding credits under review.
State Farm, 463 U.S. at 43.
IV
For the reasons stated, we hold that the FCC’s Order
dated July 21, 2015 and published on September 18, 2015
was not arbitrary, capricious, an abuse of discretion, or
otherwise contrary to law. We will deny Council Tree’s
petition for review.
16