Appeals Court To Rule On Wireless Auction Delay Bid

PHILADELPHIA -(Dow Jones)- A federal appeals court is expected to rule quickly on whether to delay a high-stakes auction of advanced wireless services spectrum, one of the largest such sales in history.

Now set for Aug. 9, the Federal Communication Commission's Auction 66 is expected to draw bids totaling from $8 billion to $15 billion and involve fierce competition among companies in the wireless industry, and those that want in.

The U.S. Third Circuit Court of Appeals heard arguments Wednesday on a bid to delay the auction so that small businesses that say they have been unfairly shut out get a chance to enter the competition.

"This is an important case and we want to rule on it with all information available and as promptly as possible," U.S. Circuit Judge Marjorie Rendell said at the conclusion of the arguments.

Instead of holding up the auction, the court could decide to suspend rules issued by the FCC just weeks before the bids were due, rules that small and minority businesses say have cut off their access to the cash they need to get into the competition.

Council Tree Communications Inc., Bethel Native Corp. and the Minority Media and Telecommunications Council went to the Third Circuit in an emergency bid to stay the auction while they seek to overturn the rules, which they say will put the so-called "designated entity" industry out of business.

Designated entities are qualified small or minority owned businesses that are entitled to get discounts of as much as 25% in bidding on public airwave spectrum.

At Council Tree's urging, the FCC for months debated ways to curb abuses of the system by big telecommunications companies and other large players.

The suspicion was that well-heeled players were buying spectrum from designated entities that operated largely as fronts to grab the discount and make some fast money.

However, Council Tree says, the rules that resulted took the small wireless bidders by surprise, and tipped them right off the playing field for Auction 66.

One change requires bidders essentially to agree to hold on to what they buy for 10 years. Another limits the amount of spectrum they are allowed to lease to others.

"These rules affect the very lifeblood of the designated entity industry," Dennis Corbett, attorney for Council Tree told the court.

Private equity investors and venture capitalists will shy away from investments that have a required 10-year horizon, he said. Designated entities that need to have flexible business plans will not be free to say how much spectrum they can afford to develop, and how much they should lease out to fund the development, Corbett said.

When the new rules kicked in, Council Tree's finance sources walked, he said, leaving the company unable to fund a bid and with no access to capital for its plan to retail wireless services in Alaska.

T-Mobile USA, a unit of Deutsche Telekom, and an industry group dominated by large telecommunications companies asked the court Wednesday not to delay the auction, saying there's too much at stake in the long-planned sale.

"This is the first major infusion of spectrum to this industry in 10 years," said William T. Lake, attorney for T-Mobile and CTIA - The Wireless Association. "There are ongoing businesses with millions of customers who need this spectrum."

If the court delays the rules but lets Auction 66 go forward as scheduled, the T-Mobile lawyer warned, those injured by the revocation of the rules will sue for the damage to their business plans.

"It would just substitute one litigation for another," Lake said.

Council Tree's Corbett, however, said a brief delay to line up funding sources would let the auction go forward without much harm. If the auction is held and the designated entity rules are later found improper, he said, it would create "a mess."

The core of Council Tree's case is an allegation that the rules the FCC issued were far afield from the proposed changes industry players reviewed during the comment period.

Instead of targeting big telecommunications players that had the ability to squash competition by buying out potential rivals in the ranks of designated entities, the FCC hit out at all funding sources that planned to get out of the business in under ten years, Corbett said.

Samuel Feder, attorney for the FCC, said the favored investment strategies of Wall Street sources should not drive rule changes meant to preserve the legitimacy of the designated entity discounts.

"We know the investment bankers don't like these rules because it limits their ability to make money," Feder said.

U.S. Circuit Judge Thomas Ambro, however, questioned Feder closely on whether the FCC gathered evidence on what its new rules would do to access to capital.

In order to grant a stay of the rules or of the auction, or both, the court must find Council Tree has a good chance of winning and that it will be irreparably harmed if the sale goes forward under the old rules.

In court papers, Council Tree suggested embarrassment over revelations that Wall Street financier Mario Gabelli had allegedly set up sham designated entities to profit from FCC auctions led the agency to overreach in its rules.

A court in New York is scheduled to consider a proposed settlement of a lawsuit over Gabelli's role in past auctions on Thursday.

-By Peg Brickley, Dow Jones Newswires; 302-656-8830

(END) Dow Jones Newswires "

Posted to the site on 28th June 2006