DISH DE Debacle Part 3: What Happens Now?

In Part 1, I explained at considerable length what happened with the whole DISH DE Debacle and Why DISH owes the FCC $3.3 billion despite not having actually violated any rules. In Part 2, I explained how the FCC came to the conclusions it came to in the Order denying SNR and Northstar their DE credits but granting them their licenses.

 

Here, I will explain why (as readers have no doubt noticed) I have sympathy for DISH and why I would have done things differently – although I can’t say Wheeler was wrong. Heck, as I’ve noted many times before, I have the luxury of being neither a Commissioner nor a party with skin in the game. So take my Monday morning quarterbacking for what it’s worth.

 

More below . . .

So What Do You think The FCC Should Have Done?

 

As an initial matter, allow me to clarify why my personal sympathy happens to lie with DISH here. Some of it is just that I’m a lawyer and geek enough to admire a cool rules hack. I am minded of Justice Scalia’s dissent in the Aereo case, responding to the majority opinion being driven by the “evident feeling that what Aereo is doing . . . ought not to be allowed,” nevertheless:

 

what we have before us must be considered a “loophole” in the law. It is not the role of this Court to identify and plug loopholes. It is the role of good lawyers to identify and exploit them, and the role of Congress to eliminate them if it wishes.

 

What makes this somewhat more complicated is that, unlike in Aereo, it is the FCC that accidentally created the “loophole” and therefore the FCC that has the responsibility to fix it. Nevertheless, it is hard to walk away from this without feeling that if it were $300 million instead of $3.3 billion the decision would have gone the other way. Since DISH had no way of knowing the auction valuations would run this high, it seems a little unfair to penalize them for that.

 

Chairman Wheeler, not being a lawyer, probably does not share my admiration of a good legal hack, and I’ll concede that admiration for a good hack is no reason to affirm a decision. But it does go to the point that viewing this as some sort of sleazy act of moral turpitude and deception (which seems to drive much of the professed outrage) is as irrational as admiring it as a cool legal hack. This is what companies do, and DISH was not in the least deceptive (as the FCC quite properly found). To the contrary, as the Order concludes in response to the allegation that DISH had actually violated any auction rules or lacked the “moral character” to hold an FCC license, DISH hid nothing. They fully declared everything at the proper time and cooperated fully with any request for information by staff, quite confident that their interpretation of the law was correct. The fact that DISH bet wrong in a complicated case hardly makes them nefarious villains.

 

Additionally, as someone around in the 00s who remembers the shenanigans the major carriers were up to – particularly the Alaskan Native case on which DISH principally relies – it really does feel like there is one rule for AT&T and another for DISH. The Alaskan Native DE was the worst sort of Potemkin Village-like sham, with AT&T effectively running everything and treating the DE like a wholly owned affiliate. But, as was the custom at the time (2002) when the FCC was not terribly interested in enforcement, AT&T got away with a slap on the wrist and a finger wag.

 

If I were Wheeler, I’d argue that it was a different time and that one of his most important goals as Chairman is to put teeth and meaning into the FCC’s interpretation of its rules. We can’t go back in time and re-do Alaskan Native, but we shouldn’t keep turning a blind eye to cases where a company is not even truly independent on paper, let alone in reality. And as someone who pushes the FCC to actually enforce its rules and not turn a blind eye to legal form over substance, I concur. But as someone who has been frustrated in the past over the deliberate and willful blindness over corporate structure and corporate control, it leaves a somewhat sour taste to see the FCC enforce against a potential new entrant when it never enforced the rule against the incumbents.

 

Which is why, as I noted above, I would have preferred that the Commission had given DISH, SNR and Northstar the opportunity to alter their agreements so as to eliminate the de facto control. Given that DISH had good arguments from precedent and the history of FCC benign neglect on DEs that favored the existing incumbents, it seems somewhat harsh to make them cough up $3.3 billion for guessing wrong. But no one requested such relief, and that’s how it goes sometimes.

So What Happens Now?

 

Excellent question. As I noted in Part 1, DISH, on behalf of SNR and Northstar, needs to come up with $3.3 billion by September 18, or come up with a Letter of Credit that extends it out another 6 months. DISH can appeal the denial of the credit to the D.C. Circuit.

Likewise, the parties that requested the Commission either give them the licenses or hold a new auction can appeal the denial of this relief to the D.C. Circuit.

I don’t think the parties that filed the Petitions to Deny have much of a case to try to overturn the auction. While parties are entitled to a fair auction, the FCC determined that is what the Petitioners got. Again, DISH, SNR and Northstar did not violate any auction rules. Yes, DISH bid as if it were going to get a DE credit, which gave it additional betting courage, but so what? As for the claims by Petitioners that the use of the bidding consortia advantaged DISH, this is true. But since the rules permitted DISH, SNR and Northstar to form a bidding consortia, and they properly declared it in advance, there is no violation that would require the FCC to rerun the auction. The fact that someone could come up with a clever rules hack does not make the bidding process unfair in the legal sense.

 

What happens if DISH sues is more interesting. Again, it turns on whether the court agrees with the FCC that the denial of the DE credit is an application for a benefit wholly separate from the auction, and which DISH had no reasonable expectation of receiving, or whether the court agrees with DISH that the Commission is effectively punishing DISH after the fact for behavior which followed the letter of the law and past Commission precedent. If the court agrees with the FCC’s characterization, then DISH loses. This is classic deference to the agency adjudication. The agency explained why it was denying the DE credit and distinguished previous precedent that arguably holds to the contrary (I’ll get to that in a minute).

 

OTOH, if the court agrees with DISH that the FCC is effectively fining it for violating the DE rules, even if the court agrees with the substance of the FCC’s analysis, it raises a problem of retroactivity. The relevant case is Trinity Broadcasting of Florida v. FCC. There, a TV licensee claimed an exception to the ownership rules under an FCC regulation permitting the licensee to exceed the ownership limit for “minority owned” stations. The FCC concluded that the additional station was not “minority owned” under the regulations as they existed then. In addition to requiring divestment of the interest, the FCC fined the licensee for violating the rules.

 

The DC Circuit upheld the FCC’s determination as reasonable, and upheld the requirement for the owner to divest the relevant interest. But the court found that it would violate due process for the FCC to impose a fine in this situation because the licensee could not reasonably have determined that the firm was not “minority owned” under the FCC’s definition in light of previous precedent and the complexity of the rules.

 

The case here may or may not fall within the fact pattern of Trinity Broadcasting depending on how the court conceptualizes the case. In any event, whether or not DISH challenges in court, it still needs to pay the money in accordance with the Order (unless it seeks and gets a stay from the court, which only happens if it files a challenge). DISH can take an intermediate course and file a Petition for Reconsideration. Unless DISH has some reason to believe the outcome would be different, this doesn’t help DISH’s situation much. DISH is still required to pay the money (or forfeit the licenses) while the Petition for Recon is pending.

 

What About Broader Impacts On The Incentive Auction And Stuff?

 

As always, it’s hard to predict what a company will do going forward, especially with a mercurial entrepreneur like Charlie Ergen running the show. Charlie Ergen has been desperately trying to acquire spectrum and get into the terrestrial wireless game since the AWS-1 auction in 2006. Ergen has recognized for 10 years that DISH needs to either find a broadband play or he needs to sell out and retire while the getting is good. Ergen is the kind of guy who is likely to retire by being wheeled out of his office feet first, so he has been looking for some way to stay in the game.

 

I say this knowing that the vast majority of analysts are utterly convinced that, all evidence to the contrary, Ergen is just trying to flip spectrum. When you ask analysts why they keep on saying this, it boils down to (a) we’d like to see more M&A work, and (b) the wireless market is so hostile to competition and new entrants that Ergen would be crazy to try to enter. I always find this last amusing, given the supposedly competitive state of our wireless market, but that is a rant for another time.

 

Anyway, the real question is whether Ergen now feels sufficiently burned to stay out of the Incentive auction or not. Even if DISH shows up, it is now an unplanned $3.3 billion deeper in the hole. How much betting courage DISH is likely to have in this situation remains to be seen.

 

More broadly, the rules for the Incentive auction are – of necessity – insanely complicated. How much is DISH, or other carriers, willing to risk if they feel the FCC may come up with a different interpretation after the fact? I don’t think carriers will treat the FCC as biased to AT&T and Verizon (given the unique facts of the case here), but I do think it underscores to carriers that participation in the auction carriers a degree of risk that if they misunderstand the rules, they may end up holding the bag for big money. Whether or not that puts a damper on things remains to be seen.

 

The one place where I think it is most likely to depress investment is in prospective designated entities for the auction. I think Clyburn hit the nail on the head here in her concurring statement. Keep in mind that investment in a DE is already a fairly risky enterprise. Additionally, anytime the Commission changes the rules, investors need to reassess and are likely to avoid risk where the pay off is less clear. Finally, while I applaud the fact that the Commission has demonstrated that it means what it says about fact-specific case-by-case review, I recognize that it may cause some companies to hold off and see how things shake out. Normally this is not a problem, but since there is only one Incentive Auction, hanging back means not investing at all.

 

Still, from the FCC’s perspective, it is much better to have a process with integrity and few investors than a process where people count on gaming the system and clever rule hacks. But even if one agrees with the FCC, it’s important to acknowledge that being right has its price. Life is like that sometime.

 

So What About This Footnote That Has Some Folks Excited?

 

In the portion of the Order distinguishing the Alaska Native Bureau Order from the DISH case, the FCC makes a statement at Footnote 354 that says, to paraphrase, ‘to the extent any past Bureau level decisions or Commission decisions are inconsistent with the interpretation we give here, we expressly overrule and abjure these past interpretations and adopt the interpretation of the Alaska Native Bureau Order given here. So mote it be!’ This has prompted some concern that the FCC is now all about changing its past precedent willy-nilly, agency out of control, etc.

 

I actually think this is not the case. The FCC cites to two cases in this footnote, and they are rather telling as to the Commission’s intent. Both cases involve times where the Commission interpreted its precedent in a particular way, and the DC Circuit then said: “Ha! FCC, you claim that your precedents say one thing. But we, the court, read your precedent to say something else. So while it is true that you can always depart from past precedent and change your mind, you must explicitly acknowledge that you are departing from past precedent and changing your mind. Since you did not acknowledge you were changing your interpretation, we reverse you and require you to start all over again. No don’t come back until you get the result we like!”

 

In particular, this happened in the Comcast bittorent case, cited in the footnote, where the DC Circuit said “FCC, you claim Section 706 is a separate source of authority, but you previously said it wasn’t a separate source of authority, so you can’t use it here until you acknowledge your past interpretation and change your mind. The FCC, in the 2010 Order, explained that ‘we so did not say Section 706 was not an independent authority, but we are now saying it is a separate source of authority and to the extent anyone might think we ever said it wasn’t, we expressly overrule that interpretation. So there!’ When the D.C. Circuit reviewed the 2010 Open Internet order, it said “oh, isn’t that cute. Well, even an agency must have a little pride, we will count this as explicitly acknowledging and reversing your prior determination and sustain it.’

 

So I see footnote 354 as primarily precautionary. The FCC is saying ‘we don’t think the Alaskan Native Order and cases DISH points to mean what DISH says they mean. But in case the D.C. Circuit agrees with DISH about how to interpret our past precedent, then we are exercising our right to change our interpretation.’ In other words, the FCC is not claiming any new authority to change its interpretation of precedent. It could always do that. This is just boilerplate language (which I expect to see more frequently) saying that ‘while we don’t think we are changing our interpretation of our precedent, to the extent the DC Circuit disagrees, we are explicitly overruling the reading the DC Circuit would give to our precedent to create a sneaky, outcome determinative justification for remanding a perfectly legitimate Order.’

 

Conclusion

 

Boy was that long. Altogether I wrote more than 10,000 words on this thing. But that’s because this was actually complicated. Which brings me around to conclude with the thought with which I started. Admin law is often times about policy choices, not a titanic conquest between good and evil. Too many people like to make policy based on whether they “like” a company or interest. And yes, sometimes that sort of bias is there. But more often these decisions lie in hazy zones with arguments on both sides, and where reasonable minds can disagree.

 

As I said above, I don’t think I would have come out the same way here as Wheeler and the Commission did. But I also have the luxury of being neither a Commissioner charged with making the decision or a company with $3.3 billion on the line.

 

Stay tuned . . . .

Click here for DISH DE Debacle Part 1: What’s A DE and Why Does Dish Owe $3bn

Click here for DISH DE Debacle Part 2: How Did The FCC Decide?

 

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