Supreme Court Dispatches

What’s the Frequency, Clarence?

The Supreme Court dials 1-800-Bankruptcy.

In a case emblematic of all that was best about the ‘90s, the Supreme Court heard argument today in Federal Communications Commission v. NextWave Personal Communications. The dispute centers around a uniquely ‘90s kind of bankruptcy: The bankrupt party wants to keep $5 billion worth of wireless phone spectrum licenses without paying for them, and the government wants to resell those same licenses for $16 billion without actually owning them. I miss those ‘90s. I do.

The facts will only hurt for a minute: In 1996, NextWave was the highest bidder when the FCC auctioned off some scarce and valuable wireless spectrum licenses. It bid $4.74 billion, paying 5 percent down, 5 percent the next year, and agreed to pay the balance over the next 10 years. Shortly thereafter, when the market tanked and NextWave couldn’t pay, it petitioned the FCC to restructure its repayment plan. When the parties couldn’t agree on a new schedule, the company declared bankruptcy. NextWave evidently never made another payment and never provided service to a single customer, although they still own licenses for crowded metropolitan areas including Los Angeles, New York, Seattle, Boston, and Washington, D.C.

After a good deal of legal wrangling, NextWave got the bankruptcy court to rule that its $5 billion licenses were really worth only $1 billion at the time of auction and that there had been a fraudulent conveyance on the part of the FCC. The 2nd Circuit Court of Appeals reversed that decision. NextWave offered in 1999 to pay the FCC the balance owed, but—with market conditions improving—the FCC elected to re-auction the same licenses. Of course, there was still a dispute pending in the courts as to whether the licenses were still the FCC’s to sell. But that didn’t prevent the FCC from selling the licenses to a group of wireless carriers for a whopping $15.9 billion. In June 2001, the Circuit Court of Appeals for the District of Columbia found that the FCC had improperly revoked the licenses and resold them.

Reviewing: NextWave owns a bunch of licenses it hasn’t paid for and, since it couldn’t sell the Brooklyn Bridge, the FCC resold these licenses but never actually turned them over. I count billions of dollars in welching here. The Supreme Court granted certiorari to resolve a narrow legal question: Did the FCC, in revoking NextWave’s licenses, violate Section 525 of the Bankruptcy Code, prohibiting government agencies from “revoking, suspending or refus[ing] to renew a license” solely because the debtor is or has been in bankruptcy?

Acting Solicitor General Paul Clement argues first for the FCC. (The real SG, Ted Olson, cannot, because he represented NextWave in the lower courts.) Clement says the bankruptcy rule forbidding the government from revoking licenses doesn’t apply here because the FCC, in revoking NextWave’s licenses for failure to pay, wasn’t acting in its capacity as “creditor” but rather in its “regulatory” capacity. The FCC didn’t revoke the licenses “solely” because NextWave failed to pay its “debts,” but because the failure to pay was a “proxy” for a regulatory “determination of who was qualified to have a license.” The licenses weren’t revoked because NextWave welched, but because the “public interest” demanded it.

Justice David Souter interrupts him: “You say the public interest determined this, but wasn’t it purely economic? When the value of the licenses dropped, you wanted full payment, when the value went up, you wanted to re-auction. In each case you made an economic, not a regulatory decision.”

Justice Antonin Scalia adds: “Can’t you always find a regulatory purpose? That’s the easiest thing in the world.”

Justice Ruth Bader Ginsburg points out that there’s a tension between the FCC’s position that licenses are “automatically canceled” upon a failure to pay, and Clement’s insistence that revocation was not automatic but up to the discretion of the agency. “There is some tension there,” admits Clement. He adds that revocation is only automatic once the agency’s efforts to collect have failed. That is, there’s some discretionary automatic-ness at work here. Justice John Paul Stevens suggests that if it’s still discretionary, why doesn’t the FCC just settle the case today? “They say they are able to pay. …”

Um, well, there is that little matter of the FCC’s subsequent resale of the licenses to someone else. …

Justice Scalia asks whether the real issue in this case isn’t whether the FCC ever has the discretion to cancel. “That may be more important than a few billion dollars here.”

Clement doesn’t seem to think so. In fact, I think he wants his several billion dollars back right now.

Jonathan Franklin argues for the poor sods who purchased NextWave’s semi-revoked licenses. Scalia hits him with a hypo about a statute that makes killing someone “solely because of his race a crime.” Franklin replies: “I’m not aware of a statute like that.”

Scalia: [Gleefully] “I made it up!”

Souter then does a round with Franklin over how “automatic cancellations” can nevertheless be discretionary. “So, it’s automatic except when it isn’t?” he asks. The Silver Fox lands his first joke of the season. Franklin responds that bidders are not entitled to scarce airwaves just by making an empty promise.

I run into Franklin’s brother, a college friend, after oral argument. He pokes a finger near my eye socket and admonishes me not to make his brother look bad. But it’s not his brother’s fault that at least eight of the justices apparently took this case just to affirm the D.C. Circuit. And it’s definitely not his brother’s fault that everyone but Justice Stephen Breyer wants to leave the government holding a billion dollar bag. More than one of these people had to vote to grant certiorari in this case.

Donald Verilli rises to argue for NextWave, trying to gloss over the company’s own welching by characterizing what it did to the FCC as “deferring payment.” Justice Scalia gives him about two seconds before sputtering, “What do you mean ‘deferred’? They failed to pay. Why don’t you just say that? You make it sound like some legal mumbo jumbo. … You didn’t pay.”

Verilli agrees. It didn’t pay.

Justice Breyer, the lone defender of the FCC, offers his objection to NextWave’s position. “I see no way the government can ever take a secured interest for a loan.” What’s to stop everyone from screwing the government and declaring bankruptcy? Verilli says that “if the FCC had demanded cash on the barrelhead upfront,” NextWave would have had to borrow from a bank. By agreeing to be paid in installments, the government put itself in a position to be ripped off. That’s called blaming the victim in some parts. 

Here’s where Justice Breyer offers the following wisdom: “I learned,” he says, “the second year of law school that when you have a text which says ‘all’ it often has unwritten exceptions.” He continues: “A sign says ‘No animals in the park.’ It doesn’t mean ‘no oysters.’ “

“An oyster is not an animal” floats, sotto voce, from the bench. About half the press corps later swears that Chief Justice William Rehnquist said it. The other half insists it was Justice Clarence Thomas. Justice Breyer thanks whichever Animal Planet fan it was and adds that in his universe an oyster is an animal. Although, really, why Justice Breyer would want to walk his oyster in a park remains a mystery.

The last oral advocate of the day is Harvard’s legendary Laurence Tribe, representing NextWave. He manages, in his inimitable Tribeian way, to reduce the entire bench to rapt silence as he explains with flawless, crystalline logic that the nature of any bankruptcy proceeding is that creditors never get back “the whole pie.” They just get back a piece. Why should the government be any different from other creditors? The FCC should have waited out the bankruptcy proceedings, instead of trying to “yank back all the value for itself, just because it has the power to revoke the licenses.”

Tribe does take his own brief walk through Oyster Park—describing government regulators as having a running shoe on one foot and a wingtip on the other. Maybe that’s why they’re so upset about the billions of dollars they’ve lost. They can’t even buy matching shoes.

The upshot of today’s argument will be that next time the FCC auctions off spectrum licenses, you and I should feel free to jump in and bid $20 billion with impunity. We’ll still get to keep the licenses for years. I’m not at all sure where the oysters will fit into all this doctrine. You’ll need to wait for Breyer’s dissent for that.