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Commission Document Attachment

FCC-14-103A2

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DISSENTING STATEMENT OF

COMMISSIONER AJIT PAI

Re:

Grain Management, LLC’s Request for Clarification or Waiver of Section 1.2110(b)(3)(iv)(A)

of the Commission’s Rules; Implementation of the Commercial Spectrum Enhancement Act

and Modernization of the Commission’s Competitive Bidding Rules and Procedures, WT

Docket No. 05-211; Expanding the Economic and Innovation Opportunities of Spectrum

Through Incentive Auctions, GN Docket No. 12-268; Amendment of the Commission’s Rules

with Regard to Commercial Operations in the 1695-1710 MHz, 1755-1780 MHz, and 2155-

2180 MHz Bands, GN Docket No. 13-185.

When Congress first granted the Commission auction authority, it wanted to ensure that small

businesses could participate in the provision of spectrum-based services.1 To implement this

congressional directive, the Commission adopted the designated entity (DE) program, which seeks to

promote opportunities for small businesses to provide facilities-based services to the public. As part of

the DE program, the Commission adopted a rule—the attributable material relationship (AMR) rule—that

kicks in whenever an applicant for DE benefits leases more than 25 percent of the spectrum capacity of

any one of its licenses to another company.2 The purpose of the AMR rule is to ensure that a DE that

benefits from the program “uses its licenses to directly provide facilities-based telecommunications

services for the benefit of the public” and is not unduly controlled or influenced by a third party.3

Today, the Commission jettisons this entire framework by waiving the AMR rule for the benefit

of Grain Management, LLC (Grain), a private equity firm that leases 100 percent of the spectrum capacity

of all of its licenses to the two largest wireless carriers in the country.

This decision cannot be justified under the Commission’s waiver law, since waiving the AMR

rule here eviscerates—rather than promotes—the purpose of the rule. The Commission’s suggestion that

the rationale underlying the AMR rule does not apply when a DE applicant obtained its spectrum licenses

without the benefit of bidding credits simply cannot be squared with either the text of the rule or the

reasoning of the Commission decision that adopted it. In addition, the Commission’s claim that Grain’s

leasing agreements do not support any inference of undue influence flatly contradicts its determinations in

the context of joint sales agreements among broadcast television stations. Finally, today’s decision will

likely produce anomalous results, inject needless uncertainty into the Commission’s auction process, and

invite arbitrageurs to make creative end-runs around our DE rules—all of which is unnecessary given the

upcoming DE rulemaking. For all these reasons, I dissent.

1.

This Request Does Not Meet the Waiver Standard.

To start, the Grain petition falls far short of satisfying even the first element of the waiver

standard—that the “underlying purpose of [the AMR rule] would not be served or would be frustrated by

1 See 47 U.S.C. § 309(j)(4)(D) (stating that the Commission shall ensure that certain designated entities “are given

the opportunity to participate in the provision of spectrum-based services, and, for such purposes, consider the use of

tax certificates, bidding preferences, and other procedures”); Conference Report, Omnibus Budget Reconciliation

Act of 1993, H.R. Rep. 103-213, 103rd Cong., 1st Sess. 484 (1993) (same), available at http://go.usa.gov/55wx.

2 See 47 C.F.R. § 1.2110(b)(3)(iv)(A). The Commission’s DE program provides bidding credits to small businesses

based on the gross revenues attributable to each DE applicant. The AMR rule is part of that calculus. It states that

every DE applicant must include, as part of its attributable gross revenues, the revenues of any entity that leases, “on

a cumulative basis, more than 25 percent of the spectrum capacity of any one of the applicant’s or licensee’s

licenses.” Id.; see also Implementation of the Commercial Spectrum Enhancement Act and Modernization of the

Commission’s Competitive Bidding Rules and Procedures, WT Docket No. 05-211, Second Report & Order and

Second Further Notice of Proposed Rulemaking, 21 FCC Rcd 4753, 4762–63, paras. 21–24 (2006) (CSEA/Part I

Second Report and Order) (adopting the AMR rule and stating that the Commission intended to prevent DEs from

leasing more than a certain percentage of their spectrum to other companies).

3 CSEA/Part I Second Report and Order, 21 FCC Rcd at 4760, para. 15.

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application to the instant case.”4 The Commission reaches a contrary conclusion by boldly asserting that

awarding DE benefits to a company that leases 100 percent of its spectrum to the nation’s two largest

wireless providers does not even “implicate any of the . . . policies underlying the AMR rule.”5 This

determination does not withstand even casual scrutiny and cannot be reconciled with the purpose of the

rule.

Why did the Commission adopt the AMR rule? It’s pretty simple: to make sure that those who

benefited from the DE program would use their licenses to provide facilities-based services directly to the

public.6 Indeed, the Commission has consistently said that the Communications Act requires DEs to have

“significant involvement in the provision of services to the public, not merely passive ownership of a

license to spectrum used by others to provide service.”7 Thus, “in accordance with the intent of Congress,

every recipient of the Commission’s designated entity benefits is an entity that uses its licenses to directly

provide facilities-based telecommunications services for the benefit of the public.”8 The whole point of

the AMR rule—indeed, the entire DE framework—is to promote competition, not arbitrage; competitors,

not middlemen.

Against this backdrop, the Commission’s decision today—that a company can lease every last

slice of its spectrum without even implicating the purpose underlying the AMR rule and therefore obtain

DE benefits—is as unlawful as it is absurd. The decision violates the AMR rule’s core purpose of

limiting DE benefits to companies that use their spectrum to offer facilities-based service, since Grain

offers no such service and its waiver petition evinces no intention whatsoever that it will do so. Indeed,

this is the very case for which the AMR rule was designed, not one that merits its waiver.

But even if one were to ignore the AMR rule’s fundamental purpose, the waiver decision itself

acknowledges another important purpose. It states that the Commission adopted the rule because it “was

concerned about ‘the potential [for leasing agreements] to significantly influence’ the DE applicant.”9

Under the Commission’s own framing, then, it can grant Grain’s request only if there is no

concern about the potential for undue influence. But how could that possibly be the case? How is the

potential for leasing agreements to significantly influence a DE not present when those leases cover 100

percent of the DE’s spectrum? If this reason for the rule is ever at play, it is here.

While the Order offers no apparent response,10 this is not a point that escaped commenters’

notice. As Council Tree observes, there is no reason why the AMR’s purpose does not apply in Grain’s

4 See 47 C.F.R. § 1.925(b)(3)(i).

5 Order at para. 12.

6 See, e.g., CSEA/Part I Second Report and Order, 21 FCC Rcd at 4763, para. 26 (concluding that the material

relationship rules “are necessary to ensure that the recipient of our designated entity benefits is an entity that uses its

licenses to directly provide facilities-based telecommunications services for the benefit of the public”).

7 Implementation of the Commercial Spectrum Enhancement Act and Modernization of the Commission’s

Competitive Bidding Rules and Procedures, WT Docket No. 05-211, Order on Reconsideration, 21 FCC Rcd 6703,

6705 n.8 (2006) (CSEA/Part I Second Report and Order Recon); see also Promoting Efficient Use of Spectrum

through Elimination of Barriers to the Development of Secondary Markets, WT Docket No. 00-230, Second Report

and Order, Order on Reconsideration, and Second Further Notice of Proposed Rulemaking, 19 FCC Rcd 17503,

17538, para. 70 (2004) (Secondary Markets Second Report and Order) (Section 309(j)’s “statutory directives were

not intended to provide generalized economic assistance to small businesses, but rather to facilitate their ability to

acquire licenses, build out systems, and provide service.”).

8 CSEA/Part I Second Report and Order Recon, 21 FCC Rcd at 6705, para. 3 (emphasis added). Although some

have argued that “‘[t]here is no reason to believe that Congress intended to limit designated entities to only one form

of participation in the spectrum market—construction and operation of a facilities-based network[,]’” the

Commission has stated that “Section 309(j) indicates otherwise.” Secondary Markets Second Report and Order, 19

FCC Rcd at 17538, paras. 70–71.

9 Order at para. 10 (quoting CSEA/Part I Second Report and Order, 21 FCC Rcd at 4762–63, paras. 21–22).

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case.11 It states that “the analytical foundation of the AMR rule, stated simply, is the proposition that a

lease of more than 25% of spectrum capacity in a given license by Party A to Party B creates ‘undue

influence’ by Party B on Party A.” “[I]f this proposition is true,” Council Tree points out, “there is no

reason to believe that it is untrue in the case of the Grain Request.” Indeed, Council Tree recognizes that

granting a waiver here would be “analytically illogical and unsupportable in the face of a continuing

AMR rule.”12

2.

This Waiver Has No Foundation in Either the AMR Rule or Commission Precedent.

Next, the item engages in some revisionist history by suggesting that the Commission never

intended the AMR rule to apply when a potential DE applicant, like Grain, obtained all of its existing

spectrum licenses without the benefit of DE credits.13 This contention is belied by both the plain text of

the AMR rule and the Commission’s prior decisions.

The AMR rule provides that an entity has an attributable material relationship “when it has one or

more arrangements with any individual entity for the lease . . . of, on a cumulative basis, more than 25

percent of the spectrum capacity of any one of the applicant’s or licensee’s licenses.”14 The language

thus requires the DE applicant to determine whether it exceeds the leasing threshold with respect to “any

one of” its licenses. This language covers all of the applicant’s existing spectrum holdings without any

exception for licenses obtained without DE benefits. The AMR rule admits of no ambiguity here.

Moreover, the Commission’s claim that the rationale for the AMR rule lacks force where a lease

agreement does not involve DE spectrum is misplaced. As indicated above, the Commission adopted the

rule because it “conclude[d] that certain agreements, by their very nature, are generally inconsistent with

an applicant’s or licensee’s ability to achieve or maintain designated entity eligibility.”15

“In this regard,”

it stated, “where an agreement concerns the actual use of the designated entity’s spectrum capacity, it is

the agreement, as opposed to the party with whom it is entered into, that causes the relationship to be ripe

for abuse and creates the potential for the relationship to impede a designated entity’s ability to become a

facilities-based provider, as intended by Congress.”16

It was the lease agreement itself (where the agreement concerned more than 25 percent of the

spectrum capacity) that worried the Commission and motivated it to adopt the AMR rule. It was wholly

irrelevant whether the agreement involved a particular license that had been obtained using DE credits.

The risk of undue influence was the same in either case.

That was certainly the view expressed by the U.S. Department of Justice in the Commission’s

AMR rulemaking.17 To ensure that DEs are truly independent, the DOJ stated that “the FCC should

10 In fact, in conducting its analysis, the Commission turns the waiver standard on its head, stating at one point that

“we are unable to conclude that the underlying purpose of the bright-line provision of the AMR rule would be

served by its application” in this case. Order at para. 11. But our rules do not permit the Commission to grant a

waiver based on an asserted inability to reach such a conclusion; rather, “[t]he Commission may grant a request for

waiver if it is shown that . . . the underlying purpose of the rule(s) would not be served or would be frustrated by

application to the instant case.” 47 C.F.R. § 1.925(b)(3).

11 See Letter from Steve Hillard, Council Tree Investors, Inc. to Marlene H. Dortch, Secretary, FCC, WT Docket

No. 05-211, GN Docket Nos. 12-268, 13-185 (May 9, 2014) available at http://go.usa.gov/5NTA.

12 Id.

13 Order at para. 11.

14 47 C.F.R. § 1.2110(b)(3)(iv)(A) (emphasis added).

15 CSEA/Part I Second Report and Order, 21 FCC Rcd at 4762, para. 23.

16 Id.

17 See Ex Parte Submission of the U.S. Department of Justice, WT Docket No. 05-211, at 5 (Mar. 17, 2006),

available at http://go.usa.gov/58fY.

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disqualify”—not merely attribute revenues, but disqualify—“a DE that has any . . . agreement with a large

wireless carrier that suggests that the licenses will be used principally for the benefit of the large wireless

carrier.”18 But today, we pave the way for precisely this.

Simply put, the idea embraced by the Commission today—that undue influence (if there is any)

flows differently through an agreement that relates to spectrum that was originally purchased with DE

credits than it does through an agreement that relates to non-DE spectrum—is untenable. If a small

business pays $1 million for a license, having obtained it with no DE benefits, and then leases 100 percent

of the capacity to a large provider, the risk from an AMR perspective is no different than if the same

company paid 10 percent less for that license, having obtained it through the use of DE credits, and then

leased 100 percent to the same large provider. How could the use of DE benefits in an auction change the

influence a lessor has over the licensee? It couldn’t, and the Commission offers no reason why it could.

In the end, the Commission’s decision today does not waive the AMR rule; it rewrites it.19

This begs the question—how will the Commission apply its new approach going forward? If

Grain or a similarly situated company uses bidding credits to obtain spectrum at auction, how will the

Commission determine whether the pre-existing leases present a risk of undue influence? The

Commission claims that it will engage in a case-by-case review. But what will that review look like?

Will the Commission just rubber-stamp those agreements? Or will it engage in a thorough review of the

underlying agreements and relationships? Neither option has much appeal. If it’s the former, the

Commission will simply confirm that it eviscerated the AMR rule today. If it’s the latter, how will the

Commission perform the inquiry? What criteria will apply? What documents and other information will

it need to review? How long will this review take? Will the review jeopardize the results of the auction?

Today’s decision offers no guidance.20

3.

This Decision Contradicts the Commission’s Recent Ban on Joint Sales Agreements

Among Broadcast Television Stations.

It is striking how irreconcilable the Commission’s decision here is with its recent crackdown on

the use of joint sales agreements (JSAs), under which one broadcast television licensee sells advertising

time on behalf of another licensee’s station.21 In the latter context, the agency recently instituted a flat

18 Id. at 5.

19 See, e.g., WAIT Radio v. FCC, 418 F.2d 1153, 1159 (D.C. Cir. 1969) (“The court’s insistence on the agency’s

observance of its obligation to give meaningful consideration to waiver applications emphatically does not

contemplate that an agency must or should tolerate evisceration of a rule by waivers.”).

20 The claim that Commission review of Grain’s leases after the conclusion of the auction would be “in accordance

with established Commission policy,” Order at n.39, is patently inaccurate. Under the Commission’s established

rules, leases such as Grain’s render a company ineligible for DE benefits so entities such as Grain are not allowed to

participate in the auction as if they were DEs. Today’s decision waives that “established Commission policy” and

allows Grain to receive DE treatment during the bidding process. Moreover, the Commission’s desire to conduct a

post-auction, case-by-case review in this instance is quite curious given its decision only a couple of months ago to

replace post-auction, case-by-case review of licenses in auctions with pre-auction, bright-line rules governing

reserved and unreserved spectrum. In explaining that policy shift, the Commission reasoned that “upfront, clear

determination, instead of case-by-case analysis post-auction, would provide potential bidders with greater certainty

in the auction process.” Policies Regarding Mobile Spectrum Holdings, WT Docket No. 12-269; Docket No. 12-

268, Report and Order, FCC 14-63 at para. 139 (2014). It also maintained that ex ante restrictions “would provide

greater certainty and efficiency in the process of licensing through competitive bidding” than a post-auction, case-

by-case analysis. Id. at para. 140. The Commission stated that “[i]n particular, upfront, bright-line determinations

would streamline the post-auction review of license applications, which should allow winning bidders to receive

their licenses more quickly and proceed to deploy service using the acquired spectrum.” Id. All of this goes out the

window in today’s decision.

21 See Processing of Broadcast Television Applications Proposing Sharing Arrangements and Contingent Interests,

Public Notice, 29 FCC Rcd 2647 (Med. Bur. 2014) (JSA Processing PN); see also 2014 Quadrennial Regulatory

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ban in most markets, through tightened attribution rules, on one station selling more than 15 percent of

advertising for another station, darkly ruing the hypothetical concern (and it was hypothetical, as no

evidence of undue influence was proffered and no advertiser had ever complained) that the mere

existence of the agreements gave licensees “the opportunity, ability, and incentive to exert significant

influence over the brokered station” of competing licensees.22 It was said then that “[w]hen one licensee

controls the cash flow of another, it controls the other. The old admonition ‘follow the money’ has never

been more appropriate.”23 The Commission thus determined that the fact of these agreements required

attribution for purposes of the agency’s media ownership rules because the risk of undue influence was

simply too great.24

So here’s a riddle: How is it that one television station in a small market selling 16 percent of

another station’s advertising is conclusive evidence of “undue influence” and an intolerable end-run

around our rules, but an investment firm’s scheme to lease every last speck of its spectrum to two of the

world’s Fortune 50 corporations does not even justify a presumption of “undue influence”? Whatever

happened to the old admonition “follow the money”? Why follow 16 percent of the money, but not 100

percent of the money? Yet again, today’s decision offers no answer. And there is none. A foolish

consistency may be the hobgoblin of little minds, but a deliberate inconsistency is the ogre of

arbitrariness.25

4.

This Decision is Entirely Unnecessary in Light of the Upcoming DE Rulemaking.

Not only is the Commission’s decision to gut a rule through waiver legally infirm,26 thus creating

risk and uncertainty for our upcoming auctions, it is not a step the Commission had to take. The

Commission stated in the Incentive Auction Order that it would “general[ly] re-examine the AMR rule”

Review — Review of the Commission’s Broadcast Ownership Rules and Other Rules Adopted Pursuant to Section

202 of the Telecommunications Act of 1996 et al., MB Docket Nos. 14-50, 09-182, 07-294, 04-256, Further Notice

of Proposed Rulemaking and Report and Order, 29 FCC Rcd 4371, 4527–45, paras. 340–72 (2014) (2014

Quadrennial Regulatory Review).

22 2014 Quadrennial Regulatory Review, 29 FCC Rcd at 4527, para. 340 (“[T]he ability of a broker to control a

brokered television station’s advertising revenue, its principal source of income, affords the broker the opportunity,

ability, and incentive to exert significant influence over the brokered station.”); see also id. at 4533, para. 350

(“[T]elevision JSAs involving a significant portion of the brokered station’s advertising time convey the incentive

and potential for the broker to influence program selection and station operations.”); id. at 4539, para. 360 (“[A] 15

percent advertising time threshold will identify the level of control or influence that would realistically allow holders

of such influence to affect core operating functions of a station, including programming choices, and give them an

incentive to do so.”); id. at 4539, para. 361 (“As the amount of advertising revenue controlled by the brokering

station increases, so too does its incentive and ability to influence brokered station’s programming.”); id. at 4582

(Statement of Chairman Tom Wheeler) (JSAs provide broker stations “the incentive and ability to unduly influence

the operations” of brokered stations), available at http://go.usa.gov/58Ck.

23 Id. at 4582 (Statement of Chairman Tom Wheeler).

24 See JSA Processing PN, 29 FCC Rcd at 2648; but see Statement of FCC Commissioner Ajit Pai on the Media

Bureau’s New Guidance on Sharing Arrangements and Contingent Interests (Mar. 12, 2014), http://go.usa.gov/58ax;" title="http://go.usa.gov/58ax;">http://go.usa.gov/58ax;

2014 Quadrennial Regulatory Review, 29 FCC Rcd at 4587 (Dissenting Statement of Commissioner Ajit Pai),

available at http://go.usa.gov/58a5; Joint Statement of Commissioners Ajit Pai and Michael O’Rielly on Three More

TV Stations Going Dark Under The FCC’s New JSA Policy (June 24, 2014), http://go.usa.gov/58xQ;" title="http://go.usa.gov/58xQ;">http://go.usa.gov/58xQ; Statement of

Commissioners Ajit Pai and Michael O’Rielly on the Negative Impact of the Decision to Restrict Television

Stations’ Use Of Joint Sales Agreements (May 29, 2014), http://go.usa.gov/9N7V.

25 The Commission’s assertion that the treatment of Grain’s leases under the wireless spectrum screen is consistent

with the Commission’s treatment of JSAs among television stations is beside the point. Order at n.39. The relevant

inconsistency is between the justification for today’s waiver of our DE rules and the rationale for the Commission’s

new JSA rules. On this point, the Commission has no response.

26 See, e.g., WAIT Radio, 418 F.2d at 1159.

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as part of a broader review of the DE program.27 It reiterates this intention in its decision today.28

Thus,

regardless of what one thinks about the merits of today’s waiver, the proper way forward would have

been to consider these issues in the context of the agency’s industry-wide DE rulemaking.

Notably, even parties that support Grain’s request on the merits argue that a rulemaking was the

appropriate forum to address it. They argue, among other things, that “[c]onsideration of this matter can

only be done as part of a review of the AMR, its policy rationale, and its effects on all DEs.”29 The

Commission’s decision to take a piecemeal approach will either complicate or prejudge the agency’s

broader consideration of these and other DE-related issues.

* * *

We need clear, predictable, and legal rules that apply to all players and promote entry by small

companies into the wireless business—not arbitrary waivers that yield no benefits other than a

serendipitous profit to a preferred entity.

Because this waiver does not meet the standard set forth in our rules; because it cannot be

reconciled with either the text of our AMR rule or Commission decisions expounding it; because it

effectively rewrites the rule in a way that raises questions about how these issues will be handled as we

approach important spectrum auctions; because it blesses a questionable scheme just months after the

agency denounced as illicit far more legitimate arrangements in the media context; because the far better

tactic is to consider this request in the general rulemaking, expected to commence soon; in short, because

to describe this waiver request is to decide against it, I respectfully dissent.

27 Expanding the Economic and Innovation Opportunities of Spectrum Through Incentive Auctions, GN Docket No.

12-268, Report and Order, FCC 14-50 at para. 482 (June 2, 2014).

28 Order at para. 16.

29 Letter from Steve Hillard, Council Tree Investors, Inc. to Marlene H. Dortch, Secretary, FCC, WT Docket No. 05-

211, GN Docket Nos. 12-268, 13-185 (Mar. 18, 2013), available at http://go.usa.gov/5NTT.

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