FCC pulls rug out from under successful bidder: before auction, FCC says bidder is entitled to discount, but it’s a different story when pay-up time comes.

We’ve warned would-be FCC auction participants about the need to perform due diligence before diving into the bidding. (Look here, for example, or here.) The FCC routinely – and prominently – announces that it doesn’t guarantee that any spectrum it may put up for bids is actually going to work. Accordingly, careful examination of the engineering specs you have in mind is always a good idea before you commit to plunking down a chunk of change on a channel.

But now, with Auction 93 just cranking up, we have yet another reason to sound the Caveat Bidder alarm again. It turns out that, even if the FCC tells you that you’re qualified for bidding credits, you should remember the cautionary admonition: trust but verify. A bidder found out the hard way what happens when you believe what the FCC tells you.

The situation arose seven years ago, in FM Auction 37. 

A couple of brothers formed a partnership to bid on some channels.   They owned attributable interests in only two stations, so they qualified for a 25% discount as new entrants to broadcasting. In their short-form Form 175 auction application they specified the four FM channels they planned to bid on; they also laid claim to the 25% discount, identified their two stations, and fully disclosed their interests in them. So far, so good.

The FCC’s staff then wrote them a letter, pointing out that their stations happened to be in the same area as one – but only one – of the channels they planned to bid on. The FCC advised the brothers that they would not be eligible for any bidding credit with respect to that one channel. Not to worry, though, because the FCC affirmatively advised that the brothers could claim the 25% credit for the other three channels they planned to bid on.

So bid they did – successfully in fact.

They were the high bidders on one of the three channels for which they were to get a credit. But when the time came to pay up, imagine their disappointment when the FCC told them that they would have to pay the full, undiscounted amount of their winning bid – an extra $63K and change over what they had expected to pay.   According to the Commission, the 70 dBu contour of one of the brothers’ existing stations would overlap the equivalent contour of the station they planned to build on their new channel. That overlap rendered them ineligible for the credit. That’ll be $63,250 more than we told you it was going to cost, please. Thanks for your business and come back real soon.

The brothers protested that they had been expressly advised by the Commission that they could claim the bidding credit for the channel in question.  Yeah, responded the FCC, about that advice – our staff messed up. Sorry about that. But forget what we told you, because you should have known that your existing station was in the “same area” as the channel you were bidding on. So you also should have known that you weren’t eligible for the credit for that channel. After all, the Commission lectured, auction participants are expected to know the rules.

But isn’t the FCC’s own staff also expected to know the rules? When the staff provides a seemingly official interpretation of those rules, you wouldn’t normally question that interpretation. After all, who knows the rules better – you or the FCC? And if the FCC tells you what the rules mean, how often does it make sense to try to argue the point, even if you’re pretty sure that they’re wrong?

But that’s apparently what the Commission thinks the brothers should have done.

And if that doesn’t surprise you, how about this? The brothers objected that the FCC was making them pay more than the channel is worth, since the brothers calculated the value of the channel based on the credit that the FCC had told them they were entitled to. In response, the Commission accused the brothers of “buyer’s remorse”.

“Buyer’s remorse”? The Commission itself had told the brothers that they would be entitled to a discounted price (thanks to the bidding credit). The brothers presumably wouldn’t be remorseful if they had to pay just that discounted price. Their reluctance to pay the non-discounted price looks more like a reasonable reaction to a bait-and-switch tactic than “buyer’s remorse”. But maybe that’s just us.

The brothers’ plight highlights at least one aspect of the FCC’s auction process. That process involves multiple self-certifications by the bidder. In order to make those self-certifications, the applicant must know the underlying rules: an applicant’s ability to accurately certify, for example, that it’s entitled to a bidding credit depends on the applicant’s familiarity with the bidding credit rules. If the applicant turns out to be wrong, disappointment can ensue – even, apparently, if the FCC’s staff made the same error and led the applicant astray on that very point.

For the record, here’s our understanding of the FCC’s bidding credit eligibility rules:

An applicant is entitled to a 35% credit if neither it nor any of its attributable interest holders owns any attributable interests in another media of mass communications (i.e., broadcast radio and TV station, cable television system, satellite direct broadcast system, and daily newspaper). An applicant is entitled to a 25% credit if (a) neither it nor any of its attributable interest owners owns any attributable interest in more than three media of mass communications and (b) none of those other commonly-owned mass media facilities serves the same area as the area of the proposed facilities. For purposes of an FM auction, “serving the same area” means overlap of any portion of the 70 dBu contours of the already-owned station and the proposed station. (The proposed station’s contour is calculated using the maximum class facilities at the FM allotment’s reference coordinates, not any applicant-specified preferred site coordinates.)

So, before certifying that you qualify for the 25% bidding credit in upcoming Auction 93, you should make darn sure that you don’t have a potential overlap problem. And even if the FCC tells you that you do qualify, take that with a grain of salt.

Preliminary reports suggest that the level of interest in Auction 93 may be extremely low. That could be a function of the economy, or the relatively slim pickings, channel-wise, that are available for bidding. But if the Commission wants to encourage increased participation in its auctions, it might want to think twice about how it treats those, like the luckless brothers mentioned above, who do choose to participate.