You think putting your license in a limited liability entity will always protect you? Think again. The FCC is holding an LLC’s owner personally accountable for a proposed $1.7 million fine because of his company’s alleged misconduct. How’s that for “limited liability”?
Many, probably most, FCC licenses are not held by individuals. Rather, they’re held by organizations – corporations, or their near relations, limited liability companies, and the like. You might assume that corporate law protects individual shareholders in the FCC’s regulatory sphere in the same way that it does in the court system.
You would be wrong.
A recent Commission decision indicates that in some circumstances the FCC can – and will –look beyond the corporate form and hold shareholders personally liable for licensee obligations, even in situations where a court wouldn’t ordinarily be expected to.
Whether you love them or hate them, corporations are a prominent feature of the American economic landscape. A corporation is a legal “body” – an entity separate and independent from the individual people who own and control it. A corporation’s debts and liabilities come out of the company coffers; investors and owners can lose only as much as they put in.
The protected investors are not the only beneficiaries of this system. The broader economy, which affects everybody, wins, too. The centuries-old theory is that “limited liability” stimulates investment and keeps the economy bustling; would-be investors know that no matter how bad things go at the corporate level, their personal bank accounts (and houses, and cars) won’t be snatched up to cover the liabilities of the corporation.
But the principle of limited liability doesn’t always comport with the FCC’s idea of regulatory justice. Take the case of telecom company Telseven, a limited liability company.
Under FCC investigation for various alleged Universal Service Fund (USF) violations, Telseven declared bankruptcy. So the FCC disregarded the Telseven entity and held its sole owner and director, Mr. Patrick Hines, personally liable for a proposed $1.7 million fine. (You can read about how USF fines get so large so fast here.) In doing so, the FCC applied a legal standard unlike the strict standard used by the courts in those exceptional circumstances when they opt to “pierce the corporate veil”.
While the law varies by state, a court that “pierces the corporate veil” generally tries to determine whether a corporation is anything more than an “alter ego” of its dominant shareholder. The court typically checks to see whether corporate formalities (holding of board meetings, etc.) have been ignored, personal and business funds have been commingled, and/or the company has been unduly under-capitalized. The court also considers whether strict adherence to the concept of “limited liability” would promote fraud or produce an inequitable result.
In the courts, at least, it is difficult to justify “piercing the corporate veil”. According to the U.S. Supreme Court, the corporate veil is to be pierced only in “exceptional circumstances.”
Historically, the FCC has not engaged in corporate veil piercing in the sense utilized by the courts, i.e., to impose personal liability on an individual shareholder for a business organization’s obligations. While the Commission has occasionally used the term “piercing the corporate veil”, it has done so in various regulatory contexts (e.g., attribution analysis) separate from the way the courts have traditionally used that term.
Indeed, when the FCC discussed imposing liability on a licensee shareholder in a 2010 decision, it expressly distanced itself from that traditional usage. In that case, Sprint and ICO were involved in a long-running dispute over whether ICO would help pay to relocate various broadcast incumbents from the 2000-2020 MHz band (a story for another day). Woops-a-daisy, said ICO, the subsidiary that holds our FCC licenses has gone bankrupt. Even if it does owe the money, it can’t pay. Not so fast, said the FCC. The Commission was prepared to hold the subsidiary’s owner (i.e., ICO) liable for the sub’s obligations, but not because the corporate veil could or should be pierced. Rather, the FCC coined a new phrase – “enterprise liability” – to describe its regulatory approach. According to the Commission:
[Enterprise liability] is distinct from the standards for “piercing the corporate veil” or finding an “alter ego” under common law . . . [E]nterprise liability does not seek to make a parent corporation liable for the actions of its subsidiary, but rather recognizes in appropriate cases that the parent is liable for its own actions as part of the overall enterprise that it has created and operated.
In reaching that decision, the FCC relied on a 40+ year old case (Federated Publications, Inc.) in which it had declared that a parent corporation was responsible for fines against the subsidiary licensee. There the FCC found that a parent entity should be deemed a statutory “holder of the radio station license” – in other words, a “licensee” in and of itself, simply because the parent was the sole stockholder of the licensee. Powerful stuff, but it gets worse. The Commission went on to say that
[w]here absolute control over a subsidiary licensee corporation resides in a parent, the parent must be prepared to assume full responsibility for the operation of the station in accordance with the Communications Act. Power and responsibility cannot be separated for our purposes, whatever the particular rule may be in different fields of law.
So much for limited liability.
But the Federated Publications case went largely ignored, even by the Commission, for more than 40 years. And even when the FCC cited it in the 2010 Sprint/ICO “enterprise liability” decision, neither case became a standard part of the FCC’s enforcement repertoire. During this time, “piercing the corporate veil” as used by the FCC meant “taking cognizance of the existence of a shareholder”, not “holding the shareholder liable.”
But now we have the Telseven case.
In justifying its decision to tap Telseven’s individual owner for the obligations of the organization, the FCC – apparently abandoning its “enterprise liability” approach – described its action as “piercing the corporate veil”. But the difference between the agency and judicial approach to “piercing the corporate veil” is not just semantic.
The FCC standard is dramatically lower than the typical judicial standard. For the FCC’s purposes, in order to “pierce the corporate veil”, all the Commission had to consider was whether: (1) there was a common identity of officers, directors, or shareholders; (2) there was common control between the entities; and (3) piercing the veil was necessary to preserve the integrity of the Communications Act and prevent the entities from defeating the purpose of statutory provisions.
Mr. Hines satisfied the first two elements of the test simply by owning and controlling the company. The third element was satisfied, said the FCC, because the USF rules would be “circumvented” by Mr. Hines unless the Commission “looked through Telseven’s corporate structure.” But under this standard, pretty much any sole owner of a licensee entity, whether that owner is an individual or organization, would be vulnerable to “piercing the corporate veil” so long as the FCC can claim some regulatory interest in doing so. The FCC might not choose to do so, but after Telseven there does not appear to be much of a legal brake on its ability to do so.
To be sure, the FCC’s patience may have been sorely tested by the facts of Telseven. Not only did Telseven dash down the bankruptcy hole shortly before the FCC could snag it, but Telseven’s numerous violations appeared to be the result of bad faith rather than inadvertence. Furthermore, Telseven’s business model had more than a whiff of the forbidden practice of “cramming” – placing unauthorized, misleading, or deceptive charges on a consumer’s telephone bill. (The company offered “directory assistance” to consumers that called out-of-service numbers and then charged the call, at long distance rates, separately from the consumer’s regular carrier charges—adding on, ironically, an additional charge for Universal Service Fund compliance costs.)
Perhaps, therefore, the Telseven case can be viewed as just a particularly strong reaction to a single apparently bad actor, and not the start of a trend. Nonetheless, the case raises questions that go to the very heart of corporate law and the legal meaning of what it means to be an FCC “licensee.” It also raises policy concerns: Is it fair to expose sole owners of small and closely-held companies to personal risks that their larger corporate counterparts don’t face? And, if limited liability is meant to encourage investment, couldn’t poking holes in that limited liability discourage investment in FCC-regulated companies, particularly if the hole-poking is performed pursuant to a less-than-crystalline standard? An action that produces expedient results on the ground may have more far-reaching effects than intended.