D.C. Circuit tosses LPTV challenge to auction/repack process, but $65 billion differential between forward and reverse auction bids forces second bid round with lower clearing target.

On the Spectrum Auction front, August, 2016 ended in Dickensian style for the FCC: it was the best of times, it was the worst of times. A victory at the U.S. Court of Appeals for the D.C. Circuit seemed to eliminate a potential pitfall for the ongoing auction process. But the presumably disappointing results of the first round of the forward auction could raise serious concerns about the prospects for the auction’s eventual success.

August 30 started well for the FCC, with the D.C. Circuit rejecting an effort by a couple of LPTV licensees who claimed that the Commission’s refusal to protect LPTV stations in the post-auction spectrum repacking process was inconsistent with the Spectrum Act. The Act, of course, prohibits the FCC from “alter[ing] the spectrum usage rights of low-power television stations”. The question before the Court: did the Commission’s treatment of LPTV stations in fact “alter the[ir] spectrum usage rights”.

Since the creation of the LPTV service more than three decades ago, the FCC has designated that service as “secondary”. That is, LPTV stations have to protect “primary” services from interference; if an LPTV station fails to do so, it’s got to modify its facilities or cease operation entirely. Since the goal of the Spectrum Auction/Repack process is to reduce the amount of spectrum available for all over-the-air television services, it’s a foregone conclusion that some, probably many, LPTV stations will be unable to find space in the repacked spectrum and will have to go off the air.

The LPTV petitioners did not dispute that LPTV licenses have long been subject to displacement or termination if they interfere with full-power TV operations, so any such displacement/termination arising from the repack would not alter their spectrum usage rights. BUT, the petitioners argued, the repack would displace and/or force off the air many LPTV stations because of interference to wireless services (i.e., the folks who, through the “forward” component of the Spectrum Auction, will acquire spectrum currently used for television broadcasting generally). As the petitioners saw it, the secondary status of LPTV stations did not historically require them to protect such wireless services. Thus, so the argument went, the fact that the auction process would effectively treat LPTV stations as secondary to wireless services constituted an alteration of LPTV spectrum usage rights, which Congress had forbidden.

The Court didn’t agree. In its view, more than a decade ago the Commission had clearly held that LPTV stations are secondary to licensed non-broadcast wireless services. That being the case, the Court concluded that the repack did not alter any “spectrum usage rights” that LPTV stations may have had, so the Commission has not violated the Spectrum Act in that regard.

Not surprisingly, the petitioners argued that the decade-old precedent cited by the Court was distinguishable from the current situation. No dice, said the Court: in its view, the repack process “subordinate[s] LPTV stations to wireless licensees in the same way the Commission had done before the Spectrum Act.”

While the possibility of further review exists, the likelihood of reversing the D.C. Circuit’s ruling is extremely low. With this challenge to the Spectrum Act now tossed,  there remain only a couple more pending challenges to the Spectrum Auction process. The petitioners in one of those – Free Access & Broadcast Telemedia, LLC v. FCC, No. 16-1100 – will be particularly disappointed in the Circuit’s decision. In their brief on the merits, which was filed less than a week before the Court’s decision, the petitioners – who represent LPTV interests – spent a considerable amount of space arguing essentially the same points that the Court has now rejected. The outlook obviously is not brilliant for those arguments. The Free Access petitioners still have a couple of additional claims involving alleged violation of the Regulatory Flexibility Act and several constitutional provisions (including a “takings” claim arising from the Fifth Amendment, a bill of attainder claim, and an “unconstitutional private delegation” claim). Those arguments, and particularly the constitutional ones, involve relatively esoteric areas of the law not often raised in FCC-related appeals. It will be interesting to see how the Court chooses to address them.

While the FCC’s litigation team was probably celebrating its victory in the D.C. Circuit, developments over on the auction side of the Commission likely tempered any exuberance. In a  notice posted on the Forward Auction page, the Commission announced that Stage One of the auction had concluded unsuccessfully, i.e., “without meeting the final stage rule and without meeting the conditions to trigger an extended round.” Disclosed elsewhere on the Auction website, the grim reason: the Reverse Auction component of the process established that the FCC could clear its initial target of 126 MHz of spectrum for a total pay-out to bidding broadcasters just north of $88 billion, but the amount of cash bid by wireless participants in the Forward Auction barely squeaked past $23 billion. In other words, a nearly 75% shortfall.

That, of course, appears to be Bad News both for the Commission and for broadcasters who might have thought that the FCC’s sky-high initial bids might be even minimally realistic. The shortfall means that the auction will now proceed to Stage 2 (based on a 114 MHz clearing target, down from the 126 MHz target in Stage 1), starting with a second round of the reverse auction followed by a second forward auction. And, since the Commission now has a sense of the level of proceeds it can eventually expect from the forward auction – a number which apparently is dramatically below $88 billion – broadcasters participating in the Stage 2 Reverse Auction can expect to see commensurately reduced bids for their spectrum from the Commission. While it is still possible that the auction will eventually generate significant proceeds for the FCC and broadcasters alike, any hyper-optimism that may have been experienced when the initial reverse auction bids were announced months ago has for sure been dampened substantially, if not extinguished entirely.

The Stage 2 Reverse Auction is currently set to kick off on September 13, 2016; the Stage 2 Forward Auction will crank up the next business day after the conclusion of the Stage 2 Reverse Auction. The Commission will make available an online tutorial for the Stage 2 Reverse Auction bidding process sometime on September 1. Check out this public notice for further details about Stage 2.

Only broadcasters whose status was “FROZEN” in Stage 1 of the Reverse Auction – i.e., their spectrum was deemed provisionally sold – will return to bidding in Stage 2. Stations that exited the auction in Stage 1 will not be eligible to return.  Returning stations will generally start at a bidding level approximately where they were frozen in Stage 1, with some variations.  The Commission also has announced that it has reset the base clock price $900 per unit of volume for Stage 2 of the reverse auction, with a station’s “volume” based on service area and population served.  Also, the price will initially decline by five percent of the reset base clock price as the auction moves to the next round of Stage 2.

Returning bidders need to have held on to their bidding tokens from Stage 1, and only those bidders who have the proper “FROZEN” status will be able to access the Commission’s auction system. That access won’t start until September 7.

In the meantime, the FCC has reminded

all full power and Class A broadcast television licensees that they remain subject to the Commission’s rules prohibiting certain communications in connection with Commission auctions until the completion of the incentive auction as announced by the Commission by public notice. A party that is subject to the prohibition remains subject to the prohibition regardless of developments during the auction process. In addition, though communicating whether or not a party filed an application does not violate the rules, communicating that a party “is not bidding” in the auction could constitute an apparent violation that needs to be reported.

It is essential to recognize that this prohibited communication rule still applies even if you ceased bidding or otherwise exited the auction – if you participated by accepting even the opening bid, it applies to you.

With one auction round under its belt, the Commission will likely be inclined to speed things up in Stage 2 (and any additional stages beyond that). Still, it seems unlikely at this point that the auction process will be completed before November, or even by the end of the year. But you never know.

Check back here for further updates.