Cincinnati Bell Telephone Company (94-3701 95-3023) Bellsouth Corporation Bellsouth Telecommunications, Inc. Bellsouth Enterprises, Inc. (94-4113 95-3315) Radiofone, Inc. (95-3238), United States Telephone Association U.S. West, Inc. New York Telephone Company New England Telephone and Telegraph Company Radiofone, Inc., Intervenors v. Federal Communications Commission United States of America, Pacific Bell Nevada Bell MCI Telecommunications Corporation At&t Corporation Us West, Inc., Intervenors
Docket: 95-3238
Court: Court of Appeals for the Sixth Circuit; November 8, 1995; Federal Appellate Court
Cincinnati Bell Telephone Company, along with several other telecommunications entities, petitioned the United States Court of Appeals for the Sixth Circuit against the Federal Communications Commission (FCC) and the United States regarding multiple cases involving telecommunications regulations. The cases numbered 94-3701, 94-4113, 95-3023, 95-3238, and 95-3315 were argued on October 10, 1995, and decided on November 9, 1995. Various legal representatives were involved, including Douglas E. Hart and Thomas E. Taylor for Cincinnati Bell, Mary McDermott for the United States Telephone Association, and Robert B. McKenna for U.S. West, among others. The FCC was represented by attorneys from its Office of the General Counsel, including John E. Ingle and James M. Carr, and the U.S. Department of Justice's Antitrust Division also participated. The cases involve complex issues of telecommunications regulation and antitrust considerations, reflecting significant interests from multiple stakeholders in the telecommunications industry.
Joel Marcus and William E. Kennard represented the Federal Communications Commission (FCC) in consolidated petitions involving Cincinnati Bell, Radiofone, and BellSouth, who contested FCC rulemaking on ownership limits in the wireless communications sector. Cincinnati Bell and Radiofone objected to cross-ownership and attribution rules that restrict current cellular providers from bidding on new wireless licenses. BellSouth challenged the FCC's decision not to rescind a 1981 rule mandating that Bell Operating Companies manage cellular licenses separately from their parent companies.
The FCC has allocated radio frequencies for new broadband Personal Communications Services (PCS), anticipated to compete with existing wireless services. The document outlines three mobile wireless services: Cellular, specializing in mobile telephone operations; Specialized Mobile Radio, traditionally used for dispatch services; and Mobile Satellite Service, which enables global communication via satellite without terrain interference.
Licenses for U.S. wireless communications are geographically distributed, with two cellular providers per region competing for customers. PCS licensees will hold licenses for ten years, with renewal expectations. To foster competition, the FCC imposed ownership restrictions on current cellular providers regarding PCS licenses. The Communications Act of 1934 authorizes the FCC to conduct auctions for wireless licenses and mandates that auction designs include public interest safeguards and pursue several objectives.
The document outlines key objectives and regulatory frameworks established by the FCC regarding the allocation of Personal Communications Service (PCS) licenses aimed at fostering technological development and competition. It emphasizes the importance of ensuring public benefit, particularly for rural populations, by facilitating the rapid deployment of new technologies without administrative or judicial delays.
The FCC aims to prevent excessive concentration of licenses by promoting equitable access for diverse applicants, including small businesses and minority- and women-owned enterprises. Under 47 U.S.C. 309(j)(3)(A, B), the Commission is tasked with creating regulations that balance the public interest with the need for an equitable distribution of licenses across geographic areas, thereby enhancing economic opportunities.
The rulemaking process began in 1990 with a Notice of Inquiry addressing concerns about control concentration in the wireless spectrum. Subsequent notices and decisions, including the August 1992 Notice of Proposed Rule Making and the October 1993 Second Report and Order, led to the establishment of specific licensing rules and spectrum allocations for PCS. The FCC's Second Report and Order detailed the division of spectrum into several blocks and confirmed the authority to allocate licenses via auction, with a focus on promoting competition and broad participation within the industry. The FCC's approach seeks to leverage the expertise of existing Cellular operators while ensuring they do not dominate the market, thereby supporting the overall development of PCS.
The FCC established rules enabling existing Cellular providers to bid on Personal Communications Service (PCS) licenses beyond their current service areas, with limitations based on territorial overlap. If a Cellular provider's territory overlaps a new PCS area by ten percent or more, it can acquire only one of the ten MHz spectrum blocks in that area. Additionally, all PCS licensees are restricted to a total of forty MHz of spectrum per license area. The FCC also relaxed restrictions on Cellular rules, allowing Cellular license holders to compete with PCS licensees.
The FCC implemented "attribution" rules to determine if an entity qualifies as a Cellular provider, which restricts ownership of PCS spectrum based on ownership stakes. A corporation with less than a twenty percent ownership in a Cellular provider can own up to forty MHz of PCS spectrum, while a corporation with twenty percent or more is limited to one ten MHz block. Cincinnati Bell challenges this twenty percent rule, arguing it is arbitrary and capricious due to a lack of supporting evidence. They contend that the distinction made between different ownership levels is unfairly discriminatory and that the FCC failed to explore reasonable alternatives, constituting an abuse of discretion.
Cincinnati Bell asserts that the record does not adequately justify the twenty percent rule's alignment with statutory objectives. Review of the FCC's actions is governed by the Administrative Procedure Act, which allows courts to invalidate agency actions deemed arbitrary or capricious. The reviewing court’s role is to assess whether the agency considered relevant factors and whether a rational connection exists between the facts and the chosen policy. The FCC's stated goal during the rulemaking process was to balance various objectives with the Cellular attribution rule.
The FCC aimed to prevent incumbent cellular licensees from dominating the Personal Communications Service (PCS) market and to allow entities with passive interests in cellular licenses to access PCS licenses due to their potential contributions in expertise and infrastructure. The FCC recognized the importance of settlements in the cellular market that resulted in passive ownership structures and sought to comply with Congressional directives for timely license distribution by implementing a clear rule rather than a complex control test. Cincinnati Bell contends that the FCC should have established a Cellular attribution rule distinguishing between controlling and non-controlling interests. The current twenty percent attribution rule does not differentiate between types of ownership, such as voting versus non-voting stock, and lacks a solid economic rationale. Cincinnati Bell cites the case of Aeronautical Radio, Inc. v. FCC, arguing that any attribution standard must be reasonably related to the entity's ability to control the cellular licensee. They assert that the existing attribution standard fails to connect minority interests to the potential for anti-competitive behavior, illustrating that a non-voting entity with a twenty-one percent stake could be unjustly barred from obtaining a PCS license despite lacking control over the cellular licensee.
An entity with a minority voting interest (19%) in a Cellular licensee, which can influence the licensee's actions, is permitted to bid for a Personal Communications Service (PCS) license. The FCC's reliance on the Financial Accounting Standards Board’s (FASB) standard, which considers 20% ownership as presumptive control, is deemed reasonable; however, the argument is countered by the observation that this standard allows for rebuttal regarding actual control, unlike the FCC's absolute ban on participation for those with 20% or more interest in a Cellular licensee.
The FCC contends that such entities would have reduced incentives to compete against their Cellular licensees due to their significant stakes. This reasoning is criticized as lacking empirical support; the FCC fails to provide data or economic theory to back its claim. Instead, it relies on a "common sense" conclusion, which is viewed as unsubstantiated. The assertion that entities holding minority interests would refrain from competition is challenged, especially considering the high costs and competitive landscape in the PCS market. The court emphasizes the necessity for the FCC to substantiate its predictions with evidence, referencing past cases where the FCC's unsupported claims were rejected. Overall, the FCC's position is seen as inadequately justified without robust evidence to support its economic forecasts.
An easily applied bright-line rule for determining Personal Communications Service eligibility is advocated by the FCC to prevent delays in administrative processes. The FCC argues against a "control" test that would necessitate case-by-case evaluations, which it believes would hinder competitive bidding. Cincinnati Bell counters that the FCC has previously implemented less restrictive and straightforward rules, such as the attribution criteria for minority or women-owned businesses bidding on C Block auctions, where ownership of at least 50.1% is required. Cincinnati Bell further references ownership regulations for broadcast stations that limit cognizable interests based on stock ownership percentages.
Cincinnati Bell asserts that if the FCC's twenty percent bright-line rule is justified by administrative convenience, it must provide a reasoned explanation for rejecting these less restrictive alternatives. The FCC's failure to do so renders its attribution rule arbitrary, prompting a grant of Cincinnati Bell's petition for further proceedings on this matter.
Radiofone contests the FCC's Cellular eligibility rules, claiming they exceed statutory limits by imposing cross-ownership restrictions between Cellular and Personal Communications Service spectrum. Additionally, Radiofone argues that the rules lack support and unfairly discriminate against Cellular providers. Under Chevron's two-step inquiry, a court must first ascertain if Congress has addressed the issue at hand, and if not, determine whether the agency's interpretation aligns with permissible statutory construction.
The Act mandates that the FCC conduct auctions for Personal Communications Service licenses, emphasizing competitive bidding to promote economic opportunity and prevent excessive license concentration. Radiofone contends that the FCC's authority, as outlined in Section 309(j)(3)(B), is limited to ensuring participation from small businesses, rural telephone companies, and businesses owned by minorities and women. It argues that the FCC overstepped this mandate by excluding certain entities from bidding. However, it is asserted that the FCC retains the authority to impose restrictions to facilitate broad participation and competition in the market. The interpretation of Section 309(j)(3)(B) is clarified to indicate that the list of specific groups is not exhaustive, and Congress intended to address the risk of excessive concentration of licenses by granting the FCC discretion in establishing eligibility criteria.
Moreover, Radiofone challenges the FCC's cross-ownership rules as arbitrary and capricious, claiming insufficient support in the record for these rules. The review standard for such challenges requires agencies to consider less restrictive alternatives and justify any rejection of these alternatives. Radiofone points out inconsistencies in the FCC's stance on the potential for anticompetitive behavior by Cellular providers and criticizes the lack of evidentiary support for the FCC's concerns.
The FCC expressed initial concerns that allowing Cellular providers to acquire Personal Communications Service licenses could lead to anticompetitive behavior and undue market power. Despite these claims, Radiofone asserts that the FCC failed to substantiate its concerns with evidence in subsequent proceedings. Radiofone argues that the significant financial investment required for obtaining a license and adhering to a build-out schedule makes the likelihood of anticompetitive behavior implausible. Furthermore, it criticizes the FCC for not considering less restrictive alternatives, such as competitive bidding and strict build-out requirements, which could achieve similar goals. Under the current rules, entities with a mere twenty percent interest in a Cellular provider face restrictions on purchasing Personal Communications Service licenses if there is a ten percent overlap in service areas. Radiofone contends that these thresholds are irrational and lack a logical basis, asserting that the FCC's reliance on "deference" does not excuse its failure to provide adequate factual support for the rules. The court finds that the FCC's record is insufficient to uphold the Cellular eligibility regulations and emphasizes that while predictive judgments may receive deference, the FCC does not possess unlimited regulatory discretion.
A regulatory agency must provide a reasoned basis for adopting specific rules, as established in Schurz Communications, Inc. v. Federal Communications Commission, 982 F.2d 1043 (7th Cir. 1992). Post-hoc rationalization is inadequate, and justification must be found within the rulemaking record, as emphasized in Coastal Tank Lines, Inc. v. Interstate Commerce Commission, 690 F.2d 537 (6th Cir. 1982). The core issue is whether the FCC has adequately justified its Cellular eligibility restrictions against objections. The FCC has failed to cite sufficient record support for these restrictions in its briefs or oral arguments. Although the FCC referenced a General Accounting Office report indicating a lack of competition in wireless markets, this report provided only broad findings and did not substantiate the FCC's conclusions. The Cellular eligibility restrictions significantly impact businesses in the telecommunications sector, with billions of dollars at stake, and their future viability depends on bidding for Personal Communications Service licenses. The FCC's admission that excluded Cellular providers may be left with outdated technology underscores the need for a stronger justification for these restrictions. The FCC's rationale for promoting diverse ownership through these rules appears ineffective, as existing Cellular providers can bid on licenses in most areas, enabling major industry players to dominate the market. The auction outcomes, where major companies secured nearly all new licenses, further illustrate a lack of ownership diversification, hindering smaller companies from participating effectively.
The Communications Act allows for the goal of preventing excessive concentration of licenses, but arbitrarily excluding a category of potential licensees without economic justification is not acceptable. The FCC is required to provide a reasoned basis for its decisions, as established in relevant case law, including *Petroleum Communications, Inc. v. FCC*. The argument that avoiding excessive concentration alone justifies the Cellular eligibility rules is inadequate and appears arbitrary, lacking factual support. The FCC must substantiate its concerns that allowing Cellular providers to bid on Personal Communications Service licenses would harm the market.
Furthermore, Radiofone argues that the Cellular ownership restrictions unfairly discriminate against Cellular providers, as similar restrictions do not apply to Specialized Mobile Radio or Mobile Satellite Service providers. This differential treatment raises substantive due process issues under the Fifth Amendment, as classifications must be rational and not arbitrary. The FCC's imposition of an aggregate cap on spectrum for various services does not address the alleged inequities in treatment between these provider categories.
The FCC maintains that its differing regulatory treatment of Cellular providers and Specialized Mobile Radio (SMR) providers is justifiable, particularly because SMR providers are limited to aggregating no more than forty-five MHz of spectrum. The FCC asserts that the technological and service differences between SMR and Cellular warrant distinct regulatory frameworks. Although future competition among these service types is anticipated, they currently do not compete directly, which supports the FCC's rationale for separate rules. The FCC's position aligns with legal precedents, such as the case of Radio Ass'n on Defending Airwave Rights, Inc. v. U.S. Dept. of Transportation, which upheld rational distinctions in regulatory treatment among different vehicle types.
Additionally, BellSouth challenges the FCC's determination that the Personal Communications Service (PCS) rulemaking did not provide an adequate record to consider rescinding the structural separation requirement for Bell Operating Companies. This requirement, implemented in 1981, mandates that these companies operate cellular services through separate subsidiaries to prevent cross-subsidization and ensure fair interconnection. The FCC had previously indicated it would review this rule within two years and proposed changes in 1994 to align Cellular and PCS regulations. The FCC suggested that concerns related to discrimination and cross-subsidization could be managed with non-structural safeguards rather than maintaining separate subsidiaries, thus allowing local exchange companies to provide PCS without the structural separation previously imposed for Cellular services.
The FCC's proposal aimed to eliminate the structural separation requirement for local exchange carriers, including the Bell Companies, allowing them to offer both Personal Communications Service (PCS) and Cellular services directly. The FCC concluded that maintaining structural separation for PCS operations was not in the public interest, as local exchange carriers could achieve economies of scope that would benefit consumers. However, the FCC decided not to remove the structural separation requirement for Cellular services, stating that the record did not provide sufficient information to justify such a change. As a result, while local exchange carriers can integrate wireline and PCS services, Bell Companies must still operate Cellular services through a separate subsidiary, limiting their ability to provide a full range of services under one entity. BellSouth contended this inconsistency was arbitrary given the FCC's findings on the similarity of PCS and Cellular services and the lack of justification for separate subsidiary requirements for PCS. The review of this agency action is governed by 5 U.S.C. § 706(2)(A), assessing whether the FCC's decision was arbitrary and capricious, acknowledging that agencies are not obliged to address every aspect of an issue in a single proceeding.
Agencies may address complex issues incrementally, but must reevaluate their policies if foundational facts change. BellSouth contends that the FCC's continuation of the structural separation requirement for Bell Companies lacks a reasoned basis, particularly since the FCC has acknowledged the similarities between Personal Communications Service (PCS) and Cellular services and determined that the public interest does not necessitate such separation for PCS. BellSouth argues that this inconsistency violates the FCC's commitment to regulatory symmetry, which aims to foster competition in mobile services. BellSouth's key argument is that the rationale for the structural separation is outdated, as the FCC now believes that existing safeguards against discrimination and cross-subsidization in PCS are adequate. The FCC defends its position by asserting that it can proceed incrementally and maintains that PCS and Cellular services are not identical, justifying different regulatory treatments for the Bell Companies. However, the document suggests that the FCC needs to reassess the structural separation requirement due to the significant changes in the wireless industry over the past fourteen years, which adversely affects the Bell Companies' competitive capabilities. Ultimately, the FCC had concluded that allowing local exchange carriers to access PCS spectrum serves the public interest by enabling a diverse range of services.
Personal Communications Service (PCS) and Cellular providers are expected to compete on price, quality, and service, necessitating a symmetrical regulatory structure as mandated by Congress. The FCC is required to provide a rationale for its disparate treatment of Bell companies but failed to do so, stating merely that the record was insufficient to justify the elimination of the structural separation requirement. This lack of explanation is viewed as arbitrary, especially given contradictory findings in prior FCC proceedings. If PCS and Cellular are sufficiently similar to warrant certain restrictions, it raises the question of why Bell Cellular providers are still subject to the structural separation rule. The FCC has not adequately justified this difference, and it is urged to reexamine the relevance of the structural separation requirement for the Bells in light of public interest considerations. The urgency of this inquiry is emphasized, as the FCC is currently auctioning PCS licenses, with new licensees expected to begin services soon. The structural separation could hinder Bell Companies' competitive ability. As a result, the matter is remanded to the FCC for a prompt inquiry into the necessity of the structural separation requirement for BellSouth and other Bell Operating Companies. The petitions from Cincinnati Bell, Radiofone, and BellSouth are granted, leading to remands for further proceedings.
Allowing Specialized Mobile Radio providers to aggregate spectrum enhances their ability to deliver complex personal mobile communications services. The Federal Communications Commission (FCC) allocated cellular spectrum in twenty-five MHz blocks, restricting cellular providers to one twenty-five MHz block and one ten MHz Personal Communications Service block per geographic area, totaling thirty-five MHz. Meanwhile, other Personal Communications Service providers can acquire up to forty MHz. Cross-ownership restrictions under 47 C.F.R. Sec. 24.204(a) prevent a Cellular licensee from obtaining a thirty MHz Personal Communications Service license in overlapping regions, defined as significant overlap when ten percent or more of the Personal Communications Service area's population is within the Cellular service area.
In each geographic region, there are currently two Cellular licensees, resulting in a duopoly that the FCC deems not fully competitive. The FCC requests deference to its predictive judgments aimed at enhancing competition in the wireless communications market; however, the document points out that this 'less than fully competitive' market stems from the FCC's earlier predictions made in 1981. The request for deference to current forecasts is viewed as unpersuasive.
Regarding Radiofone's argument about Mobile Satellite Service frequencies, the FCC notes that these issues are under separate rulemaking, making it impossible to ascertain future regulations at this time. The distinctions between Mobile Satellite Service and Cellular justify this separate treatment. Radiofone's request to strike down the aggregate forty-five MHz cap, based on alleged irrational Cellular eligibility restrictions, is rejected as this issue was not raised in its initial petition.
