SBA - Office of Advocacy- Federal Communications Commission

Before the

FEDERAL COMMUNICATIONS COMMISSION

Washington, DC 20554

Application for Assignment of Broadband
PCS C and F Block Licenses to Cricket
Holdings, Inc., a Wholly-owned Subsidiary
of Leap Wireless Int’l, Inc. from
DA 98-2319

AirGate Wireless, L.L.C.
KNLF882
KNLG279
KNLG280
KNLG 281
FCC File No. 0000002035

Jacksonville Wireless, L.P.
KNLG224
FCC File No. 0000002167

PETITION TO DENY

OF THE OFFICE OF ADVOCACY

UNITED STATES SMALL BUSINESS ADMINISTRATION

December 14, 1998

EXECUTIVE SUMMARY

Advocacy has standing as a matter of law to be involved in this proceeding given its statutory duty to represent the interests of small entities, Pub. L. No. 94-305 (codified as amended at 15 U.S.C. งง 634 a-g, 637), and its consultation role with the SBA in the SBA’s exclusive statutory duty to determine alternative size standards for small businesses. 15 U.S.C. ง 632.

Advocacy knows of no bona fide small business that can open its doors on one day, and in 24 hours, enter into a contract to acquire five PCS licenses for $19.45 million. Leap was created as an "independent" company on September 23, 1998, and on September 24, entered into agreements with AirGate Wireless and Jacksonville. Although Leap has yet to generate revenue, immediately upon creation it had $279 million in assets, and immediately conducted an Initial Public Offering, also unlikely attributes of a bona fide small business. This is not a designated entity. This is not a small business that has difficulty in accessing capital and therefore deserves the Commission’s assistance or federal benefits. This is a perversion of Section 309(j) of the Communications Act of 1934, as amended, and the FCC’s long standing effort to promote the involvement of small businesses in its competitive bidding proceedings.

Advocacy asserts that neither Cricket nor Leap qualify as a "very small business," because Leap is still an affiliate of QUALCOMM Incorporated ("QUALCOMM"), its former parent company, pursuant to the FCC’s affiliation and attribution rules, and as judged by a totality of the circumstances. Therefore, QUALCOMM’s $2.1 billion revenue and $2.45 billion in assets are attributable to Leap, making Cricket and Leap ineligible to qualify as "entrepreneurs" or "very small businesses" for broadband PCS C and F Blocks. Leap would not be prohibited from acquiring AirGate’s license, only prohibited from receiving 25 percent small business bidding credits and installment payments - federal benefits it does not deserve. 47 CFR งง 24.711(c), 24.712(b). However, Leap would be prohibited from participating in any re-auction of C and F Entrepreneurs Block licenses because it does not meet the entry criteria of a maximum of $500 million in assets.

It is not Advocacy’s intent to add to the tortured saga of C Block, nor to delay the deployment of a competitive wireless service to the public. There are, however, two greater concerns present in this case that go beyond C Block: (1) the danger of eviscerating the Commission’s competitive bidding rules, causing even more difficulty for bona fide small businesses to compete as viable providers in auctionable services and, (2) a breach of the public interest when an unqualified person receives benefits from the federal government.

Based on the corporate structure of Leap, including its contractual relationships with QUALCOMM, the SBA would find an affiliate relationship between Leap and QUALCOMM because there is no clear fracture between the two firms. In brief, (1) the very existence of Leap was and continues to be predicated on QUALCOMM’s existence. (2) There is substantial economic dependence through-out the relationship. Leap’s operating funds, acquisition financing, assets, key officers and directors, contractual arrangements for equipment purchases, office space, administrative support – all come from QUALCOMM. Leap is very dependent on QUALCOMM’s success and continuing existence for its own survival. (3) The two companies have identical or substantially identical business or economic interests in the wireless telecommunications industry, particularly given that Leap now holds QUALCOMM’s former interests in other PCS licensees, and the majority of Leap’s shareholders, if not all, are also QUALCOMM shareholders. (4) Three of QUALCOMM’s former officers, including one of its founders, are now officers and directors of Leap, each with considerable stock holdings and/or options in both companies. Cumulatively, these are very strong affiliate relationships that indicate control or the potential of QUALCOMM to control Leap under the SBA’s and the FCC’s rules.

Leap’s interpretation and use of the Publicly-Traded Corporation ("PTC") exception as a means to avoid the FCC’s affiliation and attribution rules is unreasonable given long-standing FCC policy and the provisions under Section 309(j) to promote small business participation. The rule has also been incorrectly applied to determine small business eligibility. First, the plain language of the PTC exception rule indicates that it was adopted for a very narrow purpose, for "Competitive Bidding Procedures for Broadband PCS." We question whether the exception is applicable for non-competitive bidding purposes such as a transfer or assignment of licenses post-auction. Even if it is valid, the second reason prevails - the rule is not applicable for defining small business eligibility given explicit language in the Fifth Report and Order. Although upon reconsideration the Commission appeared to have extended the PTC exception to small businesses, such extension is arbitrary and capricious, and thus is not valid. The Commission did not offer an "adequate basis and explanation" that justified its change of policy. Moreover, there was no change in external circumstances that alleviated the Commission’s concerns that large investors could control even small publicly-traded companies. Second, the Commission did not in its adoption of the Fifth MO&O, nor does it currently, have the statutory authority under the Small Business Act, the SBA’s regulations, nor its own rules to except or exempt any entity from its affiliation rules when determining small business eligibility. If the PTC exception rule was to be used to define small business eligibility, it was subject to the SBA’s approval. The Commission cannot now deviate from its SBA-approved definition without the SBA’s express approval.

Advocacy challenges the assertion that even if the warrant were exercised today because "[n]o other QUALCOMM-affiliated persons holding minority interests in Leap which, if aggregated, would rise to a controlling interest."Although the officers and directors of the two companies have no common members, the Leap prospectus filed with the SEC reveals a deep and continuing relationship between the directors and officers of Leap Wireless and the directors and officers of QUALCOMM, which points to a unity of interest and control. Leap’s officers and directors have a continuing relationship with QUALCOMM given considerable stock holdings in QUALCOMM, and possibly, continuing employee benefits under QUALCOMM’s compensation for senior executives.

Advocacy does not deny that the contractual arrangements between Leap and QUALCOMM are precisely the type of agreements that companies typically enter into in implementing a spin-off transaction. However, this is not the correct issue. The correct issue is whether these are typical contractual relationships between two separate, independent, disinterested companies – companies that have no affiliation with each other. The fact that there are such restrictive contracts between the two companies may be sufficient enough to determine that there has been no clear fracture between the two.

A very important factor when evaluating control and affiliate relationship of any entity is affiliation through the source of funds. How the entity is capitalized and where the source of funds of its acquisition originate goes to heart of "control." Such a factor in an evaluation of a spin-off company is even more critical. Leap’s financing of its purchase of AirGate and Jacksonville is capitalized 100 percent by QUALCOMM, clearly an indicia of control that alone requires the FCC’s rejection of designated entity status for this transfer application.

PETITION TO DENY

OF THE OFFICE OF ADVOCACY

UNITED STATES SMALL BUSINESS ADMINISTRATION

I. Introduction

The Office of Advocacy of the United States Small Business Administration ("Advocacy") submits this Petition to Deny in response to the assignment applications for the Personal Communications Services ("PCS") licenses from Jacksonville Wireless L.P. ("Jacksonville") and AirGate Wireless, L.L.C. ("AirGate") to Cricket Holdings, Inc. ("Cricket"), a wholly-owned subsidiary of Leap Wireless International, Inc. ("Leap"). FCC Public Notice DA 98-2319, AirGate Wireless, L.L.C. and Cricket Holdings, Inc. Application for Assignment of Authorization for Auctionable Services, FCC Form 603, Exhibit I, Oct. 5, 1998 ("Cricket/AirGate Application").(1) Advocacy asserts that neither Cricket nor Leap qualify as a "very small business" because Leap is still an affiliate of QUALCOMM Incorporated ("QUALCOMM"), its former parent company, pursuant to the FCC’s affiliation and attribution rules, and as judged by a totality of the circumstances. Therefore, QUALCOMM’s $2.1 billion revenue and $2.45 billion in assets are attributable to Leap, making Cricket and Leap ineligible to qualify as "entrepreneurs" or "very small businesses" for broadband PCS C and F Blocks. Leap would not be prohibited from acquiring AirGate’s license, only prohibited from receiving 25 percent small business bidding credits and installment payments - federal benefits it does not deserve. 47 CFR งง 24.711(c), 24.712(b). However, Leap would be prohibited from participating in any re-auction of C and F Entrepreneurs Block licenses because it does not meet the entry criteria.

II.The Office of Advocacy Is a Party in Interest and Has Standing to Participate in this Proceeding, as a Matter of Law.

The issue of whether a spin-off corporation that was previously a wholly-owned subsidiary of a large corporate entity is eligible for "small business" designation for the purpose of its acquisition of licensees assigned via the competitive bidding process is one of first impression before the Commission. Thus, this case deserves intense scrutiny by the Commission because its ruling will set a precedent that will impact not only future broadband PCS Entrepreneur Block activity (including the re-auction scheduled in 1999), but all competitive bidding proceedings that involve designated entities ("DE") which are classified as small and very small businesses, minority and women businesses, and rural telephone companies. 47 CFR S 1.2110. Additionally, a Commission decision in Leap’s favor could be harmful to several classes of small entities, including current licensees, potential licensees, wireless equipment manufacturers and suppliers, and resellers.

Therefore, Advocacy has standing as a matter of law to be involved in this proceeding to represent the interests of small entities and to preserve integrity in the Commission’s application of its small business size standards. Congress established the Office of Advocacy in 1976 by Pub. L. No. 94-305(2)to represent the views and interests of small business within the Federal government. Its statutory duties include serving as a focal point for concerns regarding the government’s policies as they affect small business, developing proposals for changes in Federal agencies’ policies, and communicating these proposals to the agencies.(3)

Significantly, the Commission’s affiliation and attribution rules were modeled after the United States Small Business Administration’s ("SBA") regulations, the federal government’s exclusive authority, as established by Congress, on small business size standards and eligibility. 15 U.S.C. ง 632(a)(2)(C); see also Northwest Mining Ass’n v. Babbitt, 5 F. Supp 9, 15 (D.D.C 1998) ("the SBA may ‘specify detailed definitions or standards by which a business concern may be determined to be a small business concern for the purposes of the Act or any other Act’")(citation omitted). Advocacy works routinely with the Administrator and the SBA’s Office of Size Standards in the SBA’s exercise of its statutory duty to approve FCC alternative small business size standards. In fact, regarding the issue of determining small business size standards, the SBA and Advocacy have been involved in the FCC’s implementation of Section 309(j) and broadband PCS proceeding since the beginning.

In drafting these comments Advocacy consulted with various divisions of the SBA, including the Office of Size Standards, the Office of Government Contracting, the Office of Minority Enterprise Development, and legal opinions from the Office of Hearings and Appeals.(4)The SBA has considerable expertise in evaluating affiliation factors and small business size standard eligibility, including this very issue: whether a spin-off company is eligible as a small business to receive government benefits designated for small businesses. Since the Commission’s affiliation rules were modeled on the SBA’s, it is appropriate for there to be intergovernmental consultation on this issue from the SBA. Advocacy hopes that these comments will provide helpful guidance to the Commission.

III. Overview of the Purpose of Section 309(j) and the Commission’s Rules in Promoting Bona Fide Small Business Participation in Competitive Bidding Proceedings.

It is not Advocacy’s intent to add to the tortured saga of C Block, nor to delay the deployment of a competitive wireless service to the public. There are, however, two greater concerns present in this case that go beyond C Block. One is the danger of eviscerating the Commission’s competitive bidding rules, causing even more difficulty for bona fide small businesses to compete as viable providers in auctionable services. Given the tremendous rate of mergers and alliances between large companies, small businesses are the best hope to provide competition and choice to under-served and niche areas. The second concern is a breach of the public interest when an unqualified person receives benefits from the federal government.

Therefore, it is first important to reiterate the Congressional intent of Section 309(j) of the Communications Act of 1934, as amended, which provides the statutory authority for the FCC to promote small business participation in its competitive bidding proceedings. 47 U.S.C. ง 309(j). It is extremely relevant that the Commission’s small business incentives were designed to fulfill the statutory objectives of the Communications Act of 1934, as amended, by "promoting economic opportunity and competition and ensuring that new and innovative technologies are readily accessible to the American people by avoiding excessive concentration of licenses and by disseminating licenses among a wide variety of applicants, including small businesses, rural telephone companies, and businesses owned by members of minority groups and women . . . ." 47 U.S.C. ง 309(j)(3)(B). Congress recognized that small businesses, minorities, and women-owned businesses do not have ready access to capital nor the resources to acquire telecommunications licenses despite being competent to qualify and perform under the license.(5) Therefore, Congress directed the Commission to consider special incentives to promote economic opportunities for these designated entities that compensated for the lack of ready access to capital.(6)

Advocacy acknowledges the measures that the Commission has already taken to allocate equitably such incentives, including refinement of its affiliation rules to include an "indicia of control" standard that "help[s] to ensure that businesses seeking small business status are truly small."(7) For example, in support of its denial to modify or eliminate the attribution rules as requested by commenters on reconsideration of the broadband PCS Fifth Report and Order,(8) the Commission stated that "[a]ggregating the gross revenues and total assets of all attributable investors in and affiliates of the applicant is central to an accurate size determination, and consistent with the Small Business Administration’s (SBA’s) approach to similar determinations. Viewing gross revenues and assets of each investor in isolation could result in very large entities bidding for these licenses. . . . In this context, however, we are not concerned with ownership, but instead seek to make a financially-based size determination in order to assess whether an applicant is eligible for significant government benefits."(9)

The difficulty of the Commission’s effort lies in granting bona fide small businesses the flexibility to raise capital and secure investors from a variety of sources for capital intensive telecommunications services while ensuring that the Commission’s small business classification does not become illusory nor its criteria eviscerated.

Some legitimate small businesses have been very successful in raising capital and forming relationships with large companies and/or well financed individuals. In fact, QUALCOMM is an equity investor in a PCS C Block licensee, Chase Telecommunications. This relationship is commendable. It is very important that there remain incentives for large companies to invest in small licensees for C Block and all other telecommunications services. However, allowing large corporations the ability to spin-off a subsidiary as a means to participate in a licensing proceeding they would otherwise be ineligible for is totally unacceptable and destroys the potential for small business investment. We strongly encourage the Commission to take every protective measure possible as a means to address innovative schemes and business structures that are inconsistent with the Communications Act’s statutory objectives of leveling the playing field for bona fide small businesses.

IV. Cricket Holdings and Leap Wireless Do Not Qualify as Designated Entities – under Any Standard.

Advocacy knows of no bona fide small business that can open its doors on one day, and in 24 hours, enter into a contract to acquire five PCS licenses for $19.45 million. Leap was created as an "independent" company on September 23, 1998, and on September 24, entered into agreements with AirGate Wireless and Jacksonville. Although Leap has yet to generate revenue, immediately upon creation it had $279 million in assets, and immediately conducted an Initial Public Offering, also unlikely attributes of a bona fide small business.(10) This is not a designated entity. This is not a small business that has difficulty in accessing capital and therefore deserves the Commission’s assistance or federal benefits. This is a perversion of Section 309(j) of the Communications Act of 1934, as amended, and the FCC’s long standing effort to promote the involvement of small businesses in its competitive bidding proceedings.

Cricket Holdings is a wholly-owned subsidiary of Leap Wireless. Leap is a new publicly-traded corporation that was a wholly-owned subsidiary of QUALCOMM until spun-off from its former parent company in September 1998. QUALCOMM is also publicly-traded and is a leading manufacturer and supplier of digital wireless equipment. It generated a record of more than $2.1 billion in gross revenues in 1997. It also has $2.45 billion in assets and over 10,000 employees.(11) Advocacy acknowledges that Leap is technically no longer a wholly-owned subsidiary of QUALCOMM after the distribution of Leap’s stock to QUALCOMM’s shareholders (on a four-to-one ratio) on September 23, 1998 (i.e. Distribution Date). As part of this transaction, QUALCOMM, inter alia, holds a warrant for the purchase of 5.5. million shares of Leap common stock, representing 23.8 percent of Leap’s outstanding shares as of October 9, 1998.(12)

However, Advocacy asserts that Leap is not truly independent from its former parent company and the alleged "spin-off" of Leap by QUALCOMM is a fiction for the purposes of this assignment application. After the Distribution Date there continues to be a close relationship between QUALCOMM and Leap. Significantly, this fact is confirmed by Leap’s own admission. "QUALCOMM’s relationship as equipment vendor to Leap and the Leap Operation Companies as lender under the Credit Facility will give QUALCOMM significant influence over Leap and will create certain conflicts with Leap."(13) Advocacy asserts that it is this "significant influence," compounded by several additional factors, that provide sufficient evidence of QUALCOMM’s continued control or the potential to control Leap.

A. The Commission’s Definition of "Very Small Business" and its Standard of Review for Designated Entity Eligibility.

Leap has requested that the FCC qualify it as a "very small business" defined as an "entity that, together with its affiliates and persons or entities that hold interest in such entity and their affiliates has average annual gross revenues that are not more than $15 million for the preceding three years." 47 CFR ง 24.720(b)(1) (emphasis in original).(14)

In its evaluation of Leap’s eligibility for DE status, the Commission will consider multiple factors enumerated in 47 CFR ง 1.2110(b)(4) in addition to the six factors established in Intermountain Microwave, 24 Rad Reg. 983 (1063).(15) Such factors must also include application of the Commission’s affiliation and attribution rules that help determine the nature of a relationship between a DE and its investors, partners, and suppliers. Pursuant to Section 24.720(l) of the Communications rules, "[a]n individual or entity is an affiliate of an applicant or of a person holding an attributable interest in an applicant under ง24.709 . . . if such individual or entity – (A) directly or indirectly controls or has the power to control the applicant, or (B) is directly or indirectly controlled by the applicant, or (C) is directly or indirectly controlled by a third party or parties that also has the power to control the applicant, or (D) has an ‘identity of interest’ with the applicant." 47 U.S.C. ง 1.2110(b)(4)(i).

Control can be either positive or negative.(16) Control can also be defined as either de jure or de facto.(17)"Typically, de jure control is evidenced by ownership of 50.1 percent or more of a entity’s voting interest, while de facto control is determined on a case-by-case basis after considering all of the circumstances of a given application."(18) It is also immaterial whether control is exercised, "so long as the power to control exists."(19)The Commission’s final decision on whether QUALCOMM has de facto control of Leap will be based on the "totality of the circumstances."(20)

B. The SBA’s Fundamental Principles of Affiliation for Newly Organized Entities Is Pertinent to the FCC’s Evaluation of Affiliation for a Spin-off Company and as Applied to Leap.

If the Commission deviates from the Intermountain Microwave factors, it must provide a reasoned explanation for doing so.(21) Because this is a case of first impression for the FCC, there are several additional factors not previously considered in FCC precedent that Advocacy considers critical to the Commission’s evaluation of affiliation when a spin-off company is involved. In fact, these principles do not really deviate from Intermountain, but help elucidate the business realities inherent in the unique relationship between spin-off companies and former parent companies. They also build on the enumerated factors in the Commission’s rules that were initially modeled on SBA’s rules.

Leap, as a spin-off, is not a newly-created or nascent entity. Technically, it is a "newly organized entity," because it existed previously as a wholly-owned subsidiary of QUALCOMM.(22) For a spin-off to be considered separate from its predecessor-in-interest or from its parent company, it must demonstrate that there is a "clear fracture" with the second firm.(23) A finding for affiliation for newly-organized entities under the SBA’s rules is also based on a totality of the circumstances review pursuant to 13 CFR ง 121.103(a).

General Principles of Affiliation. (1) Concerns are affiliates of each other when one concern controls or has the power to control the other, or a third party or parties controls or has the power to control both. (2) SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships, in determining whether affiliation exists. (3) Individuals or firms that have identical or substantially identical business or economic interests, such as family members, persons with common investments, or firms that are economically dependent through contractual or other relationships, may be treated as one party with such interests aggregated. (4) SBA counts the receipts or employees [based on specific industry measurement of how small business is defined] of the concern whose size is at issue and those of all its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit, in determining the concern’s size.

13 CFR ง 121.103(a).

Based on the corporate structure of Leap, including its contractual relationships with QUALCOMM, the SBA would find an affiliate relationship between Leap and QUALCOMM because there is no clear fracture between the two firms.(24) In brief, (1) the very existence of Leap was and continues to be predicated on QUALCOMM’s existence. (2) There is substantial economic dependence through-out the relationship. Leap’s operating funds, acquisition financing, assets, key officers and directors, contractual arrangements for equipment purchases, office space, administrative support – all come from QUALCOMM. Leap is very dependent on QUALCOMM’s success and continuing existence for its own survival and if QUALCOMM ceased to exist – Leap would not exist, or at minimum, would be in serious financial difficulty. Conversely, if Leap failed or defaulted, QUALCOMM losses would be heavy since it is Leap’s exclusive financier. However, QUALCOMM would also be the direct beneficiary since it holds a security interest in all of Leap’s assets. (3) The two companies have identical or substantially identical business or economic interests in the wireless telecommunications industry, particularly given that Leap now holds QUALCOMM’s former interests in other PCS licensees, and the majority of Leap’s shareholders, if not all, are also QUALCOMM shareholders. (4) Three of QUALCOMM’s former officers, including one of its founders, are now officers and directors of Leap, each with considerable stock holdings and/or options in both companies. Cumulatively, these are very strong affiliate relationships that indicate control or the potential of QUALCOMM to control Leap under the SBA’s and the FCC’s rules.

C Evaluation of Cricket and Leap’s Relationship with QUALCOMM as Alleged in the Cricket/AirGate Application.

1. For the Purpose of PCS C and F Block Participation, QUALCOMM’s "Spin-off" of Leap Is a Fiction.

Advocacy does not doubt that there are numerous legitimate bases for the spin off of Leap from QUALCOMM that are wholly unrelated to this application for transfer. Nonetheless, the relationship between QUALCOMM and Leap is suspect as it pertains to DE eligibility.

First, it is important to address Leap’s reference to the Securities Exchange Commission’s ("SEC") determination that QUALCOMM does not control Leap.(25) Leap requests that the FCC give "substantial weight to the determination of its sister agency."(26) We think not. Advocacy believes the issue before the SEC was a narrow one: whether QUALCOMM would receive favorable accounting treatment after it transferred certain operating losses to Leap.(27) The SEC’s criteria for resolving this issue could be very different criteria than those used by the FCC. Unfortunately, Advocacy was not able to evaluate the actual phrasing from the SEC because the letter to QUALCOMM is not available to the general public. The letter could include a specific expensing provision that looks at which entity, Leap or QUALCOMM, will be wholly responsible for the losses. The SEC’s ruling may or may not mean that Leap and QUALCOMM are truly separate entities or that there isn’t control. Regardless, the SEC’s determination was only for a narrow purpose as previously noted. It was not for determining small business eligibility under the FCC’s rules and therefore, is not pertinent to this proceeding. And if any deference is to be granted to a "sister agency," the Office of Advocacy respectfully requests that the FCC give controlling deference to Advocacy’s comments and the SBA’s decisions, particularly since SBA’s expertise is in determining small business size standard eligibility, the very issue before the FCC.

The following are the indicia of control factors set forth in Leap’s application that Advocacy takes issue with. Advocacy’s discussion is organized under the factors set forth in the Commission’s rules, however it also applies to the pertinent Intermountain Microwave factors. Further examination of the structure and relationship between Leap and QUALCOMM measured against several indicia of control factors illustrate that the two companies are not totally independent.

a. Affiliation through Stock Ownership

i. QUALCOMM’s Warrant Indicates an Affiliate Relationship.

Under the Commission’s affiliation rules, QUALCOMM’s warrant to acquire 5.5 million of Leap’s shares within the next ten years "are generally considered to have a present effect on the power to control the concern, . . . [and] will generally be treated as though the rights held thereunder had been exercised." 47 CFR ง 24.720(l)(5). The issue is then whether QUALCOMM’s interests (i.e. 5.5 million shares) in Leap will be attributable to Leap in determining its DE eligibility.

Generally, QUALCOMM, may hold up to 25 percent stock in a qualifying entrepreneur’s block applicant before its interest is attributable. 47 CFR ง 24.720(j). Under a narrow exception to this general rule, that interest is limited to a maximum 15 percent of the voting stock of an applicant that is a publicly-traded corporation, but only if the applicant meets additional criteria. 47 CFR ง 24.709(b)(2); see infra, page 21. Advocacy notes that QUALCOMM’s warrant which represents either 23.8 percent of voting stock (per the Leap SEC Prospectus) or 18 percent (per the Cricket /AirGate application), exceeds this 15 percent limit. QUALCOMM’s stock interest in Leap is active equity under the Commission’s rules. Only corporate "investors who hold non-voting stock or de minimis amounts of voting stock that include no more than five percent of the voting interests" are classified as passive.(28) The Commission’s limitation on equity investment interests should "serve as a safeguard that the very large entities who are excluded from bidding in these blocks do not, through their investments in qualified firms, circumvent the gross revenue/total asset caps."(29)

In its application, Leap attempts to discount the value of QUALCOMM’s warrant by asserting that the warrant "is not of the type that provides sufficient economic benefit to its holder to constitute ownership under the Commission’s rules."(30) Leap relies primarily on whether or not it is able to acquire Leap’s stock considerably below an anticipated market price compared to "typical" warrants.(31) This assertion ignores the basic functions of the public stock market and how the market reacts when there is a major purchase of shares for one specific company. There are still considerable benefits to QUALCOMM through its warrant arrangement. Given the laws of supply and demand, heavy trading in one company causes the stock price to rise. QUALCOMM’s purchase of 5.5 million shares of stock in a company with approximately 20 million outstanding shares would be heavy trading by most definitions. Therefore, if QUALCOMM purchased its shares on the open market, it would be subject to fluctuating market conditions that normally exist during heavy trading – bottom-line, it would pay higher prices if it were to purchase the entire 5.5 million shares. Conversely, its warrant provides QUALCOMM with the opportunity to purchase the entire 5.5 million shares "at a purchase price equal to the average of the last sales price per share . . . for each of the five (5) consecutive trading days immediately prior to its exercise,"(32) in effect, a fixed price for the entire block. Granted, QUALCOMM’s warrant price is not likely the very favorable price offered at the time of initial distribution, but it still enables QUALCOMM to essentially control its purchase price by simply choosing when it wants to exercise its warrant. QUALCOMM is guaranteed a stable, favorable price to purchase a major interest.

Advocacy also demonstrates infra that there are additional control factors between QUALCOMM and Leap, therefore, QUALCOMM’s warrant must be calculated on a fully-diluted basis under 47 CFR ง 24.709. Advocacy also requests that the Commission deny Cricket/Leap’s request to waive this rule.

Advocacy offers a simple resolution to this one particular issue. If QUALCOMM’s warrant does not provide real economic benefit, as Leap has alleged, they should strike the warrant clause to relieve concerns. The savings clause would then become unnecessary.

ii. Leap’s Use of the Publicly Traded Corporations Exception Is Incorrect for Post Auction Purposes and for Defining Small Business Eligibility.

Leap contends that even if the FCC finds an affiliate relationship in QUALCOMM’s stock ownership of Leap, such relationship is "moot" when using the Publicly Traded Corporation ("PTC") exception.(33) Advocacy disagrees. The PTC rule states "[w]here an applicant (or licensee) is a publicly traded corporation with widely dispersed voting power, the gross revenues and total assets of a person or entity that holds an interest in the applicant (or licensee) and its affiliates, shall not be considered." 47 CFR ง 24.709(b)(2).

Leap’s interpretation of the PTC rule is unreasonable given long-standing FCC policy and the provisions under Section 309(j) to promote small business participation.

The Supreme Court has implied that federal regulations are to be "construed to effectuate the intent of the enacting body."(34) The FCC receives substantial deference for its interpretation of its own rules, unless an "alternative reading is compelled by the regulation’s plain language or by other indications of the [Commission’s] intent at the time of the regulation’s promulgation."(35) The FCC’s regulations are also given "controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute."(36) Therefore, the FCC’s consideration of Leap’s interpretation of the PTC rule must include a review of the intent of the rule at the time the rule was promulgated and whether the rule comports with Section 309(j).

There are three reasons why this exception has been incorrectly applied to this license transfer request. First, the plain language of the PTC exception rule indicates that it was adopted for a very narrow purpose. The rule is listed under the Part 24 section titled "Subpart H – Competitive Bidding Procedures for Broadband PCS," and the Commission explicitly stated in its Fifth Report and Order, that "[w]e note that this exception for publicly held companies is only applicable for purposes of assessing eligibility to bid in the entrepreneur’s blocks and for the general installment payment option." Fifth Report and Order, para. 163 n.141 (emphasis added). We question whether the exception is applicable for non-competitive bidding purposes such as a transfer or assignment of licenses post-auction.

Even if it is valid, the second reason prevails - the rule is not applicable for defining small business eligibility. The Commission explicitly stated upon adoption that "[w]e do not believe that publicly traded corporations with individual shareholders owning up to 15% active equity require additional special provisions such as bidding credits, ‘enhanced’ installment payments, or tax certificates to overcome access to capital problems. Thus, we will not apply this exception with regard to the small business definition . . . ."(37) However, upon reconsideration of the Fifth Report and Order, the Commission modified some of its eligibility provisions for publicly-traded corporations. These included a limited exemption from the control group requirement for small, publicly-traded corporations with widely dispersed voting stock ownership "because no identifiable control group exists or can be created."(38) The Commission added that, a small publicly-traded corporation meeting the criteria above will "not be required to aggregate with its own revenues and assets the revenues and assets of management and shareholders for the purposes of entrepreneurs block eligibility or small business status."(39) Therefore, despite its express language in the Fifth Report and Order not to apply the PTC rule to define small business, the Commission appears to have extended the rule to small business eligibility.

Advocacy asserts two arguments that this extension to small business eligibility is invalid. First, pursuant to the Supreme Court’s decision in the seminal case Motor Vehicle Manufacturers Ass’n v. State Farm Insurance Co., 463 U.S. 29 (1983), the Commission did not offer an "adequate basis and explanation" that justified its change of policy.(40) Therefore, the PTC rule as applied to small business eligibility is invalid.(41) With the addition of just four words ("or small business status") tacked on the end of a section that addressed only problems with identifying control groups, the Commission ignored its previous rationale that a publicly-traded company with deep pocketed investors does not deserve government benefits and completely changed its decision to not use the PTC’s exception for determining small business eligibility. There was no discussion at all, much less than a "cogent" discussion, outside of the discussion on the control group, which justified this change in policy. (42)Difficulty in identifying the control group has no relevance on whether a publicly-traded company would also have difficulty accessing capital or deserved federal benefits as the Commission strongly asserted. Moreover, there was no change in external circumstances that alleviated the Commission’s concerns that large investors could control even small publicly-traded companies.(43) We propose that the "small business" language was merely a drafting error. However, if such an extension was truly intended, we assert that the decision to extend the PTC exception to define small business is arbitrary and capricious and cannot stand.

Second, the Commission did not in its adoption of the Fifth MO&O, nor does it currently, have the statutory authority under the Small Business Act, the SBA’s regulations, nor its own rules to except or exempt any entity from its affiliation rules when determining small business eligibility. The evaluation of whether an affiliation exists with another entity is an integral part of the Commission’s own definition of very small business, an "entity that, together with its affiliates and persons or entities that hold interest in such entity and their affiliates has average annual gross revenues that are not more than $15 million for the preceding three years." 47 CFR ง 24.720(b)(1) (underlined emphasis added).(44) This is the alternative small business definition that was approved by the SBA pursuant to 15 U.S.C. ง 632(a)(2)(C) under its exclusive authority to determine small business size standards. See also Northwest Mining Ass’n v. Babbitt, 5 F. Supp 2^nd 9, 16-17 (D.D.C. 1998). If the PTC exception rule was to be used to define small business eligibility, it was subject to the SBA’s approval. This exemption was never disclosed to the SBA upon the Commission’s request for SBA’s approval nor during the SBA’s review. Given the importance of affiliation in the SBA’s own regulations, 13 CFR ง 121.103, and its previous review of FCC alternative size standards, it is highly unlikely that the SBA would have approved any FCC rule that did not include an affiliation test to determine an entity’s eligibility as a small business. Therefore, the Commission cannot now deviate from its SBA-approved definition without the SBA’s express approval. The absence of an affiliation test at this time to determine small business eligibility for the Cricket/AirGate application would render any FCC’s decision on this application invalid because it would violate the Small Business Act and thus, would not be in accordance with law. 5 U.S.C. ง 706.

iii. Leap Does Not Qualify for Use of the Publicly-Traded Corporation Exception.

Advocacy also asserts that Leap does not qualify under the PTC exception as drafted for several reasons. The PTC exception is only for publicly-traded corporations "with widely dispersed voting power." 47 CFR ง 24.709(b)(2). Leap’s stock is not widely-dispersed because QUALCOMM stock holders hold substantially all of Leap’s stock and as noted above, a nucleus of nine people effectively control Leap’s stock. See infra, page 24. It is insignificant that Leap is now available on the NASDAQ National Market System. The Commission adopted two tests for determining widely-dispersed ownership of voting stock; 1) "if no person (including any ‘group’ . . . ) has the power to control the election of more than 15 percent of the corporation’s directors; [and 2)] "no person shall have an equity interest in the applicant of more than 15 percent."(45) Advocacy asserts that Leap has failed both tests. In its application, Leap only proffers that under its warrant, QUALCOMM could not elect more than two board members, "far fewer than the five required to exercise control."(46) It did not address what degree of influence on elections QUALCOMM shareholders could have as a majority voting block.

More importantly, the inherent nature of Leap’s status as a spin-off company does not warrant application of the provisions set forth by the Commission obviously intended to aid nascent publicly-traded corporations. The application of the PTC exception rule to a spin-off company would be inconsistent with the Commission’s stated intent at the time the rule was promulgated and inconsistent with Section 309(j) of the Communications Act of 1934, as amended.

In crafting its designated entity rules, the Commission took various precautions to ensure that eligibility for the entrepreneur blocks would be limited to bona fide entrepreneurs and small entities, especially small businesses that historically have had limited access to capital. The Commission was very concerned about abuse of its designated entity rules and "sham deals."(47) "[P]ublicly-traded corporations with individual shareholders owning up to 15% active equity do not require additional special provisions such as bidding credits, ‘enhanced’ installment payments, or tax certificates to overcome access to capital problems."(48) The intent of the Commission was clear – its rules were designed to protect small entities with lack of access to capital and offer significant incentives for large companies, who are otherwise ineligible to participate in the entrepreneur blocks, to "partner" with small companies, while maintaining the integrity of the designated entity. In the transfer petition at issue, QUALCOMM/Leap, the larger company would not be a partner but admittedly a direct competitor to other small licensees, including those it holds an equity interest in.(49) Given these extensive efforts, it is obvious that the Commission’s adoption of the PTC exception rule for PCS C and F Blocks was in consideration of newly-created publicly-traded companies, not newly- organized spin-offs from large corporate entities. Advocacy believes that applications for, or transfers of licenses to "spin-offs" weren’t even contemplated nor expected in 1994.

Nonetheless, Leap has interpreted the PTC exception to mean that its sole status as a publicly-traded company would shield it totally from the Commission’s attribution and affiliation rules. Under this interpretation, the $2.1 billion revenue and $2.45 billion in assets of QUALCOMM would never be considered by the Commission in its evaluation of Leap’s qualifications for "very small business" status. This interpretation simply does not make any sense. Such a broad interpretation would negate all of the work the Commission has done since 1994, eviscerate the entire competitive bidding process, and make the statutory provisions to promote small business participation in Section 309(j) illusory. It also could allow for future abuses in the Commission’s foreign ownership restrictions, cable or telephony cross ownership restrictions, and any other prohibitions that are only discoverable upon looking at the affiliation and attribution structure of an applicant.

Supported by the above reasons, Advocacy respectfully requests that the FCC reject Leap’s use of the PTC exception to determine its eligibility as a "very small business."

iv. Common Stock Ownership of QUALCOMM Shareholders in General and QUALCOMM’s Board of Directors Indicate Affiliation.

Leap alleges that QUALCOMM does not control Leap through direct or indirect ownership of Leap stock, even if the warrant were exercised today because "[n]o other QUALCOMM-affiliated persons holding minority interests in Leap which, if aggregated, would rise to a controlling interest."(50)Advocacy challenges this assertion given that significant blocks of Leap voting stock are also held by the majority of QUALCOMM shareholders and collectively by the individual members of QUALCOMM’s Board of Directors.

The simple fact that all QUALCOMM shareholders on the Distribution Date received Leap stock makes QUALCOMM shareholders an easily "identifiable group of shareholders holding a controlling interest in the company’s voting stock,"(51) thus, a majority voting block that has effective control or has the potential to control Leap. In fact, QUALCOMM continues to promote investment of Leap stock on its own Web pages to current and potential investors. It is highly unusual for one non-affiliated company to promote the investment of another non-affiliated company.

QUALCOMM Spin-Off Information. Click here for more information on QUALCOMM’s new spin-off company, Leap Wireless International, or please contact QUALCOMM Investor Relations at 1 619 658 4813 or Leap Investor Relations at 1 618 658 4260.(52)

Advocacy asserts that QUALCOMM’s tens of thousands of shareholders control more than 50 percent of Leap voting stock. See 47 CFR ง 24.720(l)(4)(i). However, if QUALCOMM shareholders do not control 50 percent or more, a presumption of control still exists because its block "is large as compared with any outstanding block of stock." 47 CFR ง 24.720(l)(4)(ii).

Addressing QUALCOMM’s Board of Directors stock ownership, general information on individual stock ownership is not available to Advocacy. Therefore, we are not able to determine with specificity the number of Leap shares distributed to QUALCOMM directors in September via the "1 share of Leap for every 4 QUALCOMM shares" ratio, nor can we confirm what additional purchases or sales, if any, have been made since the Distribution Date. However, the stock holdings of a company’s board of directors and officers - "insiders" - is public information. As of December 4, 1998, QUALCOMM’s directors collectively held 5,021,575 shares of stock in QUALCOMM, plus another 1,096,000 in options.(53) Given the ‘four to one disbursement’ ratio of QUALCOMM stock to Leap, it is reasonable to estimate that QUALCOMM directors’ shares of QUALCOMM stock (excluding options since obviously not exercised prior to the September Distribution Date) translates to approximately 1,255,393 shares of Leap, representing 7.1 percent of the total of 17, 647,684 outstanding shares of stock as of October 9, 1998, as reported in the SEC Prospectus.(54) (We acknowledge that the number of shares or percentages could be higher or lower based on the actual shares distributed in September and the total shares that are outstanding to date.)

In the aggregate, QUALCOMM’s warrant for 5.5 million shares, fully diluted, and QUALCOMM Board of Directors’ 1,255,393 estimated shares could represent 29 percent controlling share of Leap - in excess of the Commission’s 25 percent non-attributable interest benchmark and the 15 percent for qualification under the Publicly Traded Corporation exception. Even if Advocacy is incorrect in its estimate of the percentage of Leap stock held by QUALCOMM directors, there is no doubt that cumulatively, QUALCOMM directors and shareholders have majority control of Leap. Given that the corporation and the directors are essentially one and the same since the directors manage and control the corporation and can influence its shareholders, Leap stock held by QUALCOMM’s directors combined with the majority block held by QUALCOMM shareholders, indicates controlling stock ownership of Leap, and therefore affiliation.

Furthermore, Leap’s board of directors, especially the three that also serve as senior executive officers that were previously with QUALCOMM just prior to the spin-off, also have generous shares of stock in Leap given their dividend distribution as QUALCOMM shareholders – a total of 292,955 shares in Leap reported as of December 4, 1998.(55) Cumulatively, Leap’s directors only hold approximately 1 percent of Leap’s outstanding shares as of October 9, 1998. But because they hold common stock interests in QUALCOMM as well, this 1 percent is a factor. Added with the percent of shares controlled by QUALCOMM directors and shareholders (who are also Leap directors and shareholders), – an estimated total of 29 percent of Leap voting stock is controlled by a nucleus of nine (9) people that serve on either QUALCOMM’s or Leap’s board of directors.

b. Affiliation through Common Management.

Although the officers and directors of the two companies have no common members, the Leap prospectus filed with the SEC reveals a deep and continuing relationship between the directors and officers of Leap Wireless and the directors and officers of QUALCOMM, which points to a unity of interest and control. Advocacy also rejects the assertion that the only three stock-holding members of Leap’s current board of directors, all former QUALCOMM officers, "have no continuing relationship with QUALCOMM."(56) To the contrary, these officers and directors have a continuing relationship with QUALCOMM given considerable stock holdings in QUALCOMM, and possibly, continuing employee benefits under QUALCOMM’s compensation for senior executives.

QUALCOMM provides generous benefits to its highest officers, benefits that appear to have survived the transfer of the three employees to the senior executive ranks of Leap. Although it is not unusual for a former employee to keep his or her 401K plan and other benefits at his or her former employer, this is not the usual scenario that involves separate and disinterested parties and therefore, deserves a hard look by the FCC.

Prior to serving as Leap’s Chairman of the Board/President and CEO, Board Director/Executive Vice President, and Board Director and Secretary/ Senior V.P and General Counsel, Harvey White, Thomas Bernard, and James Hoffman, respectively, were senior officers of QUALCOMM.(57) White was a co-founder of the company. In this capacity, they received QUALCOMM matching 401(k) contributions, executive benefits payments, and executive retirement contributions.(58) The executive retirement contributions especially illustrate the continued interest of Leap’s officers in QUALCOMM since they are unsecured and depend on continued profitability of QUALCOMM. They also provide Leap’s officers with additional ownership interests in QUALCOMM.(59)

White, Bernard, and Hoffman collectively contributed in excess of $110,000 to the executive retirement contribution plan.(60) After reviewing QUALCOMM’s SEC filing, Advocacy believes that these interests survive intact the transfer of officers to Leap. The SEC Prospectus states that Leap is assuming QUALCOMM’s obligation under White’s life insurance policy, but it is silent on whether Leap will assume the other executive benefits obligations.(61) Therefore, Advocacy concludes that Leap’s officers still maintain extensive benefits from employment at QUALCOMM, creating not only a potential for control but also a conflict of interest.

Advocacy asserts that an affiliate relationship exists through common management.

c. Affiliation through Contractual Relationships.

The Cricket/AirGate Application states that the various contractual relationships between the parties are "precisely the type of agreements that companies typically enter into in implementing a spinoff transaction."(62) Advocacy does not deny that. However, this is not the correct issue. The correct issue is whether these are typical contractual relationships between two separate, independent, disinterested companies – companies that have no affiliation with each other. The answer is resoundingly, no. The fact that there are such restrictive contracts between the two companies may be sufficient enough to determine that there has been no clear fracture between the two.

i. Obligations Imposed by the Credit Facility on Leap by QUALCOMM.

* Restrictions on its ability to incur indebtedness.

* Restrictions on its ability to merge.

* Restrictions on its ability to consolidate.

* Restrictions on its ability to transfer all or substantially all of its assets.

* Restrictions on its ability to make certain sales of assets.

* Restrictions on its ability to create, incur or permit the existence of liens or pay dividends.

* Requires Leap to achieve and maintain a total debt to capitalization financial ratio. Leap may not at any time permit the quotient obtained by divided total debt by total capitalization of Leap to exceed 70 percent through the fourth anniversary of the distribution date and 50 percent thereafter.

* QUALCOMM will have a first priority security interest in substantially all of the assets of Leap so long as any amount is outstanding under the Credit Facility.

Leap SEC Prospectus, at 23-4.

Even with the above restrictions, Advocacy questions whether any outside investor would have given Leap, if it were a newly-created company with no ties at all with QUALCOMM – no assets, no line-of-credit, no operating capital – a $265 million line of credit for the purpose to acquire interests in financially plagued C or F Block? In fact, the risk associated with C and F blocks are tremendous, which has been acknowledged by Leap.(63)

ii. Obligations Imposed by the Separation and Distribution Agreement

* QUALCOMM will receive a warrant to purchase 5.5 million shares of Leap common stock exercisable in the next 10 years. The warrant represents 23.8 percent of Leap’s outstanding shares according to the SEC Prospectus or 18 percent of Leap’s outstanding shares according to the Transfer Application.

* The Master Agreement Regarding Equipment Procurement

* QUALCOMM will provide at least 50 percent of all equipment needs for Leap.

* Leap will cause all companies in which it invests to purchase at least 50 percent of their equipment needs from QUALCOMM.

* Leap shall exercise reasonable efforts to cause all companies in which it invests to provide QUALCOMM with a reasonable opportunity to bid on such U.S. Operator’s requirements for infrastructure and subscriber equipment and encourage that operator to use QUALCOMM’s equipment.

* QUALCOMM’s provision of equipment will be conditional on it bidding not greater than 110 percent of the lowest competing bid. Once QUALCOMM has been awarded contracts for an aggregate $250 million, the 110 percent criterion will be lowered to 100 percent.

*QUALCOMM has a non-exclusive, royalty-free license to any patent rights developed by Leap or by Leap’s affiliates.

*QUALCOMM has right of first refusal for a period of three years to proposed transfers of interests in joint ventures and equity interests.

*Leap will only invest in companies using cdmaOne systems.

Leap SEC Prospectus, at 22-5.

The terms of several of these contracts will end in the near future, however the mere passage of time does not end the affiliation of a newly organized concern with the large business from which it was spun off."(64) There must be a clear fracture, no residual benefits.

Advocacy finds Leap’s request for "very small business" status particularly egregious given its equipment contract vendor relationship with QUALCOMM, one of the country’s leading manufacturers of PCS equipment. With QUALCOMM’s ready-made assistance, Leap has an ease of market entry that is not experienced by other small business licensees in PCS C Block, or for that matter in any other wireless service, giving it an unfair advantage.

d. Affiliation through Identity of Interest.

Finally, there is also affiliation between Leap and QUALCOMM given application of the Commission’s identity of interest rule. 47 CFR ง 24.720(l)(3). QUALCOMM and Leap shareholders have an "identity of interest" because they are persons with "common investments" - they own shares of voting stock in others’ company! Id. "In determining if the applicant controls or is controlled by a concern, persons with an identity of interest will be treated as though they were one person." Id.

D. QUALCOMM Has De Facto Control Of Leap because It Is Leap’s Exclusive Source of Capitalization for Leap’s License Acquisition.

There is an additional factor that is not explicitly listed in Intermountain Microwave nor in the Commission’s rules, but is surely already incorporated in the Commission’s review. A very important factor when evaluating control and affiliate relationship of any entity is affiliation through the source of funds. How the entity is capitalized and where the source of funds of its acquisition originate goes to heart of "control." Such a factor in an evaluation of a spin-off company is even more critical.

Leap’s financing of its purchase of AirGate and Jacksonville is capitalized 100 percent by QUALCOMM, clearly an indicia of control that alone requires the FCC’s rejection of designated entity status for this transfer application. As of the Distribution Date, Leap had no other available source of working capital or financing, except for the Working Credit Facility provided by QULACOMM.(65) And it is unlikely that other sources of financing, either debt or equity, will be available in the near future. By Leap’s own admission, "[t]he terms of the Credit Facility, including the security interest in favor of QUALCOMM and other restrictive convenants, may significantly limit or prevent the Company’s ability to obtain additional debt financing."(66) Furthermore, if additional capital were raised through equity financing, dilution of the Company’s existing stockholders would result, a violation of the anti-dilution clause under QUALCOMM’s warrant.

It is undisputed that Leap will be highly leveraged given its need to draw down the entire $35.2 million borrowing limit under the Working Capital Facility and the entire $229.8 million borrowing limit under the Investment Capital Facility – all provided by QUALCOMM.(67) Such a position puts Leap in a very high risk and vulnerable position – a position in which QUALCOMM as its senior debtor can take advantage of if Leap defaults. In fact, QUALCOMM has a "first priority security interest in, subject to certain exceptions, substantially all of the assets of Leap for so long as any amounts are outstanding under the Credit Facility."(68)

V. Denial of Designated Entity Status for Leap Is in the Public Interest.

The Commission’s denial of "very small business" status to Leap would not prohibit Leap from acquiring AirGate’s license, only from receiving federal benefits it does not deserve. This is the very purpose of the Commission’s unjust enrichment provisions for bidding credits, 47 CFR ง 23.712(b), and installment payments, 47 CFR ง 24.711(c). Granted, Leap would have to pay more for the license less the 25 percent bidding credits and minus the installment payments, however given its extensive relationship with QUALCOMM, the additional financial burden should not be a factor relevant to the Commission’s consideration.

Advocacy recognizes that a denial of DE status could, unfortunately, adversely impact a legitimate very small business licensee, AirGate. It is not Advocacy’s intent to harm or put any C or F block licensee through any more difficulty. However, there is a greater potential harm caused by the FCC’s approval of this assignment that goes beyond the immediate parties in this proceeding. In this instance, hard fought incentives in the overall competitive bidding proceeding for small businesses from the federal government would go to an entity that does not need them nor deserve them. Discounting the public’s electromagnetic spectrum by 25 percent for a $2.1 billion dollar company’s affiliate is the epitome of unjust enrichment.(69)

Because strategic partnerships between small business licensees, investors and suppliers are not only desirable but also necessary, there is a fundamental problem when a larger manufacturing entity, spins-off its own subsidiary as a means to acquire licenses it could not have acquired through the competitive bidding process. This destroys any incentive to partner and invest in small businesses, clearly undermining the DE provisions established by the FCC.

At the very least, we ask the Commission to not make a final decision on this Assignment application until after it addresses Advocacy’s previous requests for the Commission to consider tightening the attribution and affiliation rules to better address situations like this spin-off.(70) The Commission needs to complete the reconsideration of its competitive bidding rulemaking first given that this proceeding will affect the rights of all current and potential licensees for years to come.

VI. Conclusion

Advocacy asserts that Leap proffers nothing, other than the spin-off itself, to demonstrate that a clear fracture has taken place between it and QUALCOMM and that there is no affiliate relationship between the two corporations. Significantly, by its own admission, QUALCOMM has considerable, and thus impermissible, influence over Leap. Based on the inherent nature of Leap as a spin-off from QUALCOMM, common stock and management interests between Leap and QUALCOMM’s directors and officers, source of Leap’s assets, source of operating capital, source of investment capital, and multiple contractual arrangements, Leap is an affiliate of QUALCOMM under a totality of circumstances. "Considering the entire web of relationships, it stretches the imagination to believe that the potential for [control] does not exist."(71)

Therefore, for the reasons set-forth in this Petition to Deny, the Office of Advocacy respectfully requests that the Commission take every possible measure, within its control, to preserve the integrity of its DE rules and deny Cricket/Leap’s request for "very small business" designation under the Commission’s rules.

Jere W. Glover,
Chief Counsel for Advocacy

S. Jenell Trigg,
Assistant Chief Counsel for
Telecommunications

Eric E. Menge,
Assistant Chief Counsel for
Telecommunications

ENDNOTES

1. Advocacy understands that the Jacksonville application has been withdrawn pursuant to a letter to the FCC. Since notice of this withdrawal has not yet been formally released, Advocacy will continue to include Jacksonville as party in its headings, however, Advocacy will not include reference to it in the text of its comments.

2. Codified as amended at 15 U.S.C. งง 634 a-g, 637.

3. 15 U.S.C. ง 634c(1)-(4).

4. The Office of Size Standards evaluates other federal agency requests for the SBA Administrator's approval of alternative small business size standards. The Office of Minority Enterprise Development establishes program eligibility requirements (except for small business size status) for the SBA's 8(a) Minority Enterprise Development program. The Office of Government Contracting conducts reviews of individual company sizes for all of SBA's programs in response to a protest on the small business status of a company. The Office of Hearings and Appeals is the appellate body that reviews the size determinations made by the Office of Government Contracting.

In 1997, there were 27,602 contract actions in the 8(a) program. A Report to the U.S. Congress on Minority Small Business and Capital Ownership Development for Fiscal Year 1997, U.S. Small Business Administration, Office of Enterprise Development, at 3.

5. See H.R. Rep. No. 103-111, at 254-55 (1993) (" [U]nless the Commission is sensitive to the need to maintain opportunities for small businesses, competitive bidding could result in a significant increase in concentration in the telecommunications industries. . . . One of the primary criticisms of utilizing competitive bidding to issue licenses is that the process could inadvertently have the effect of favoring only those with ‘deep pockets’, and therefore have the wherewithal to participate in the bidding process.").

6. Id. at 255.

7. In re Amendment of Part I of the Commission’s Rules – Competitive Bidding Procedures, WT Docket No. 97-82, Third Report and Order and Second Further Notice of Proposed Rulemaking, 13 FCC Rcd 10274, para. 27 (1997) ("Third Report & Order") (emphasis added).

8. In re Implementation of Section 309(j) of the Communications Act - Competitive Bidding, Fifth Report and Order, 9 FCC Rcd 5581 (1994) ("Fifth Report and Order").

9. In re Implementation of Section 309(j) of the Communications Act - Competitive Bidding, Fifth Memorandum Opinion and Order, 10 FCC Rcd 403, para. 25 (1994) ("Fifth MO&O") (emphasis added).

10. This situation is a prime example that supports Advocacy’s request for an asset test for small business eligibility and re-evaluation of the Commission’s affiliation and attribution rules for small business eligibility. Letter from Jere W. Glover, Chief Counsel for Advocacy, and S. Jenell Trigg, Assistant Chief Counsel for Telecommunications, Office of Advocacy, U.S. Small Business Administration, to William E. Kennard, Chairman, Federal Communications Commission, Sept. 10, 1998 ("Advocacy Letter").

11. QUALCOMM Fact Sheet, <http://www.qualcomm.com.IR.virtue/QC-IRfact.pdf>.

12. Leap Wireless International, Inc. SEC Prospectus, (visited October 16,1998) <http://www.sec.gov/Archives/edgar/data/1065049/0000936392-98-001355.txt>, at 84 ("Leap SEC Prospectus"). Advocacy requests that the Commission seek clarification between the 18 percent of Leap’s equity asserted in the Cricket/AirGate Application and the Leap SEC Prospectus that reports 23.8 percent.

13. Leap SEC Prospectus, at 7 (emphasis added).

14. Pursuant to 15 U.S.C. ง 632(a)(2)(C), the SBA has approved this definition of "very small business."

15. In re Baker Creek Communications, L.P., Memorandum Opinion and Order, DA 98-1921, para. 6 (rel. Sept. 28, 1998) ("Baker Creek"). The six factors are: "(1) Who controls daily operations?; (2) Who is in charge of employment, supervision, and dismissal of personnel?; (3) Does the licensee have unfettered use of all facilities and equipment?; (4) Who is in charge of the payment of financing obligations, including expenses arising out of operating?; (5) Who receives monies and profits from the operation of the facilities?; and (6) Who determines and carries out policy decision, including preparing and filing applications with the Commission?" Id. para. 7.

16. Id.

17. Id.

18. Id.

19. Id.

20. Id.

21. Id. para. 8.

22. See In re Frontier Applied Sciences, Inc., No. 4316, Dkt. No. SIZ-98-02-27-11 (U.S. SBA OHA July 31, 1998) ("Frontier Applied Services"). This case is attached as an Addendum to this Petition.

23. Frontier Applied Services, at 2.

24. Frontier Applied Services; In re Size Appeal of: Field Support Services, Inc., No. 4176, Dkt. No. SIZ-95-10-6-95 (U.S. SBA OHA May 6, 1998); In re Size Appeal of: W. M. Howard Assoc., Inc., No. 4309, Dkt. No. SIZ-98-4-17-16 (U.S. SBA OHA June 30, 1998).

25. Cricket/AirGate Application, at 5.

26. Id.

27. Id.

28. Fifth Report and Order, para. 158 (emphasis added).

29. Id. para. 159.

30. Cricket/AirGate Application, at 12.

31. Id.

32. Id.

33. Cricket/AirGate Application, at 4.

34. Fidelity Fed. Sav. and Loan Ass’n v. de la Cuesta, 458 U.S. 141 (1982); Southern Pacific Transp. Co. v. Commercial Metals Co., 456 U.S. 336, 345 (1982).

35. Thomas Jefferson University v. Shalala, 114 S. Ct. 2381, 2386-87 (1994) (citations omitted); see also Northern Indiana Pub. Serv. Co. v. Porter County Chapter of Izaak Walton League of America, Inc., 423 U.S. 12, 15 (1975) ("so long as the interpretation ‘sensibly conforms to the purpose and wording of the regulations’"); see also United States v. Larionoff, 431 U.S. 864, 872 (1977)(an agency’s interpretation of its own regulations should be accepted unless it is "plainly erroneous or inconsistent with the regulation.")

36. Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837, 844 (1984), reh’g denied, 468 U.S. 1227 (1984) (distinguishing the degree of deference to be given to an agency’s express delegation of authority).

37. Fifth Report and Order, para. 163 n.141 (emphasis added).

38. Fifth MO&O, para. 73.

39. Id. para.74 (emphasis added).

40. State Farm, 463 U.S. at 34.

41. Id.

42. Id. at 35 (citations omitted).

43. See generally, id.

44. The FCC’s rules are modeled on the SBA’s rules, which require an affiliation test. 13 CFR ง 121.103.

45. Fifth MO&O, para. 73 (emphasis added).

46. Cricket/AirGate Application, at 6.

47. Fifth Report and Order, para. 168; see also Sixth Report & Order, para. 17.

48. Fifth Report and Order, para. 163, n.141.

49. "QUALCOMM believes that its joint venture and equity interest in emerging wireless telecommunications operating companies create potential conflicts with QUALCOMM’s CDMA equipment customers, which compete against these companies." Leap Wireless Investor Information,>http://www.qualcomm.com/IR/leap/faq.html>, at 1.

50. Cricket/AirGate Application, at 6.

51. Fifth MO&O, para. 74.

52. QUALCOMM Investor Relations Fact Sheet (visited December 14, 1998),<http://www.qualcomm.com/IR/>, at 1-2 (Attached as an Addendum to this Petition).

53. InvestNet Insiders Profile, Dec. 4, 1998 ("InvestNet Insiders Profile").

54. Leap SEC Prospectus, at 84.

55. As of Dec. 4, 1998, Harvey P. White held 287,513 shares with 123,450 in options, Thomas J. Bernard held 744 shares with options on 15,150, and James E. Hoffman held 4,698 shares with 6,250 in options, a combined total of 437,805 fully diluted shares for the Leap board. InvestNet Insiders Profile. This report only lists those shares held by each director or officer individually. It does not list the additional shares held for the benefit of spouses, relatives, or family trusts. For detail of such additional holdings see Leap SEC Prospectus, at 84-85.

56. Cricket/AirGate Application, at 7.

57. At QUALCOMM White was Vice Chairman of the Board and President, Bernard was Senior Vice President and General Manager of the Infrastructure Product Division; and Hoffman was Vice President and Division Counsel for the Infrastructure Products Division. Leap SEC Prospectus, at 66.

58. Leap SEC Prospectus, at 69.

59. The executive retirement contribution is a voluntary retirement plan for QUALCOMM executives who defer up to 100% of their income. Participants receive a 50% company stock match up to 15% of the income deferred , which is payable only upon eligible retirement. Participants become fully vested in the stock benefit at age 65 and may become partially vested at age 62 ฝ to 65 if they have completed 10 years of employment with QUALCOMM. Leap SEC Prospectus, at 70.

60. White contributed $48,919, Bernard contributed $32,346, and Hoffman contributed $29,726 to the voluntary retirement plan. Id. Additionally, on September 28, 1997, 1,008 shares were vested on behalf of Harvey P. White. Id. at 69.

61. Id. at 75.

62. Cricket/AirGate Application, at 7.

63. See generally Leap SEC Prospectus.

64. Field Support Services, at 1.

65. Leap SEC Prospectus, page 12.

66. Id.

67. Id.

68. Id at 23.

69. Advocacy also asserts that Leap does not qualify for "entrepreneur" designation given that its attributable assets exceed $500 million. Leap has $279 million in assets and Qulacomm has $2.45 billion, well over the threshold criteris for entry eligibilty in the Entreprenuers Blocks.

70. See Advocacy Letter.

71. See Separate Statement of Commissioner Susan Ness, Re: WLUK-TV, Green Bay, Wisconsin and W40AN, Escanaba, Michigan Applications for Assignment of License, 10 FCC Rcd 7926 (1995) (commenting on a similar case with former employees in a broadcast license context).

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