March 17, 1999
Magalie Roman Salas
Secretary
Federal Communications Commission
The Portals
445 12th Street, S.W.
Washington, D.C. 20554
Leap Wireless International, Inc., Application for Auction #22, FCC Acct. No. 0221346036
Dear Ms. Salas:
The Office of Advocacy of the U.S. Small Business Administration hereby submits this authorized and timely response to Leap Wireless International, Inc.’s ("Leap") modification of its assignment application filed with the Federal Communications Commission ("FCC" or "Commission") on March 5, 1999, to acquire the F Block licenses of AirGate Wireless, L.L.C. ("AirGate"). Letter from James H. Barker III, Latham & Watkins and Thomas Gutierrez, Lukas, Nace, Gutierrez & Sachs, Chtd. (Counsel for Leap) to Magalie Roman Salas, Secretary, FCC 4 (Mar. 5, 1999) (Leap Mar. Letter). In this most recent filing, Leap addresses the modifications in QUALCOMM Incorporated’s ("QUALCOMM") Warrant and its officers’ and directors’ holdings. These changes were first proffered by Leap in a previous filing to the Commission. Letter from James H. Barker III, Latham & Watkins and Thomas Gutierrez, Lukas, Nace, Gutierrez & Sachs, Chtd. (Counsel for Leap) to Magalie Roman Salas, Secretary, FCC 4 (Feb. 9, 1999) (Leap Feb. Letter).
In short, these superficial modifications introduced by Leap on February 9 and finally confirmed by QUALCOMM almost a full month later, do nothing to change Leap’s status as a non-qualifying entity for designated entity ("DE") status. Leap is still not eligible to receive the Federal government’s benefits entitled to a "very small business," "small business," or to an "entrepreneur."
Neither does this filing address or resolve two remaining fundamental problems in Leap’s application: 1) Leap’s stock is not widely distributed therefore, Leap is not qualified to use the publicly traded corporation exception ("PTC exception") under 47 CFR § 24.709(b)(2) for any purpose; and 2) the use of the PTC exception is not valid to determine small and very small business eligibility pursuant to the Small Business Act, 15 U.S.C. § 632(a)(2)(C), and the U.S. Small Business Administration’s ("SBA") regulations implementing the Act.
I. LEAP’S POST HOC AMENDMENTS TO ITS APPLICATION ARE IRRELEVANT AND CANNOT LAWFULLY BE CONSIDERED BY THE FCC.
As stated by Advocacy in the February 5, 1999, meeting with the FCC and all interested parties, any post hoc changes to Leap’s application are irrelevant and cannot lawfully be considered by the Commission according to the Commission’s own rules. The FCC’s effective date of measuring Leap’s eligibility for licensing in the PCS C and F Blocks is Leap’s status (and QUALCOMM’s) as of October 5, 1998, the date of the Leap/Cricket assignment application. Leap must meet the "eligibility criteria set forth in 47 CFR § 24.709 at the time the application for assignment or transfer of control is filed . . . ." 47 CFR § 24.839(d)(2)(emphasis added).
Furthermore, eligibility for the upcoming PCS C Block reauction is determined by Leap’s status "at the time the applicant’s short-form application (Form 175) is filed," also nullifying any post hoc changes in Leap’s relationship with QUALCOMM after the February 12, 1999 short-form deadline. 47 CFR § 24.709(a)(1) (emphasis added); see also In re Applications of NextWave Personal Communications, Inc. for Various C-Block Broadband Licenses, File Nos. 00341CWL96 et al., Memorandum Opinion & Order, 12 FCC Rcd 2030, para. 13 (1997) ("Next Wave MO&O"). (1) The FCC’s rules for effective dates are also consistent with SBA procedures for the tens of thousands of applications it processes annually. It would be arbitrary and capricious for the FCC to deviate from its long-standing policy, namely that an applicant’s status is determined as of the date of its application for both post-auction assignments/transfers and auction participation.
As to the precedent set forth in NextWave in which the FCC allowed NextWave time to resolve its violation of the foreign ownership benchmark, there was a genuine material issue of fact of whether certain debt instruments should be treated as equity or debt in NextWave that justified the Bureau’s benevolent decision. (2) There is no such uncertainty present in Leap’s case. As detailed below, it has been undisputed and documented by Leap and QUALCOMM that the majority of Leap’s stock was held in the aggregate by QUALCOMM Incorporated, QUALCOMM officers and directors, and QUALCOMM’s shareholders – an easily identifiable group of shareholders holding a majority controlling interest in the company’s voting stock, and persons with common investments in both Leap and QUALCOMM, i.e., affiliation through identity of interest. 47 CFR § 24.720(l)(3). "Persons with an identity of interest will be treated as though they were one person." Id.
II. LEAP’S STOCK IS NOT WIDELY DISTRIBUTED UNDER THE COMMISSION’S RULES.
The FCC should not apply the PTC exception automatically just because a company’s stock is traded on the NYSE or NASDAQ National Market. The FCC must first make a determination whether the company’s stock is widely dispersed or not, especially in the case of a spin-off company whose former parent company is very likely to have preserved some interest in its newly organized entity.
Leap’s February 9 and March 5 letters to the FCC clearly support Advocacy’s initial assertion in its Petition to Deny that Leap’s stock was not widely dispersed as of the date of its application on October 5, 1998. Office of Advocacy, U.S. Small Business Administration, Petition to Deny, Dec. 14, 1998, at 21 ("Advocacy Petition to Deny"). Other interested parties have also reiterated this issue. See, e.g., Letter from Michael Kurtis (Counsel for Carolina PCS I Limited Partnership), to Magalie Roman Salas, Secretary, FCC 2-3 (February 16, 1999) ("CPCSI Letter"). Leap’s and QUALCOMM’s March letters do not change this fact.
Leap’s recent filings prove that QUALCOMM and its officers and directors hold in the aggregate substantially more stock in Leap than initially alleged in Leap’s application. Leap claimed in its application that "[e]ven if QUALCOMM’s Warrant were exercised today, there are no other QUALCOMM-affiliated persons holding minority interests in Leap which, if aggregated, would rise to a controlling interest." Cricket/AirGate Application, at 6 (emphasis in original). Advocacy first disputed this claim in its Petition to Deny. Advocacy Petition to Deny, at 23-6.
The facts are now clear. The Warrant alone, fully-exercised, represents a minimum of 17 percent of Leap’s stock, (3) well exceeding the 15 percent cap of the PTC exception.(4) The Warrant, in addition to QUALCOMM officers’ and directors’ 9 percent share of stock (Leap Feb. Letter, at 3), represents an aggregated total of 26 percent of Leap stock - also exceeding the FCC’s 25 percent benchmark for nonattributable interests. 47 CFR § 24.720(j). Furthermore, as of the October 5,1998 date of Leap’s assignment application, a mere twelve days after QUALCOMM’s distribution date (Sept. 23, 1998) to its shareholders of 1 share of Leap stock for every four of QUALCOMM shares – it is very likely that the majority of QUALCOMM shareholders also held a majority of Leap stock. Therefore, QUALCOMM’s shareholder holdings in Leap combined with QUALCOMM’s Warrant and its officers and directors individual shares and options which represent 26 percent, QUALCOMM’s holdings in Leap as of October 5 surely exceeded 50 percent. "An applicant is presumed to control or have the power to control a concern if he or she owns or controls or has the power to control 50 percent or more of its voting stock." 47 CFR § 24.720(l)(4)(i) (emphasis added).
In Leap’s case, use of the PTC exception is even more egregious and will undermine the Commission’s efforts to promote bona fide small business participation in its competitive bidding proceedings given that it has now been confirmed that QUALCOMM owned controlling shares in Leap as of the date of Leap’s application.
III. USE OF THE PTC EXCEPTION IS INVALID TO DEFINE SMALL BUSINESS BECAUSE IT VIOLATES THE SMALL BUSINESS ACT AND ITS IMPLEMENTING REGULATIONS.
Leap’s claim that "there is absolutely no requirement in the Commission’s rules regarding how a company becomes public for purposes of the PTC exception," Leap March Letter at 2, either ignores or illustrates a material misunderstanding of the SBA’s exclusive statutory authority over determination of small business size standards. The Communications Act is simply not a factor in this issue regarding small business size standards. Controlling law is the Small Business Act, 15 U.S.C. § 632, and the Regulatory Flexibility Act, as amended. 5 U.S.C. § 601(3). Under its official governmental role in all Commission proceedings related to small business size standards, Advocacy takes this opportunity to expound on this issue.
Advocacy is strongly opposed to use of the PTC exception – under any circumstances – to define a small business or very small business. The PTC exception in effect negates application of a complete and comprehensive affiliation test to determine small business eligibility for all publicly traded companies, including spin-offs. "Where 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 CRF § 24.709(b)(2) (emphasis added).
However, Advocacy does not object to use of the PTC exception for an entity to qualify as an entrepreneur (5) This use, arguably, does not implicate the Small Business Act nor SBA’s regulations.
Let’s be perfectly clear – it is not Leap’s sole status as a spin-off company that Advocacy objects to – it is Leap’s use of the PTC exception despite its status as a spin-off company that is the major issue. It is only common sense that a spin-off company’s structure and relationship to its former parent company receive at least the same degree of scrutiny as other entities when it asks for government benefits based on specific qualifications. Therefore, an affiliation test is not only reasonable, it is in the public interest, and mandatory under multiple provisions of the Small Business Act and SBA’s regulations.
Under SBA case precedent, a spin-off company can receive federal government benefits if there were a clear fracture established between it and its former parent company. Advocacy Petition to Deny, at 11-12 (citing SBA’s Office of Hearing and Appeals case precedent). Additionally, if a complete and comprehensive affiliation test were conducted by the FCC to review Leap’s relationship with QUALCOMM and Leap was then deemed to be a qualified designated entity, the Small Business Act would not be violated, nor would the authority of the SBA be implicated, although we do not see how the FCC could arrive at such a conclusion. Assuming that such a conclusion could be substantiated, Advocacy may have additional concerns, but not regarding violations of our statute and regulations.
Leap has argued previously that there is "no basis in law, policy or logic" for excluding use of the PTC exception to Leap because of its spin off status. Leap Feb. Letter, at 7. Leap also claims that the FCC may adopt its own affiliation tests and is not required to use the SBA’s definitions. Id. The truth is that the FCC’s affiliation rules mirror the SBA’s in most instances, with only minor modifications. Given that SBA’s affiliation standards have not only been established by the expert agency designated by Congress but have also withstood judicial and congressional scrutiny, it is prudent for other federal agencies to follow SBA precedent.
Where the FCC has deviated from SBA’s rules, such deviation has not served to undermine or eliminate the entire requirement for an affiliation test – unlike the PTC exception. For example, as Leap as recognized, the FCC did not adopt the SBA’s rule "where former officers, directors, principal stockholders, and/or key employees of one concern organize a new concern in the same or related industry or field of operation . . . " are presumed to be affiliated. It was the per se affiliation nature of this SBA rule that was rejected by the FCC. NextWave MO&O, at para. 21. Nonetheless, the FCC still conducted an affiliation test that looked at the relationship between the former officers and directors, contracts between the subject parties, and the applicant’s financing structure. Nothing less should be done in Leap’s case.
Under the Small Business Act there are four subsections that support an affiliation test as a fundamental part of any small business definition, including those alternative size standards used by other Federal agencies that are subject to the express approval of the SBA Administrator.
2. The SBA Administrator "may specify detailed definitions or standards by which a business concern may be determined to be a small business concern for the purposes of this chapter or any other act." 15 U.S.C. 632(a)(2)(A) (emphasis added).
3. "[N]o Federal department or agency may prescribe a size standard for categorizing a business concern as a small business concern unless such proposed size standard . . . provides for determining . . . other appropriate factors." 15 U.S.C.632(a)(2)(C)(ii)(IV).
4. "[T]he Administrator shall ensure that the size standard varies from industry to industry to the extent necessary to reflect the differing characteristics of the various industries and consider other factors deemed to be relevant by the Administrator. 15 U.S.C. 632(a)(3) (emphasis added).
An affiliation test executes the statutory requirement for "independently owned and operated." The SBA deems that an affiliation test is not only required for all small business size standards but also critical to determine bona fide eligibility as a small business concern. There is a need to look at a company’s overall organizational structure and relationships to determine whether there is de jure or de facto control -not just whether a company is technically separate on paper. Application of the PTC exception to be used for PCS licensing eviscerates the express language of the FCC’s approved definition for "small business’ and "very small business."
The SBA has exclusive authority to determine or modify the definition of small business for all federal agency proceedings, including the FCC’s. Northwest Mining Ass’n v. Babbitt, 5 F. Supp. 2d 9, 16-17 (D.D.C. 1998) (citing to the Small Business Act). Respectfully, the FCC does not have unfettered discretion or authority under the Communications Act, as amended, the Administrative Procedure Act or its subsequent case law to determine small business size standards. It must do so with the approval of the SBA and in consultation with the Office of Advocacy. 5 U.S.C. § 601(3). The SBA has not approved the PTC exception for use in defining small business.
Furthermore, it is irrelevant whether Advocacy petitioned on a timely basis for reconsideration of the Commission’s Fifth Memorandum Opinion & Order’s alleged extension of the PTC exception to define small business (6) All FCC rules must comply with other laws – including the Small Business Act and the SBA’s implementation regulations.
IV. THE TERMS OF QUALCOMM’S PLEDGE REGARDING AMENDMENTS TO ITS WARRANT ARE ILLUSORY AND AMBIGUOUS.
The only "significant" thing about the Leap March letter confirming the assertions that Leap made on QUALCOMM’s behalf in its February letter, is that QUALCOMM obviously has the power to influence Leap’s size and eligibility at its discretion – even now. Importantly, it is always the parent company that ultimately controls the creation, size, and structure of its subsidiary and subsequently, its spin-off company. That truth is no better illustrated than in this instance.
It is also noteworthy that the terms of the revised Warrant are contingent on specific circumstances. QUALCOMM has preserved in its "amendments" a substantial interest in Leap regardless of the outcome of the FCC’s decision on Leap’s application. Specifically, if the application is denied, then the original warrant terms prevail. QUALCOMM March Letter, at 1-2 ("In the event that by March 28, 1999 the FCC finds by order that Leap or Cricket is not qualified to hold C or F Block licenses, then either party shall have the right, by written notice to the other and exercisable within five business days of the date of any such FCC determination, to cause this reduction in the Warrant to be rescinded.").
Conversely, if the FCC grants Leap’s application, as soon as the clock strikes 12:00 Midnight on the expiration date of the F Block 5-year holding period, QUALCOMM still has the option to acquire a substantial chunk of Leap stock. The savings clause only operates to prevent QUALCOMM from exercising the Warrant for as long as Leap must qualify as a DE. Leap March Letter, at 3; QUALCOMM March Letter, at 2. Under either circumstance, QUALCOMM has really given up nothing. Advocacy believes that this makes these amendments not "significant," but illusory.
Leap claims that the "opposition has argued that the Commission should ignore the Warrant’s express terms and deem Leap to be noncompliant with the PTC exception." Leap March Letter, at 1. This statement does not frame Advocacy’s concern correctly. Our concern is that Leap wants the FCC to ignore not the express terms of the Warrant, but its mere existence. Although we find the contingent terms of the Warrant illusory and the "going forward basis" language confusing and ambiguous, (7) the bottom line is that the Warrant terms are insignificant when determining small business eligibility. Advocacy concurs with Carolina PCS I Limited Partnership’s argument that the savings clause is appropriate for determining foreign ownership and attribution but not small business eligibility. See CPCSI Letter, at 2-3. The former use implicates the Commission’s own rules – the latter impermissibly implicates the Small Business Administration’s jurisdiction.
Moreover, several of QUALCOMM’s officers and directors have agreed to restrict their individual voting rights as to the shares and options they hold by placing such shares in a trust. Leap March Letter, at 3; QUALCOMM March Letter, at 2. Supposedly, this commitment removes the potential of voting control but again only for the holding period of the license. The placement of such shares in a trust may arguably influence voting control, but does not make Leap’s shares widely distributed. A set-aside of Leap’s shares still exists for QUALCOMM’s directors and officers.
V. CONCLUSION.
Therefore, for the reasons stated in this filing and its Petition to Deny, the Office of Advocacy respectfully requests that the Federal Communications Commission deny Leap Wireless Inc.’s request for designated entity status as a "very small business."
Respectfully submitted by:
__________________________
Jere W. Glover,
Chief Counsel for Advocacy
__________________________
S. Jenell Trigg,
Assistant Chief Counsel for Telecommunications
__________________________
Eric E. Menge,
Assistant Chief Counsel for Telecommunications
cc: The Honorable William E. Kennard
The Honorable Susan Ness
The Honorable Gloria Tristani
The Honorable Michael Powell
The Honorable Harold Furchtgott-Roth
K. Ham
A. Zaslov
M. Bollinger
P. D’Ari
J. Radin
D. Judelsohn
S. Spencer (by Federal Express)
T. Gutierrez
J. Barker
M. Kurtis
J. Stockman
M. Dever
L. Gurman
All above persons served by courier or by hand, excepted where noted.
ENDNOTES
1. In NextWave, even though the Wireless Telecommunications Bureau initially found NextWave’s application insufficient based on its status at the time of its short form filing date, it conditionally granted NextWave’s licenses with the requirement that NextWave restructure its financing to come into compliance with 47 U.S.C. § 310(b)(4) (foreign ownership benchmark requirements). Id. para. 1.
2. The first C Block auction had also been completed with NextWave winning the largest number of licenses for a recording breaking net bid total of $4.2 billion.
3. QUALCOMM reports that its Warrant represents approximately 17.5 percent of Leap’s shares, not 17 percent as Leap has stated. Letter from Anthony S. Thornley, Executive V.P. and CFO, QUALCOMM Incorporated, to Thomas Willardson, Senior V.P., Finance and Treasurer, Leap 1 (Mar. 5, 1999) ("QUALCOMM Mar. Letter").
4. In its D/E/F Block Report and Order, the Commission explicitly declined to eliminate the 15 percent single entity ownership limitation which would have redefined publicly traded companies with widely dispersed voting power. In re Amendment of Parts 20 and 24 of the Commission’s Rules – Broadband PCS Competitive Bidding and the Commercial Mobile Radio Service Spectrum Cap/Amendment of the Commission’s Cellular/PCS Cross-Ownership Rule; WT Dkt. No. 96-59, Report and Order, 11 FCC Rcd. 7824, para. 60 (1996).
5. Under the FCC’s holding rules, an incumbent licensee may transfer or assign its license to an entity that qualifies for entry into the PCS C and F Blocks set forth in 47 CFR § 24.709 at the time the application is filed, therefore meeting entrepreneur eligibility. 47 CFR § 24.839(d). The assignee does not have to qualify as a small business or very small business to execute the assignment. However, if the entrepreneur assignee does not qualify as a small business or very small business, the FCC’s unjust enrichment provisions would then apply. 47 CFR §§ 24.712(b) (bidding credits) and 24.716(d) (installment payments).
6. In re Implementation of Section 309(j) of the Communications Act – Competitive Bidding, Fifth Memorandum Opinion and Order, 10 FCC Rcd 403 (1994).
7. It is not clear whether Leap is addressing future stock ownership in Leap, ignoring current holdings by QUALCOMM and its directors/officers, or whether the statement means that from this point forward in this proceeding these actions will be taken by QUALCOMM.