No. 10-834 In the Supreme Court of the United States COUNCIL TREE INVESTORS, INC., ET AL., PETITIONERS v. FEDERAL COMMUNICATIONS COMMISSION, ET AL. ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT BRIEF FOR THE FEDERAL RESPONDENTS IN OPPOSITION AUSTIN C. SCHLICK General Counsel PETER KARANJIA Deputy General Counsel RICHARD K. WELCH Acting Associate General Counsel LAURENCE N. BOURNE Counsel Federal Communications Commission Washington, D.C. 20554 NEAL KUMAR KATYAL Acting Solicitor General Counsel of Record Department of Justice Washington, D.C. 20530 SupremeCtBriefs@usdoj.gov (202) 514-2217 I QUESTION PRESENTED The court of appeals concluded that the Federal Communications Commission (FCC), in issuing two rules related to small business bidding credits for spec- trum license auctions, had not complied with the notice and comment requirements of the Administrative Proce- dure Act, 5 U.S.C. 551 et seq. As a remedy for those violations, the court vacated both rules. The question presented is as follows: Whether the court of appeals erred by not also set- ting aside two multi-billion dollar spectrum license auc- tions that the FCC had conducted while the two rules were in force. (III) TABLE OF CONTENTS Page Opinions below........................................ 1 Jurisdiction........................................... 1 Statement ............................................ 2 Argument ........................................... 13 Conclusion .......................................... 22 Appendix A – Second report and order and second further notice of proposed rule making (Apr. 25, 2006) ...................... 1a Appendix B – Order on reconsideration of the second report and order (June 2, 2006) ....... 98a Appendix C – Second order on reconsideration of the second report and order (Mar. 26, 2008) .................... 151a TABLE OF AUTHORITIES Cases: Adarand Constructors v. Pena, 515 U.S. 200 (1995) ...... 3 Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970) ....... 15 Allied-Signal, Inc. v. United States Nuclear Regula- tory Comm’n, 988 F.2d 146 (D.C. Cir. 1993) ......... 14 Council Tree Commc’ns, Inc. v. FCC: 503 F.3d 284 (3d Cir. 2007) ......................... 7 324 Fed. Appx. 3 (D.C. Cir. 2009) ................ 9, 16 Forest Guardians v. Babbitt, 174 F.3d 1178 (10th Cir. 1999) .......................................... 14 National Org. of Veterans’ Advocates, Inc. v. Secre- tary of Veterans Affairs, 260 F.3d 1365 (2001) ....... 14 PGBA, LLC v. United States, 389 F.3d 1219 (Fed. Cir. 2004) ................................. 14 IV Cases—Continued: Page Pennsylvania Dep’t of Corr. v. Yeskey, 524 U.S. 206 (1998) .......................................... 15 Qwest Corp. v. FCC, 258 F.3d 1191 (10th Cir. 2001) ..... 14 United States v. Gabelli, 345 F. Supp. 2d 313 (S.D.N.Y. 2004) .................................. 4 Statutes and regulations: Administrative Procedure Act, 5 U.S.C. 551 et seq.: 5 U.S.C. 706 .................................... 14 5 U.S.C. 706(1) .................................. 14 5 U.S.C. 706(2) ...................... 13, 14, 15, 16, 17 Communications Act of 1934, 47 U.S.C. 151 et seq. ....... 2 47 U.S.C. 307 .................................... 2 47 U.S.C. 309 .................................... 2 47 U.S.C. 309(j)(1) ................................ 2 47 U.S.C. 309(j)(3)(A)-(C) ......................... 2 47 U.S.C. 309(j)(3)(B) ............................ 10 47 U.S.C. 309(j)(4) ................................ 2 47 U.S.C. 402(a) ................................. 16 47 U.S.C. 402(b)(6) .............................. 17 Digital Television Transition and Public Safety Act of 2005, Pub. L. No. 109-171, Tit. III, 120 Stat. 21 ....... 8 28 U.S.C. 2342(1) .................................. 16 28 U.S.C. 2344 ..................................... 16 47 C.F.R.: Section 1.2110(a) ................................. 3 Section 1.2110(b) ................................. 3 V Regulations—Continued: Page Section 1.2111(d)(2)(i)(A) ......................... 21 Section 1.2111(d)(2)(ii)(C) ........................ 21 Miscellaneous: Amendment of the Commission's Rules to Establish Part 27, the Wireless Commc’ns Serv., 12 F.C.C.R. 10,785 (1997) .................................... 4 FCC File No. 0004404302, Application for Transfer of Control of Denali Spectrum License Sub., LLC (filed Oct. 1, 2010), http://wireless2.fcc.gov/ UlsApp/ApplicationSearch/applMain.jsp? applID=5732431 ................................ 21 Implementation of Section 309(j) of the Communica- tions Act - Competitive Bidding, 11 F.C.C.R. 136 (1995) ........................................... 4 Implementation of Section 6002(b) of the Omnibus Budget Reconciliation Act of 1993, 25 F.C.C.R. 11,407 (2010) ................................... 7, 8 Implementation of the Commercial Spectrum En- hancement Act & Modernization of the Commis- sion’s Competitive Bidding Rules & Procedures, 21 F.C.C.R. 1753 (2006) ....................... 3, 4, 5 News Release, FCC, Statement by FCC Chairman Kevin J. Martin (Mar. 18, 2008), http://hraunfoss. fcc.gov/edocs_public/attachmatch/DOC-280887A1. pdf ............................................. 8 VI Miscellaneous—Continued: Page Office of the White House Press Secretary, President Obama Details Plan to Win the Future through Expanded Wireless Access (Feb. 10, 2011), http://www.whitehouse.gov/the-press-office/ 2011/02/10/president-obama-details-plan-win- future-through-expanded-wireless-access .......... 20 Public Notice, FCC: AU Docket No. 06-30, Auction of Advanced Wire- less Servs. Licenses Rescheduled for Aug. 9, 2006, 21 F.C.C.R. 5598 (2006) .................... 6 AU Docket No. 10-248, Auction of 700 MHz Band Licenses Scheduled for July 19, 2011, DA 10-2298 (Dec. 15, 2010) ........................ 20 Auction of Advanced Wireless Servs. Licenses Closes, 21 F.C.C.R. 10,521 (2006) ................ 21 RCRWireless, Leap Completes Denali Acquisition (Dec. 28, 2010), http://www.rcrwireless.com/ article/20101228/carriers/101229949/leap- completes-denali-acquisition ...................... 21 Service Rules for the 698-746, 747-762 & 777-792 MHz Bands, 22 F.C.C.R. 15289 (2007), petition for re- view dismissed, Council Tree Commc’ns, Inc. v. FCC, 324 Fed. Appx. 3 (D.C. Cir. 2009) .............. 8 TRDaily, Third Circuit Vacates, Remands Portion of FCC’s ‘DE’ Regulations (Aug. 24, 2010), http://www.tr.com/online/trd/2010/td082410/ td082410.htm?print=Yes. ........................ 20 VII Miscellaneous—Continued: Page U.S. Dep’t of Commerce, Relocation of Federal Radio Systems from the 1710-1755 MHz Spectrum Band: Third Annual Progress Report (Mar. 2010), http://www.ntia.doc.gov/reports/ 2010/CSEA_Report_20100407.pdf .................. 7 John R. Wilke, Gabelli, U.S. Discuss Settlement in Fraud Case; Pact to End Investigation of Cellular- Spectrum Bids Is Likely to Top $100 Billion, Wall St. J., June 1, 2006 ................................ 4 1 The Commission’s orders are not included in the appendix to the petition for a writ of certiorari but are reproduced as an appendix to this brief. (1) In the Supreme Court of the United States No. 10-834 COUNCIL TREE INVESTORS, INC., ET AL., PETITIONERS v. FEDERAL COMMUNICATIONS COMMISSION, ET AL. ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT BRIEF FOR THE FEDERAL RESPONDENTS IN OPPOSITION OPINIONS BELOW The opinion of the court of appeals (Pet. App. 1a-51a) is reported at 619 F.3d 235. A prior decision of the court of appeals in this case is reported at 503 F.3d 284. The decisions of the Federal Communications Commission are reported at 21 F.C.C.R. 4753, 21 F.C.C.R. 6703, and 23 F.C.C.R. 5425. 1 JURISDICTION The judgment of the court of appeals was entered on August 24, 2010. On November 8, 2010, Justice Alito extended the time for filing a petition for a writ of cer- 2 tiorari to and including December 22, 2010, and the peti- tion was filed on that date. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATEMENT 1. The Communications Act of 1934, as amended, 47 U.S.C. 151 et seq., authorizes the Federal Communi- cations Commission (FCC or Commission) to award li- censes to permit use of the electromagnetic spectrum to provide communications services. 47 U.S.C. 307, 309. Since 1993, the Communications Act has required the FCC to award many spectrum licenses “through a sys- tem of competitive bidding,” i.e., by auction. 47 U.S.C. 309(j)(1). The statute directs the Commission, in designing auction procedures, to seek to promote a variety of sometimes competing objectives. These objectives in- clude developing and deploying new technologies and services for the benefit of the public “without adminis- trative or judicial delays”; promoting economic opportu- nity and competition by avoiding “excessive concentra- tion of licenses and by disseminating licenses among a wide variety of applicants,” including “designated enti- ties” (DEs) such as small businesses and rural telephone companies; and avoiding “unjust enrichment.” 47 U.S.C. 309(j)(3)(A)-(C); see 47 U.S.C. 309(j)(4) (directing the Commission to prescribe regulations to achieve these objectives). In implementing the auctions program, the Commission has sought “to find a reasonable balance” among the statute’s competing goals. App., infra, 7a. To promote the participation of DEs in spectrum license auctions, the Commission has awarded such enti- ties bidding credits—that is, “percentage discounts on 3 2 The Commission’s rules define the term “designated entities” as “small businesses, businesses owned by members of minority groups and/or women, and rural telephone companies.” 47 C.F.R. 1.2110(a). Following this Court’s decision in Adarand Constructors v. Pena, 515 U.S. 200 (1995), which addressed the constitutionality of certain govern- ment affirmative action programs, DE benefits have been available only to small businesses, including rural telephone companies. See App., infra, 3a-4a n.8. winning bid amounts.” App., infra, 8a. 2 An applicant for these benefits must demonstrate that its gross revenues, in combination with those of its “attributable” interest holders, fall below certain service-specific caps. Id. at 8a-9a (citing 47 C.F.R. 1.2110(b)). Since 2000, the FCC has applied a standard that attributes to an applicant its own gross revenues, as well as those of its “controlling interests” (i.e., those entities that have de jure or de facto control over the applicant), its affiliates, and the affiliates of its controlling interests. Id. at 12a. To ensure that small-business benefits are available only to bona fide small businesses, the agency has sought to “prevent companies from circumventing the objectives of the designated entity eligibility rules.” Further Notice of Proposed Rulemaking, Implementa- tion of the Commercial Spectrum Enhancement Act & Modernization of the Commission’s Competitive Bid- ding Rules & Procedures, 21 F.C.C.R. 1753, 1757 (para. 6) (2006) (Further Notice). For example, the Commission has adopted unjust-enrichment rules re- quiring a DE that has benefitted from bidding credits to return some or all of those credits if it subsequently transfers its license to a non-DE or otherwise loses its eligibility for such benefits. At various times, the FCC’s auction rules have required repayment of the entire bid- ding credit if the licensee lost its DE eligibility during 4 3 See, e.g., Sixth Report and Order, Implementation of Section 309(j) of the Communications Act - Competitive Bidding, 11 F.C.C.R. 136, 180 (1995) (requiring total reimbursement of bidding credits if eligibility was lost at any time during the ten-year license term); Report and Order, Amendment of the Commission’s Rules to Establish Part 27, the Wireless Commc’ns Serv., 12 F.C.C.R. 10,785, 10,918-10,919 (1997) (providing for 100% reimbursement for loss of eligibility during the first five years of the license term, with declining reimbursement obligations for years five through ten). the ten-year license term. 3 At the time the Commission commenced the rulemaking challenged in this case, its rules required repayment if a licensee lost its eligibility during the first five years after winning the license. App., infra, 128a. 2. In administering the auction program, the FCC became aware that some putative DEs were “put[ting] themselves forward as small companies in order to qual- ify for auction discounts,” despite having entered into agreements to lease their prospective spectrum rights to other entities that were not entitled to such benefits. See Further Notice, 21 F.C.C.R. at 1771 (Statement of Comm’r Copps). Other bidders reportedly had acquired discounted licenses not for the purpose of pursuing “ac- tual business operations” but rather “as investments to be later sold for profit in the after-market.” United States v. Gabelli, 345 F. Supp. 2d 313, 321-322 (S.D.N.Y. 2004); see John R. Wilke, Gabelli, U.S. Discuss Settle- ment in Fraud Case; Pact to End Investigation of Cellular-Spectrum Bids Is Likely to Top $100 Million, Wall St. J., June 1, 2006 at A3. In February 2006, after petitioner Council Tree Communications, Inc., submitted a proposal to tighten some of the eligibility rules for DE benefits, the Com- mission issued a notice of proposed rulemaking. That 5 notice sought comment on measures to “prevent compa- nies from circumventing the objectives of the designated entity eligibility rules” and to ensure that DE benefits are “available only to bona fide small businesses.” Fur- ther Notice, 21 F.C.C.R. at 1757. In April 2006, after reviewing comments in response to the Further Notice, the Commission issued its Second Report and Order. That order tightened the agency’s auction rules for designated entities in two relevant re- spects. First, with respect to leasing and resale ar- rangements, the Commission adopted two new eligibility restrictions designed to ensure that every recipient of DE benefits uses its licenses to provide telecommunica- tions services directly to the public. App., infra, 20a- 25a. One restriction—the 25% Attribution Rule—pro- vided that “if a DE leases or resells (including at whole- sale) more than 25% of its spectrum capacity to any sin- gle lessee or purchaser, it must add that lessee’s or pur- chaser’s revenues to its own to determine continued eli- gibility for DE credits.” Pet. App. 33a. The other re- striction—the 50% Impermissible Relationship Rule— “ma[de] license applicants or holders ineligible for DE benefits if they lease or resell (including at wholesale) more than 50% of their spectrum capacity” on an aggre- gate basis. Id. at 38a. Second, to address concerns about license “flip- ping”—attempts by DEs “to immediately monetize their bidding credits by selling their spectrum licenses at market prices” (Pet. App. 5a)—the Commission streng- thened its “unjust enrichment” rules by returning to a ten-year (rather than five-year) unjust enrichment pe- riod. This change meant that a DE that transferred its license to a non-DE or otherwise lost eligibility for those benefits during the first ten years of its license would 6 4 Public Notice, AU Docket No. 06-30, Auction of Advanced Wireless Services Licenses Rescheduled for August 9, 2006, 21 F.C.C.R. 5598 (2006) (Auction Public Notice). have to repay some or all of its bidding credits (the Ten- Year Repayment Schedule). See id. at 17a, 43a. On May 5, 2006, Council Tree and its co-petitioners filed a request for expedited reconsideration of the Sec- ond Report and Order. See App, infra, 99a n.2. Be- cause a major auction (the Advanced Wireless Services (AWS) auction) was impending, the Commission on its own motion issued an order on reconsideration before the comment period on Council Tree’s request for recon- sideration was closed. In that order, the FCC reaf- firmed the new DE rules, while clarifying them in sev- eral respects. Id. at 98a-138a. Although the sua sponte order on reconsideration responded to all of Council Tree’s arguments about the rules adopted in the Second Report and Order, Council Tree’s request for reconsid- eration remained formally pending at the agency. 3. On June 7, 2006, petitioners filed a petition for review in the Third Circuit, challenging the Second Re- port and Order, the Reconsideration Order, and a public notice regarding the timing of the AWS auction. 4 See Pet. App. 24a. Petitioners also asked the court of ap- peals to stay the FCC’s new DE rules and the upcoming AWS auction pending judicial review on the merits. Ibid. On June 29, 2006, the court of appeals denied peti- tioners’ stay request, concluding that “[t]he public inter- est * * * militates strongly in favor of letting the auc- tion proceed without altering the rules of the game at this late date.” No. 06-2943, at 5 n.1, 6 (3d Cir. June 29, 2006). After briefing on the merits, the court of appeals dismissed the petition for review because petitioners had filed it before Federal Register publication of the 7 5 Following the Commission's practice of designating auctions by number, this auction is referred to in the relevant Commission orders and the decision below as “Auction 66.” 6 See U.S. Department of Commerce, Relocation of Federal Radio Systems from the 1710-1755 MHz Spectrum Band: Third Annual Progress Report 3 (Mar. 2010), http://www.ntia.doc.gov/reports/2010/ CSEA_Report_20100407. pdf. 7 See, e.g., Fourteenth Report, Implementation of Section 6002(b) of the Omnibus Budget Reconciliation Act of 1993, 25 F.C.C.R. 11,407, 11,485 (para. 116) (2010) (Fourteenth Wireless Competition Report) (noting T-Mobile’s use of AWS spectrum to deploy advanced wireless services to U.S. cities covering hundreds of millions of people by the end of 2010); id. at 11,462-11,463 (para. 72) (noting that Leap Wireless used, inter alia, AWS licenses to expand coverage from 53.9 million people in October 2008 to 80.5 million people in October 2009, and that MetroPCS used such licenses to expand coverage during the same period from 56 million people to 84.6 million people). Reconsideration Order and while their own request for reconsideration was still pending at the agency. Council Tree Commc’ns, Inc. v. FCC, 503 F.3d 284, 287 (3d Cir. 2007). 4. Because petitioners’ jurisdictional misstep led to a four-year gap between the filing of their initial petition for review and issuance of the decision on the merits of their claim, the FCC conducted several spectrum auc- tions while the revised DE rules were in effect. In 2006 the FCC held the AWS auction. 5 That auc- tion raised nearly $14 billion in winning bids (net of bid- ding credits). Pet. App. 26a. More than $375 million in proceeds from the AWS auction have already been spent by federal agencies to pay for the relocation of their us- ers from the spectrum that the auction reassigned for commercial use. 6 In addition, winning bidders from that auction are now using the spectrum they won to provide service to millions of customers. 7 8 8 See Second Report and Order, Service Rules for the 698-746, 747- 762 and 777-792 MHz Bands, 22 F.C.C.R. 15,289, 15,296, 15,405 (paras. 15, 318) (2007) (700 MHz Service Rules Order) (citing the Digi- tal Television Transition and Public Safety Act of 2005, Pub. L. No. 109- 171, Tit. III, 120 Stat. 21), petition for review dismissed, Council Tree Commc’ns, Inc. v. FCC, 324 Fed. Appx. 3 (D.C. Cir. 2009); Martin Statement at 1. 9 See, e.g., Fourteenth Wireless Competition Report, 25 F.C.C.R. at 11482 (para. 112) (noting that Verizon Wireless expected “to launch [advanced wireless services] in 25-30 markets in 2010 using its 700 MHz Band spectrum, and to expand [such] coverage to 210 markets covering 285 million people by 2013”); id. at 11,484-11,485 (para. 115) (noting that AT&T planned to conduct trials for similar advanced mobile services using 700 MHz Band and AWS spectrum in 2010 and to begin deployment in 2011). In early 2008, the Commission conducted another major auction. That auction involved the reapportion- ment of the 700 MHz spectrum that television broad- casters had relinquished in converting from analog to digital broadcast. The 700 MHz auction (referred to in the FCC’s orders as “Auction 73”) raised approximately $19 billion in winning bids, nearly doubling congressio- nal estimates of its likely proceeds. News Release, FCC, Statement by FCC Chairman Kevin J. Martin 2 (March 18, 2008), http://hraunfoss.fcc.gov/edocs_public/ attachmatch/DOC-280887A1.pdf (Martin Statement); see Pet. App. 27a. The proceeds of the auction have been transferred to the United States Treasury, as re- quired by statute, to support public safety and digital television transition initiatives. 8 700 MHz license win- ners are now providing service using this spectrum in many markets. 9 9 10 Petitioner Council Tree attempted to seek review in the D.C. Cir- cuit of the Commission’s application of the modified DE rules to the 700 MHz auction, but, like its earlier petition in the Third Circuit, that pe- tition was dismissed on jurisdictional grounds. See Council Tree Commc’ns, Inc. v. FCC, 324 Fed. Appx. 3, 4 (D.C. Cir. 2009). There was robust DE participation in both the AWS and 700 MHz auctions. In the AWS auction, DEs ac- counted for 166 of 252 auction applicants; 100 of the 168 total qualified bidders; and 57 of the 104 total winning bidders. Pet. App. 26a. DEs submitted $551 million in winning bids. Ibid. Two DEs were among the top ten winners in dollar amount. Ibid. In the 700 MHz auc- tion, 119 of the 214 total qualified bidders and 56 of 101 total winning bidders were DEs. Id. at 27a. In all, DEs won 35% of the individual licenses auctioned in the 700 MHz auction. Ibid. While the dollar value of the li- censes won by DEs in these auctions was less than in some prior auctions, the court of appeals noted that such “data must be considered in light of the absence from [these two auctions] of the set-asides by which, in prior auctions, only DEs had been permitted to purchase cer- tain spectrum blocks.” Id. at 27a n.4. In addition, “the purpose of the instant rulemaking from its inception was to disqualify sham DEs, which would be expected to re- duce the number of qualifying DEs.” Ibid. 5. After the Commission formally denied petition- ers’ reconsideration petition (App., infra, 151a-153a), whose pendency had required dismissal of their first petition for review, petitioners filed a new petition for review in the Third Circuit. That petition, filed shortly after the 700 MHz auction ended, 10 led to the opinion at issue in this case. Petitioners contended that the new DE rules violated the Communications Act, were arbi- trary and capricious, and were issued in violation of the 10 11 The court found no notice defect with respect to the Ten-Year Re- payment Schedule insofar as it applied to the 25% Attribution Rule, notice-and-comment requirements of the Administrative Procedure Act (APA). Petitioners asked that the rules be vacated and that the court nullify both the AWS and 700 MHz auctions and order that those auctions be con- ducted again under revised DE rules. Pet. App. 33a, 47a. The court of appeals granted the petition in part and denied it in part. Pet. App. 1a-51a. The court rejected petitioners’ contention that the revised DE rules were inconsistent with the Communications Act. Id. at 28a- 29a n.7. The court noted that, although the statute re- quired that the Commission’s auction rules allow for the “disseminat[ion] [of] licenses among a wide vari- ety of applicants, including small businesses [and] rural telephone companies,” the statute also included oth- er, competing requirements. Ibid. (quoting 47 U.S.C. 309(j)(3)(B)). The court of appeals explained that, “[g]iven the general agreement that the DE program can be abused, as well as the continuing participation by DEs in auctions held under the new rules, we cannot conclude that the FCC has failed to promote small-busi- ness participation at all.” Id. at 29a n.7. Turning to petitioners’ APA claims, the court reached different conclusions for different rules. The court rejected petitioners’ notice-and-comment and arbitrary-and-capricious challenges to the 25% Attribu- tion Rule, and it accordingly upheld that rule. Pet. App. 33a-37a. The court determined, however, that the Com- mission had provided inadequate notice of the 50% Im- permissible Relationship Rule and the Ten-Year Repay- ment Schedule. Id. at 38a-46a. 11 Having reached that 11 since “there was more than adequate notice that the new repayment schedule would apply to any new rules adopted by the FCC.” Pet. App. 46a n.10. But because the court concluded that notice was insufficient to apply the new schedule to pre-existing DE eligibility restrictions— and the court saw “no way to sever the FCC’s legitimate adoption of the ten-year schedule with respect to the 25% rule from its unlawful appli- cation of the rule to other situations”—the court vacated the Ten- Year Repayment Schedule in its entirely and specified that the effect of such vacatur would be to restore the pre-existing five-year schedule. Id. at 46a n.10, 50a. conclusion, the court found it unnecessary to consider petitioners’ further argument that those rules were arbi- trary and capricious. Id. at 42a n.8, 46a n.10. In considering the appropriate remedy for the viola- tions it had found, the court of appeals noted that peti- tioners had urged it to vacate the DE rules, while the FCC had urged it to “remand the matter without vaca- tur to permit [the FCC] to correct the defects.” Pet. App. 47a. The court also noted that the parties dis- agreed on its authority to remand the DE rules without vacatur: the FCC had argued that this remedy was within the court’s equitable authority, while petitioners had contended that the APA required it “to vacate any rules we find in violation of the APA.” Id. at 49a & n.13. The court “express[ed] no view as to whether [it was] authorized to” remand the DE rules without vacating them because it found such a remedy “inappropriate on the facts of this case.” Id. at 49a n.13. Because the court viewed the APA notice violations as “serious,” and because it believed that vacatur of the two rules would not be disruptive, the court agreed with petitioners that the rules should be vacated. Id. at 50a (“[E]ven assum- ing we have the authority to remand the matter without vacatur, we would decline to do so here.”). 12 The court of appeals noted that petitioners had re- quested, as a separate remedy, that the court “exercise [its] equitable authority to rescind Auctions 66 and 73.” Pet. App. 47a. The court also noted (id. at 48a n.12; see id. at 27a n.5) that the federal respondents and other parties had contested the court’s jurisdiction to review the auctions, which were distinct proceedings with their own agency orders that petitioners had not timely chal- lenged. The court determined that it need not address those jurisdictional arguments because, in exercising its “equitable authority” to fashion an appropriate remedy, it “would decline to exercise any jurisdiction [it] may have to rescind the auction results.” Id. at 48a n.12. The court of appeals explained that petitioners’ re- quest to rescind the AWS and 700 MHz auctions was “vigorously opposed” by intervenors and amici, some of which had won licenses in those auctions and were “in- nocent third parties in relation to” the notice defects in the DE rulemaking. Pet. App. 47a-48a. The court pointed out that rescinding the auctions “would involve unwinding transactions worth more than $30 billion, upsetting what are likely billions of dollars of additional investment made in reliance on the results, and seri- ously disrupting existing or planned wireless service for untold numbers of customers.” Id. at 48a. Such poten- tial “large-scale disruption in wireless communications,” the court observed, “would have broad negative implica- tions for the public interest in general.” Ibid. The court of appeals further determined that petition- ers’ proposed solution to the disruption—allowing the winning bidders “to keep their licenses unless and until they are won by another bidder at re-auction”—“might mitigate the chaos of a rescission, but it could not elimi- nate the massive uncertainty, waste, and frozen develop- 13 ment that would occur” during the period preceding any re-auction. Pet. App. 48a. For all these reasons, the court concluded that, under the circumstances, it would be “imprudent and unfair to order rescission of the auc- tion results.” Id. at 49a. ARGUMENT Petitioners contend that, once the court of appeals found that the FCC had violated the APA’s notice-and- comment provisions in promulgating two of the chal- lenged DE rules, 5 U.S.C. 706(2) required the court not only to vacate those rules but also to rescind two multi- billion dollar spectrum license auctions that had taken place while the rules were in force. The court of appeals correctly declined to impose that extraordinarily disrup- tive remedy, and its decision does not conflict with any decision of this Court or another court of appeals. More- over, petitioners did not argue below that Section 706(2) of the APA required the court of appeals to nullify the auctions, so the principal contention in their petition has been waived. Further review is not warranted. 1. Petitioners ask the Court to address what they claim is a division in the circuits on whether the APA permits courts that find procedural defects in agency rules to remand those rules to the agency for correction without vacating them, or instead requires automatic vacatur upon a finding of error. Pet. 15-23. That ques- tion is not presented here. Although the federal respon- dents asked the court of appeals for a remand of the DE rules without vacatur, the court declined to limit its remedy in that manner. Pet. App. 49a-50a. Instead, it vacated the two DE rules whose promulgation it found defective, just as petitioners asked it to do. Id. at 50a. 14 12 Although the court of appeals found it unnecessary to address the question in this case, other circuits have held that, in appropriate cir- cumstances, a court of appeals that finds an agency rule to have been invalidly promulgated may remand that rule to the agency without va- cating it. See, e.g., Allied-Signal, Inc. v. United States Nuclear Regu- latory Comm’n, 988 F.2d 146, 150-151 (D.C. Cir. 1993). Contrary to petitioners’ contention (Pet. 19-21), the Tenth and Federal Circuits have not held to the contrary. Forest Guardians v. Babbitt, 174 F.3d 1178 (10th Cir. 1999), involved 5 U.S.C. 706(1), not 5 U.S.C. 706(2). 174 F.3d at 1187. When Section 706(2) is at issue, the Tenth Circuit holds that it has the authority to remand without vacating. Qwest Corp. v. FCC, 258 F.3d 1191, 1205, 1207 (2001); see Qwest Corp. v. FCC, No. 99-9546, Order of Clarification 4 (10th Cir. filed Aug. 27, 2001) (explain- ing that its reported opinion “did not vacate the rules” at issue, which “may remain in effect * * * pending the completion of * * * proceedings on remand”). The court in PGBA, LLC v. United States, 389 F.3d 1219 (Fed. Cir. 2004), did not address whether Section 706(2) permits a reviewing court to remand without vacating an agency order. The court in that case was construing another statute, which incorpo- rated by reference the APA’s substantive arbitrary-and-capricious standard but did not incorporate Section 706’s remedial standards. Id. at 1225-1226. By contrast, when the Federal Circuit has directly addressed the question whether the APA permits remand without vacatur, it has held that “[a]n inadequately supported rule * * * need not necessarily be vacated .” National Org. of Veterans’ Advocates, Inc. v. Secretary of Veterans Affairs, 260 F.3d 1365, 1380 (2001) (quoting Allied-Signal, 988 F.2d at 150, 151). In addressing this remedial question, the court of appeals noted petitioners’ contention that the APA “re- quired [it] to vacate any rules [it] f[ou]nd in violation of the APA.” Pet. App. 49a n.13. The court “express[ed] no view” on that question, however, because it found remand without vacatur inappropriate “on the facts of this case.” Ibid. Petitioners identify no sound reason for this Court to review a question on which petitioners prevailed below. 12 15 13 Petitioners state that “[t]he Third Circuit did not question that the auctions in this case—conducted pursuant to unlawfully issued rules —constituted unlawful agency action subject to Section 706’s ‘shall . . . set aside’ command.” Pet. 29. The Third Circuit had no occasion to “question” that proposition, however, because petitioners never ad- vanced it. Petitioners now attempt to shift their Section 706(2) argument to the completely separate remedial question decided by the court of appeals, i.e., whether the court should have nullified both the AWS and 700 MHz auc- tions in addition to vacating the two DE rule changes. Before the court of appeals, however, petitioners did not contend that Section 706(2) required the auctions to be unwound once a procedural defect in the DE rules was identified. Their contention that Section 706(2) made vacatur mandatory was made exclusively in service of their argument that the DE rules themselves should be vacated, rather than merely remanded. See Pet. 2008 C.A. Br. 25 n.43. With respect to rescission of the rele- vant auctions, petitioners did not argue below that Sec- tion 706(2) required that remedy; they contended only that the court should “exercise its equitable authority” to impose it. Pet. App. 47a; Pet. 2008 C.A. Br. 26-37. The court of appeals accordingly did not consider the question whether Section 706(2) required rescission of the auctions. 13 Petitioners’ waiver of the principal claim they now advance is a sufficient reason to deny their petition. See Pennsylvania Dep’t of Corr. v. Yeskey, 524 U.S. 206, 212-213 (1998) (“Where issues are neither raised before nor considered by the Court of Appeals, this Court will not ordinarily consider them.”) (quoting Adickes v. S.H. Kress & Co., 398 U.S. 144, 147 n.2 (1970)). 16 14 Petitioners attempted to challenge an auction notice scheduling the AWS auction, but their effort was untimely. Petitioners timely chal- lenged that public notice as part of their 2006 petition for review, but when the court of appeals dismissed that petition, they did not ask the court to retain jurisdiction over the public notice. Instead, they sought to challenge it anew in 2008, but the 60-day window for challenging that notice, 28 U.S.C. 2344, had closed more than two years earlier. The period for seeking review was not tolled by petitioners’ request for ad- ministrative reconsideration, which pertained only to the DE rule- making orders and not the public notice. In their petition for review in this case, petitioners did not even attempt to challenge any order re- garding the 700 MHz auction. They did so in the D.C. Circuit, but, as noted, that petition was dismissed on jurisdictional grounds. Council Tree Commc’ns, 324 Fed. Appx. at 4; see note 10, supra. Even if petitioners had preserved this contention, it would fail on the merits. The provision on which peti- tioners rely provides that a “reviewing court shall * * * hold unlawful and set aside agency action, findings, and conclusions found to be * * * without observance of procedure required by law” or arbitrary and capricious. 5 U.S.C. 706(2) (emphasis added). For two independent reasons, this provision did not require nullification of the auctions. First, with respect to the auctions, the court of appeals did not have properly before it any “agency action” that could have been “set aside.” In a case like this, a timely petition for review of an FCC “order” is the exclusive basis of a court of appeals’ jurisdiction. 47 U.S.C. 402(a); 28 U.S.C. 2342(1). Here, petitioners even- tually filed a proper petition for review challenging the modifications to the FCC’s generally applicable DE rules. They did not, however, timely challenge any or- der regarding the AWS or 700 MHz auctions. 14 The 17 15 To the extent that petitioners claim that the FCC’s award of licens- es from the auctions was the “agency action” before the court of ap- peals, Pet. 29 n.22, that contention fails for multiple reasons. Petition- ers never made that argument below; they did not challenge any order granting licenses in the court of appeals; and the D.C. Circuit has exclusive jurisdiction over appeals by “any person who is aggrieved or whose interests are adversely affected by any order of the Commission granting or denying,” inter alia, any license application, 47 U.S.C. 402(b)(6). court of appeals accordingly lacked jurisdiction to pro- vide any remedy regarding those distinct proceedings. 15 Second, petitioners’ claim would fail even if there had been an auction order properly before the court of ap- peals because that court nowhere found that the Commis- sion’s decision to hold the auctions under its revised DE rules violated any provision of the APA. Accordingly, even if petitioners were correct in arguing that Section 706(2) mandates vacatur of any agency action found to be unlawful, petitioners would at most be entitled to vacatur of the orders modifying the DE rules (a remedy that the court of appeals awarded in any event as an exercise of discretion). Section 706(2) would not require the court to “set aside” separate “agency action[s],” such as the auctions in this case, that the court had not “found to be” “arbitrary [or] capricious” or “without ob- servance of procedure required by law.” 5 U.S.C. 706(2). Finally, petitioners identify no court of appeals deci- sion that has accepted the argument they now advance —i.e., that the APA requires a court that finds proce- dural error in the promulgation of agency rules to “set aside” not only the rules themselves, but also the out- come of entirely separate proceedings, with their own orders and agency docket numbers and in which the court found no legal error. Absent any conflict in the 18 16 The court of appeals did not find it necessary to reach this juris- dictional question since it found that rescission of the auctions would be unwarranted even assuming it had jurisdiction. Pet. App. 27a n.5. circuits on this question, petitioners’ claim would not warrant this Court’s review even if that claim had been properly preserved. 2. In the alternative, petitioners contend that the court of appeals abused its equitable discretion in declin- ing to nullify the auctions. Pet. 28-34. The court of ap- peals’ record-intensive resolution of that question does not conflict with any decision of this Court or of any other court of appeals. Moreover, for the reasons stated above, the court of appeals was without jurisdiction to nullify the auctions because petitioners failed to timely challenge any auction order. 16 In any event, the court of appeals correctly declined to provide petitioners with the extraordinarily disruptive remedy they sought. As the court of appeals noted, rescinding the auc- tions “would involve unwinding transactions worth more than $30 billion, upsetting what are likely billions of dol- lars of additional investments made in reliance on the results, and seriously disrupting existing or planned wireless service for untold numbers of customers.” Pet. App. 48a. Such a step would also directly harm “inno- cent third parties.” Id. at 47a-48a. Among them would be customers whose mobile devices would stop working when their providers lost their licenses, as well as com- panies that secured spectrum licenses in the auctions, including DEs that filed an amicus brief in the court of appeals “vigorously” opposing rescission as directly con- trary to their interests. Ibid.; Atlantic Wireless 2008 C.A. Br. 8-10 (discussing irreparable harm auction re- scission would cause to innocent small and medium-size companies that had won licenses in AWS auction). Un- 19 winding the auctions would cause enduring systemic harms as well. Taking away spectrum licenses years after the auctions were held, the licenses had issued, companies had spent billions of dollars building facili- ties, and millions of customers had begun utilizing re- sulting services would significantly undermine confi- dence in the auction system as a whole and make bidders significantly less likely to participate in the future. Petitioners have suggested that the court of appeals should “nullify the auction results, but permit the win- ning bidders to keep their licenses unless and until they are won by another bidder at re-auction.” Pet. App. 48a. As the court below correctly recognized, that approach “might mitigate the chaos of a rescission, but it could not eliminate the massive uncertainty, waste, and frozen development that would occur from the time of the re- scission until the re-auction.” Ibid. “A re-auction * * * would unfairly require [auction winners] to pay sums that they may not have in order to protect investments they have already made, and perhaps cannot recoup without the relevant spectrum licenses.” Id. at 49a. Finally, the relief petitioners sought was especially inappropriate because their own failure to comply with jurisdictional requirements in 2006 led to dismissal of their first petition for review and a multi-year postpone- ment of a decision on the merits. The 700 MHz auction took place during that interval, and reliance by both licensees and customers on the results of both auctions steadily increased during that time period. As a matter of equity, petitioners should not be allowed to leverage their own litigation mistakes into a claim for more ex- pansive and disruptive relief. In sum, the court of ap- peals correctly concluded that “it would be imprudent 20 and unfair to order rescission of the auction results.” Pet. App. 49a. Petitioners are also wrong in contending (Pet. 29) that the court of appeals “declined to provide any rem- edy at all to petitioners injured by the unlawful agency action.” The court of appeals vacated the rules whose issuance it found procedurally improper. Pet. App. 50a. Petitioners thus secured the remedy that courts of ap- peals typically provide when they find agency regula- tions to have been unlawfully promulgated. Indeed, when the court of appeals issued its decision, petitioner Council Tree recognized the significance of the relief it had obtained, stating that the decision had “restored a pathway for wireless competition, innovation and diver- sity by ensuring the ‘dissemination of licenses among a wide variety of applicants’ envisioned by Congress in establishing the FCC’s wireless auction authority.” TRDaily, Third Circuit Vacates, Remands Portion of FCC’s ‘DE’ Regulations (Aug. 24, 2010). Because the court of appeals vacated the 50% Imper- missible Relationship Rule and the Ten-Year Repay- ment Schedule, petitioners may participate in future auctions of spectrum licenses without being subject to those restrictions. An auction of additional licenses in the 700 MHz Band currently is scheduled for July 2011, Public Notice, AU Docket No. 10-248, Auction of 700 MHz Band Licenses Scheduled for July 19, 2011, DA 10-2298 (Dec. 15, 2010), and more significant auctions are on the horizon, see Office of the White House Press Secretary, President Obama Details Plan to Win the Future through Expanded Wireless Access (Feb. 10, 2011), http://www.whitehouse.gov/the-press-office/ 2011/02/10/president-obama-details-plan-win-future- through-expanded-wireless-access. 21 17 Public Notice, Auction of Advanced Wireless Service Licenses Closes, 21 F.C.C.R. 10,521, 10,582 (2006); see Gov’t 2006 C.A. Br. 44 n.57; Pet. 2006 Reply Br. 27 n.26. 18 See FCC File No. 0004404302, Application for Transfer of Control of Denali Spectrum License Sub., LLC (filed Oct. 1, 2010), available at http://wireless2.fcc.gov/UlsApp/ApplicationSearch/applMain.jsp? applID=5732431. An attachment to the application (scroll to Attach- ments and click on the link “Calculations for Unjust enrichment pay- ment”) provides unjust-enrichment calculations showing a payment of 50% of relevant bidding credit calculated, pursuant to the five-year repayment schedule of 47 C.F.R. 1.2111(d)(2)(ii)(C), rather than the 100% unjust enrichment payment that would have been applicable under the vacated Ten-Year Repayment Schedule (see 47 C.F.R. 1.2111(d)(2)(i)(A)). See generally RCRWireless, Leap Completes Denali Acquisition (Dec. 28, 2010), http://www.rcrwireless.com/article/ 20101228/carriers/101229949/leap-completes-denali-acquisition. Moreover, a DE that was one of the top ten winning bidders in the AWS auction and in which Council Tree’s principals have had an acknowledged ownership inter- est, 17 already has received a tangible benefit from the decision below. On December 27, 2010, that winning bidder transferred to a non-DE its control of a portion of the AWS license it had won at auction. In doing so, the winning bidder paid the reduced unjust enrichment payment associated with the five-year repayment sched- ule that the court of appeals had reinstated, rather than the greater payment that would have been required un- der the now-vacated 10-year schedule. 18 In short, there is no basis for petitioners’ contention that the court’s failure to rescind the AWS and 700 MHz auctions left petitioners without any remedy. 22 CONCLUSION The petition for a writ of certiorari should be denied. Respectfully submitted. AUSTIN C. SCHLICK General Counsel PETER KARANJIA Deputy General Counsel RICHARD K. WELCH Acting Associate General Counsel LAURENCE N. BOURNE Counsel Federal Communications Commission Washington, D.C. 20554 NEAL KUMAR KATYAL Acting Solicitor General FEBRUARY 2011 (1a) APPENDIX A FEDERAL COMMUNICATIONS COMMISSION WASHINGTON, D.C. 20554 WT Docket No. 05-211 IN THE MATTER OF IMPLEMENTATION OF THE COMMERCIAL SPECTRUM ENHANCEMENT ACT AND MODERNIZATION OF THE COMMISSION’S COMPETITIVE BIDDING RULES AND PROCEDURES Adopted: Apr. 25, 2006 Released: Apr. 25, 2006 SECOND REPORT AND ORDER AND SECOND FURTHER NOTICE OF PROPOSED RULE MAKING Comment Date: 60 days after publication in the Federal Register Reply Comment Date: 90 days after publication in the Federal Register By the Commission: Chairman Martin and Commission- er Copps issuing separate statements; and Commission- er Adelstein approving in part, dissenting in part, and issuing a separate statement. 2a 1 “Designated entities” are small businesses, businesses owned by members of minority groups and/or women, and rural telephone com- panies. 47 C.F.R. § 1.2110(a). In an effort to eliminate some past incon- sistency in nomenclature, we clarify that, unless otherwise noted, when referring to “designated entities,” we include as a subgroup “entrepre- neurs” eligible to bid for “set-aside” broadband Personal Communica- tions Service (“broadband PCS”) licenses offered in closed bidding. See id. §§ 1.2110(a), 24.709. 2 47 U.S.C. § 309(j)(4)(D); see also id. § 309(j)(3)(B). 3 Id. § 309(j)(4)(E); see also id. § 309(j)(3)(C). I. INTRODUCTION 1. In this Second Report and Order and Second Fur- ther Notice of Proposed Rule Making (“Second Further Notice”), we address our rules concerning the eligibility of applicants and licensees for designated entity bene- fits. In the Second Report and Order, we modify our rules in order to increase our ability to ensure that the recipients of designated entity benefits are limited to those entities and for those purposes Congress in- tended. 1 In the Second Further Notice, we seek com- ment on a variety of additional measures that might fur- ther augment the effectiveness of our rules in this re- gard. We take all of these steps with the goal of enhanc- ing our ability to carry out Congress’s dual directives with regard to designated entities: (1) that we ensure that designated entities are given the opportunity to participate in the provision of spectrum-based services; 2 and (2) that, in providing such opportunity, we prevent unjust enrichment. 3 With regard to the second direc- tive, our particular intention is to ensure that entities ineligible for designated entity incentives cannot circum- vent our rules by obtaining those benefits indirectly, through their relationships with eligible entities. 3a 4 Implementation of the Commercial Spectrum Enhancement Act and Modernization of the Commission’s Competitive Bidding Rules and Procedures, WT Docket No. 05-211, Further Notice of Proposed Rule Making, 21 FCC Rcd 1753 (2006) (“Further Notice”). 5 Id. at 1754-55 ¶ 1. 6 Id. In response, we received 37 comments and 18 reply comments. Two parties who filed initial comments in response to the Commission’s Public Notice relating to AWS auction procedures (AU-06-30) also raised issues with respect to the Commission’s designated entity program. We also received ex parte filings in response to the Further Notice from various parties including the Congressional Black Caucus, the U.S. Department of Justice and Council Tree. Appendix A contains a list of full and abbreviated names of commenting parties. 7 See 47 C.F.R. § 1.2101 et. seq. 8 See id. § 1.2110. The Commission establishes special small business size standards on a service-specific basis, taking into consideration the 2. In the Further Notice of Proposed Rule Making in this docket (“Further Notice”), we tentatively con- cluded that we should restrict the award of designated entity benefits to an otherwise qualified applicant where it has a “material relationship” with a “large in-region incumbent wireless service provider.” 4 We sought com- ment on how we should define the elements of such a restriction. 5 We further sought comment on whether we should restrict the award of designated entity benefits where an otherwise qualified applicant has a “material relationship” with a large entity that has a significant in- terest in communications services, and if so, how we should define the elements of such a restriction. 6 A. Second Report and Order 3. As discussed fully below, we revise our general competitive bidding rules (“Part 1” rules) 7 governing benefits reserved for designated entities 8 to include cer- 4a characteristics and capital requirements of the particular service. 47 C.F.R. § 1.2110(c)(1). In the Part 1 Fifth Report and Order, the Com- mission, in light of the Adarand decision, declined to adopt special pro- visions for minority- and women-owned businesses but noted that minority-and women-owned businesses that qualify as small businesses may take advantage of the provisions the Commission has adopted for small businesses. Amendment of Part 1 of the Commission’s Rules— Competitive Bidding Procedures, WT Docket No. 97-82, Order on Reconsideration of the Third Report and Order, Fifth Report and Order, and Fourth Further Notice of Proposed Rule Making, 15 FCC Rcd 15293, 15319 ¶ 48 (2000) (“Part 1 Fifth Report and Order”) (citing Adarand Constructors, Inc. v. Pena, 515 U.S. 200, 227 (1995)). On several occasions, the Commission has declined to adopt bidding credits for large telephone companies that serve rural areas. See, e.g., Imple- mentation of Section 309(j) of the Communications Act—Competitive Bidding, PP Docket No. 93-253, Fifth Memorandum Opinion and Order, 10 FCC Rcd 403, 457-58, 462-63 ¶¶ 100, 111 (1994) (“Competitive Bidding Fifth MO&O”); Amendment of Part 1 of the Commission’s Rules—Competitive Bidding Procedures, Order on Reconsideration of the Third Report and Order, Fifth Report and Order, and Fourth Notice of Proposed Rule Making, 15 FCC Rcd 15293, 15320-21 ¶¶ 51-52 (2000); Reallocation and Service Rules for the 698-746 MHz Spectrum Band (Television Channels 52-59), GN Docket No. 01-74, Report and Order, 17 FCC Rcd 1022, 1090-91 ¶ 176 (2002). The Commission determines eligibility for its small business provisions based on an entity’s size determined pursuant to attribution rules. 47 C.F.R. § 1.2110(b)(1)-(3). But see Amendment of Part 1 of the Commission’s Rules—Competitive Bidding Procedures, Second Order on Reconsider- ation of the Third Report and Order and Order on Reconsideration of the Fifth Report and Order, 18 FCC Rcd 10180, 10191-94 ¶¶ 16-18 (2003) (establishing exemption for rural telephone cooperatives from the requirement that gross revenues of entities controlled by an applicant’s officers and directors be attributed to the applicant), modified on reconsideration, Second Order on Reconsideration of the Fifth Report and Order, 20 FCC Rcd 1942 (2005); 47 C.F.R. § 1.2110(b)(3)(iii) (exempting rural telephone cooperatives from attrib- uting the gross revenues of its officers and directors). tain “material relationships” as factors in determining designated entity eligibility. Specifically, we adopt rules 5a 9 In the legislative history of Section 309(j), Congress explains that the reason for imposing anti-trafficking restrictions and unjust enrich- ment payment obligations on entities that receive small business bene- fits is to deter “participation in the licensing process by those who have no intention of offering service to the public.” H.R. REP. NO. 103-111, at 257-58 (1993) (Conference Agreement adopted House provisions, in relevant part, with amendments. H.R. CONF. REP. NO. 103-213, at 483 (1993)). 10 See 47 C.F.R. § 1.2111. to limit the award of designated entity benefits, as ex- plained in more detail below, to any applicant or licensee that has “impermissible material relationships” or an “attributable material relationship” created by certain agreements with one or more other entities for the lease or resale (including under a wholesale arrangement) of its spectrum capacity. These definitions of material rela- tionships are necessary to strengthen our implementa- tion of Congress’s directives with regard to designated entities and to ensure that, in accordance with the intent of Congress, every recipient of our designated entity benefits is an entity that uses its licenses to directly pro- vide facilities-based telecommunications services for the benefit of the public. 9 4. We also adopt rule modifications to strengthen our unjust enrichment rules so as to better deter entities from attempting to circumvent our designated entity eligibility requirements and to recapture designated entity benefits when ineligible entities control desig- nated entity licenses or exert impermissible influence over a designated entity. 10 Similarly, to ensure our con- tinued ability to safeguard the award of designated en- tity benefits, we provide clarification regarding how the Commission will implement its rules concerning audits, 6a 11 Broadband Personal Communications Services entrepreneurs will be subject to these new rules as described below. 12 See discussion infra ¶¶ 28-30. 13 The rules adopted herein, therefore, will not apply to the upcoming auction of 800 MHz Air-Ground Radiotelephone Service licenses, sched- uled to begin on May 10, 2006, nor to the Form 601 applications to be filed subsequent to the close of that auction by the winning bidders. See Auction of 800 MHz Air-Ground Radiotelephone Service Licenses Scheduled for May 10, 2006; Notice and Filing Requirements, Minimum Opening Bids, Upfront Payments and Other Procedures for Auction No. 65, Public Notice, 21 FCC Rcd 1278 (2006). 14 See discussion infra note 116 and accompanying text. and we refine our rules with respect to the reporting obligations of designated entities. 5. The rules we adopt today will apply to all deter- minations of eligibility for all designated entity benefits, including bidding credits and, as applicable, set-asides 11 and installment payments, unless excepted by the grandfathering provisions described in detail below. 12 These rules will be applied to any application filed to participate in auctions in which bidding begins after the effective date of the rules adopted herein and to all long- form applications filed by winning bidders after such auctions, 13 as well as to all applications for an authoriza- tion, an assignment or transfer of control, a lease, or reports of events affecting a designated entity’s ongoing eligibility, 14 including “impermissible material relation- ships” or “attributable material relationships,” filed on or after release of this Second Report and Order. These rules will become effective thirty days after their publi- cation in the Federal Register. 7a 15 See, e.g., Comments of NHMC at 17-18; Reply Comments of Con- sumers Union at 1-2. 16 See supra note 8 (discussing the Commission’s designated entity benefits). 17 See 47 U.S.C. § 309(j)(4)(D); see also 47 C.F.R. § 1.2110(a). 18 47 U.S.C. § 309(j)(4)(D). 19 Id. § 309(j)(4)(E). B. Second Further Notice of Proposed Rule Making 6. In reviewing the record in this proceeding, includ- ing the requests of various parties to conduct a further inquiry, 15 we issue this Second Further Notice to con- sider whether we should adopt additional restrictions, beyond those we adopt herein, to further safeguard the benefits reserved for designated entities. 16 II. BACKGROUND 7. Throughout the history of the auctions program, the Commission has endeavored to carry out its Con- gressional directive to promote the involvement of des- ignated entities in the provision of spectrum-based ser- vices. 17 Congress recommended that the Commission, in assisting designated entities, consider the use of various mechanisms such as tax credits and bidding preferenc- es. 18 Yet, in so doing, Congress also mandated that the Commission safeguard the award of the benefits it dis- tributed to “prevent unjust enrichment as a result of the methods employed to issue licenses.” 19 8. The challenge for the Commission in carrying out Congress’s plan has always been to find a reasonable balance between the competing goals of, first, providing designated entities with reasonable flexibility in being able to obtain needed financing from investors and, sec- 8a 20 See Implementation of Section 309(j) of the Communications Act— Competitive Bidding, PP Docket No. 93-253, Fifth Report and Order, 9 FCC Rcd 5532, 5582 ¶ 159 (1994) (“Competitive Bidding Fifth Report and Order”). 21 See, e.g., Implementation of Section 309(j) of the Communications Act—Competitive Bidding, PP Docket No. 93-253, Second Report and Order, 9 FCC Rcd 2348, 2391-92 ¶¶ 241-44 (1994) (“Competitive Bidd- ing Second Report and Order”). 22 See id. at 2389-91, 2392 ¶¶ 231-40, 245-48. ond, ensuring that the rules effectively prevent entities ineligible for designated entity benefits from circum- venting the intent of the rules by obtaining those bene- fits indirectly, through their investments in qualified businesses. 20 The changes in the Commission’s desig- nated entity rules over time have been the result of the Commission’s continuing effort to maintain this balance effectively in the face of a rapidly evolving telecommuni- cations industry, legislative changes, judicial decisions, and the demand of the public for greater access to wire- less services. 9. The Commission’s primary method of promoting the participation of designated entities in competitive bidding has been to award bidding credits—percentage discounts on winning bid amounts—to small business applicants. 21 The Commission also has utilized other incentives, such as installment payments and, in the broadband Personal Communications Services (“broad- band PCS”), a license set-aside, to encourage designated entities to participate in spectrum auctions and in the provision of service. 22 In order to qualify for these bene- fits, an applicant must demonstrate that its gross reve- nues (and, in some cases, its total assets), in combination with those of its “attributable” interest holders, fall be- 9a 23 See 47 C.F.R. § 1.2110(b). 24 See id. § 24.709(a)(1)-(2). 25 See id. § 24.709(b)(1)(i)-(iv). 26 See id. § 24.709(b)(1)(iii), (iv). 27 A control group is an entity, or a group of individuals or entities, that possesses de jure and de facto control of an applicant or licensee. See id. § 24.720(k). 28 A qualifying investor is a person who is (or holds an interest in) a member of the applicant’s control group and whose gross revenues and total assets, when aggregated with those of all other attributable investors and affiliates, do not exceed the entrepreneurs’ block gross revenues and total assets limits. Id. § 24.720(n). 29 Id. § 24.709(b)(1)(v)(A)(2), (b)(1)(vi)(A)(2). If the applicant was a partnership, the control group was required to hold all of its general partnership interests. Id. low certain service-specific financial caps. 23 Thus, in determining eligibility for size-based benefits, it is criti- cal to decide which investors’ gross revenues (and total assets) must be attributed. 10. During the early years of the designated entity program, the Commission adopted often complicated attribution rules on a service-specific basis. For broad- band PCS attribution, the Commission had a “general rule”—its financial caps 24 —and four exceptions to the rule. 25 Two of these exceptions came to be known as the “control group exceptions”—a 25 percent equity excep- tion and a 49.9 percent equity exception. 26 Both excep- tions required the applicant to form a “control group” 27 within which “qualifying investors” 28 owned at least 50.1 percent of the applicant’s voting interests. 29 Under the 25 percent equity exception, the applicant’s control group was required to own at least 25 percent of the ap- plicant’s total equity; and, within the control group, qualifying investors were required to hold at least 15 10a 30 Id. § 24.709(b)(1)(v)(A), (b)(1)(v)(A)(1). 31 Id. § 24.709(b)(1)(vi)(A), (b)(1)(vi)(A)(1). 32 Id. § 24.709(b)(1)(iii)-(vi). The equity ownership requirements un- der both exceptions were somewhat relaxed for entities that had been operating and earning revenues for at least two years prior to December 31, 1994. Id. §§ 24.709 (b)(1)(v)(B), 24.709(b)(1)(vi)(B), 24.709(b)(6)(ii), 24.720(h). 33 See id. § 24.709(b)(i), (ii). 34 In some non-PCS services, the Commission uses the term “entre- preneur” to refer to a level of small business eligibility for bidding cred- its. See, e.g., id. §§ 22.229, 27.702, 101.538, 101.1107, 101.1112, 101.1429. percent of the applicant’s total equity. 30 Under the 49.9 percent equity exception, the applicant’s control group was required to own at least 50.1 percent of the appli- cant’s total equity; and, within the control group, quali- fying investors were required to hold at least 30 percent of the applicant’s total equity. 31 If these and certain other requirements were met, the gross revenues and total assets of non-controlling investors were not attrib- uted to the applicant. 32 These two exceptions to the gen- eral rule were widely used; however, the other two ex- ceptions—one for publicly-traded corporations with widely dispersed voting stock ownership and the other for small business consortia 33 —were seldom invoked. 11. The Commission used the control group ap- proach in broadband PCS for determinations of small business eligibility and also for determinations of “en- trepreneur” eligibility. In broadband PCS, the Commis- sion originally “set aside” C and F block licenses for “entrepreneurs,” 34 small entities whose gross revenues and total assets, when aggregated with those of their attributable interest holders, fell below certain financial 11a 35 In the context of Broadband PCS, an applicant or licensee gen- erally qualifies as an entrepreneur if it, together with its affiliates, per- sons or entities that hold interests in the applicant or licensee, and their affiliates, has combined total assets of less than $500 million and has had combined gross revenues of less than $125 million in each of the last two years. Id. § 24.709(a)(1). 36 Under this standard, the gross revenues and affiliations of an inves- tor in the applicant were not considered so long as the investor held 25 percent or less of the applicant’s passive equity and was not a member of the applicant’s control group. Amendment of Part 1 of the Commis- sion’s Rules—Competitive Bidding Proceeding, WT Docket 97-60, Or- der, Memorandum Opinion and Order, and Notice of Proposed Rule Making, 12 FCC Rcd 5686, 5702 ¶ 26 (1997) (“Part 1 Order”). 37 47 C.F.R. § 90.814(g) (2001); see Part 1 Order, 12 FCC Rcd at 5703 ¶ 27. 38 See, e.g., 47 C.F.R. §§ 1.948, 1.2105, 1.2110, 1.2112, 20.6, 21.38, 22.223, 22.225. 39 See, e.g., id. §§ 1.2110, 22.223, 27.210, 90.814, 90.912, 90.1021, 101.1109. caps. 35 A variation of this control group approach was employed for narrowband PCS. 36 In determining wheth- er applicants for the 900 MHz specialized mobile radio (“SMR”) service qualified as small businesses, the Com- mission attributed the revenues of parties holding part- nership and other ownership interests and any stock interest amounting to 20 percent or more of the equity, or outstanding stock, or outstanding voting stock of the applicant. 37 For virtually all other services, the Commis- sion used a “controlling interest” 38 or “controlling prin- cipal” 39 standard much like the attribution standard used today. Under this earlier standard, the Commis- sion attributed to the applicant the gross revenues of its controlling interests and their affiliates in assessing whether the applicant was qualified to take advantage of 12a 40 See Part 1 Order, 12 FCC Rcd at 5703 ¶ 27. 41 See generally Part 1 Fifth Report and Order, 15 FCC Rcd at 15293. 42 Id. at 15323 ¶ 59. 43 47 C.F.R. § 1.2110(c)(2). 44 Id. 45 Id. 46 In Ellis Thompson, the Commission identified the following fac- tors used to determine control of a business: (1) use of facilities and equipment; (2) control of day-to-day operations; (3) control of policy de- cisions; (4) personnel responsibilities; (5) control of financial obligations; and (6) receipt of monies and profits. Application of Ellis Thompson Corporation, Memorandum Opinion and Order and Hearing Designa- tion Order, 9 FCC Rcd 7138, 7138-7139 ¶ 9 (1994) (citing the Commis- sion’s decision in Intermountain Microwave, Applications for Micro- wave Transfers to Teleprompter Approved with Warning, Public No- tice, 12 FCC 2d 559 (1963) (“Intermountain Microwave ”) (1963)). See also Application of Baker Creek Communications, L.P. for Authority to the Commission’s small business provisions, such as bid- ding credits. 40 12. Since 2000, the Commission has applied the cur- rent “controlling interest” standard to all services when making attribution determinations. 41 Under this stan- dard, the Commission attributes to an applicant the gross revenues of it, its controlling interests, its affili- ates, and the affiliates of the applicant’s controlling in- terests. 42 A “controlling interest” includes individuals or entities, or groups of individuals or entities, that have control of the applicant under the principles of either de jure or de facto control. 43 De jure control is typically evidenced by the holding of greater than 50 percent of the voting stock of a corporation or, in the case of a part- nership, general partnership interests. 44 De facto con- trol is determined on a case-by-case basis 45 and includes the criteria set forth in Ellis Thompson. 46 Under the 13a Construct and Operate Local Multipoint Distribution Services in Multi- ple Basic Trading Areas, Memorandum Opinion and Order, 13 FCC Rcd 18709 (Wireless Tel. Bur. 1998) (discussing in detail the factors constituting de facto control); Stephen F. Sewell, Assignments and Transfers of Control of FCC Authorizations Under Section 310(d) of the Communications Act of 1934, 43 FED. COMM. L.J. 277, 316-17 (1991). 47 47 C.F.R. 1.2110(c)(2)(ii)(F); Part 1 Fifth Report and Order, 15 FCC Rcd at 15325-26 ¶¶ 65-66. 48 See Part 1 Fifth Report and Order, 15 FCC Rcd at 15325-26 ¶ 65. 49 Id. controlling interest standard, the officers and directors of any applicant are considered to have a controlling interest in the applicant. 47 The Commission has declined to impose minimum equity requirements on controlling interests, believing that such requirements would dic- tate that a person or entity identified as a controlling interest must retain some level of equity in the appli- cant, thereby reducing the amount of equity the appli- cant could offer to non-controlling interests in exchange for financing and making it more difficult for the appli- cant to attract sufficient investment to compete in the marketplace. 48 13. In applying the controlling interest standard, the Commission’s intent has been to provide designated en- tities with increased flexibility and simplicity in struc- turing their businesses, while continuing to ensure that size-based benefits are reserved solely for qualified enti- ties. In making the change, the Commission acknowl- edged the complexity of the broadband PCS control group approach, emphasizing that the controlling inter- est standard would be “simpler” and “more straightfor- ward to implement.” 49 Also, the Commission explained, application of the controlling interest standard would 14a 50 Amendment of Part 1 of the Commission’s Rules—Competitive Bidding Procedures, WT Docket No. 97-82, Third Report and Order and Second Further Notice of Proposed Rule Making, 13 FCC Rcd 374, 478 ¶ 186 (1997) (“Part 1 Third Report and Order”). 51 Part 1 Fifth Report and Order, 15 FCC Rcd at 15293, 15323-24 ¶ 58. 52 Further Notice, 21 FCC Rcd at 1754-57 ¶¶ 1, 3-5. 53 Id. at 1754-55, 1759-62 ¶¶ 1, 12-18. 54 Id. at 1754-55, 1762-63 ¶¶ 1, 19. allow “legitimate small businesses . . . to attract pas- sive financing in a highly competitive and evolving tele- communications marketplace,” 50 while ensuring “that only those entities truly meriting small business status qualif [ied] for [the Commission’s] small business pro- visions.” 51 III. SECOND REPORT AND ORDER A. Background 14. In the Further Notice, we tentatively concluded that we should restrict the award of designated entity benefits to an otherwise qualified applicant where it has a “material relationship” with a “large in-region incum- bent wireless service provider.” 52 We sought comment on how to define the specific elements of such a restric- tion. 53 Further, we sought comment on whether such a restriction on the award of designated entity benefits should apply where a designated entity applicant has a “material relationship” with a large entity that has a “significant interest in communication services,” and whether we should include in such a definition a broad category of communications-related businesses or in- stead exclude or include certain types of entities. 54 In addition, we sought comment on whether we should 15a 55 Id. at 1763 ¶ 20. 56 Id. at 1763-64 ¶ 21. 57 In the legislative history of Section 309(j), Congress explains that the reason for imposing anti-trafficking restrictions and unjust enrich- ment payment obligations on entities that receive small business bene- fits is to deter “participation in the licensing process by those who have no intention of offering service to the public.” H.R. REP. NO. 103-111, at 257-58 (1993) (Conference Agreement adopted House provisions, in relevant part, with amendments. H.R. CONF. REP. NO. 103-213, at 483 (1993)). adopt unjust enrichment provisions that would require reimbursement of designated entity benefits in the event that a designated entity makes a change in its ma- terial relationships or makes any other changes that would result in the loss of or change in its eligibility sub- sequent to acquiring a license with a designated entity benefit. 55 Finally, in the Further Notice, we sought com- ment on changes to the Commission’s auction application rules to facilitate the application of any rule modifica- tions to upcoming auctions. 56 B. Material Relationship 15. As discussed fully below, we revise our Part 1 rules to consider certain relationships as factors in de- termining designated entity eligibility. In so doing, we seek to improve our ability to achieve Congress’s direc- tives with regard to designated entities and to ensure that, in accordance with the intent of Congress, every recipient of our designated entity benefits is an entity that uses its licenses to directly provide facilities-based telecommunications services for the benefit of the pub- lic. 57 Specifically, except as grandfathered below, an ap- plicant or licensee has “impermissible material relation- ships” when it has agreements with one or more other 16a 58 Further Notice, 21 FCC Rcd at 1760 ¶ 13. entities for the lease (under either spectrum manager or de facto transfer leasing arrangements) or resale (in- cluding under a wholesale arrangement) of, on a cumula- tive basis, more than 50 percent of its spectrum capacity of any individual license. Such “impermissible material relationships” render the applicant or licensee (i) ineligi- ble for the award of designated entity benefits, and (ii) subject to unjust enrichment on a license-by-license ba- sis. Furthermore, except as grandfathered below, an applicant or licensee has an “attributable material rela- tionship” when it has one or more agreements with any individual entity, including entities and individuals at- tributable to that entity, for the lease (under either spectrum manager or de facto transfer leasing arrange- ments) or resale (including under a wholesale arrange- ment) of, on a cumulative basis, more than 25 percent of the spectrum capacity of any individual license that is held by the applicant or licensee. The “attributable ma- terial relationship” with that entity will be attributed to the applicant or licensee for the purposes of determining the applicant’s or licensee’s (i) eligibility for designated entity benefits, and (ii) liability for unjust enrichment on a license-by-license basis. 16. Further Notice. To define “material relation- ship,” the Further Notice sought comment on the spe- cific nature of the types of additional relationships that should trigger a restriction on the availability of desig- nated entity benefits. 58 For instance, Council Tree ini- tially proposed that the Commission should restrict a designated entity applicant’s “material relationships,” including both financial and operational agreements, in order to more carefully ensure that designated entity 17a 59 Id. 60 Id. 61 Id. at 1761 ¶ 15. 62 Id. 63 Id. benefits are awarded only to bona fide eligible entities. 59 In this regard, we sought comment on what might con- stitute a “material financial” or “material operational” relationship. Moreover, insofar as our current rules already attribute the gross revenues of those that have relationships with designated entity applicants that con- fer either de jure and de facto control, we also sought comment on the type of attribution standard that we should apply to any rule modification. 60 17. The Further Notice also sought comment on whether restricting certain agreements as a “material relationship” would be too harsh or unnecessarily limit a designated entity applicant’s ability to gain access to capital or industry expertise. 61 Additionally, the Further Notice sought comment on whether there might be in- stances where the existence of either a “material finan- cial agreement” or a “material operational agreement” might be appropriate and might not raise issues of un- due influence. 62 In this regard, the Further Notice asked whether the Commission should allow designated entity applicants to obtain a bidding credit or other ben- efits if they had only a “material financial agreement” or only a “material operational agreement” but not both, and what factors we should consider in determining the types of relationships that might not adversely affect an applicant’s designated entity eligibility. 63 Finally, we sought comment on whether a spectrum leasing ar- rangement should be defined as a “material relation- 18a 64 Id. at 1761 ¶ 16. 65 See, e.g., Comments of STX at 2; see also Comments of Antares at 4 (“the Commission needs to balance the public policy goal of continuing to encourage small business participation within the wireless industry against the very real need for qualified small businesses to raise capital in order to participate in wireless service auctions.”); Comments of Cook Inlet at 3 (“it is particularly challenging for small companies to obtain access to financial resources necessary to support bidding and paying for even one license in a given auction, much less to construct and operate a system within the time frame mandated by the Commis- sion’s rules.”); Comments of NAB at 2 (“If the Commission were to adopt unnecessarily restrictive DE rules, small businesses would be more limited in their ability to raise capital and attract investors.”); Re- ply Comments of Ericsson at 2-3 (arguing that the Commission should not constrain access to manufacturer financing). 66 Comments of Wirefree Partners at 7. 67 See, e.g., Comments of Council Tree at 52; Comments of Leap at 15; Comments of MMTC at 2, 9. ship,” and whether we should consider any other ar- rangements for the purposes of such a definition. 64 18. Comments. Commenters are generally split re- garding the level of specificity with which the Commis- sion should define “material relationship.” Several com- menters urge the Commission to narrowly tailor the def- inition so as not to “inadvertently hinder the flow of capital” to designated entity applicants. 65 For example, Wirefree Partners argues that the Commission should “narrowly and specifically define what constitutes a ma- terial relationship” because “[s]mall businesses need the flexibility to enter into reasonable commercial agree- ments with other participants in the communications in- dustry.” 66 Others maintain that the reach of the Commis- sion’s policies should be very broad and that we should define “material relationship” to include both financial and operational agreements. 67 For example, Council 19a 68 Comments of Council Tree at 52. See also Further Notice, 21 FCC Rcd at 1761 ¶ 9. A number of commenters also generally appeared to support the premise of Council Tree’s proposals without specifically commenting on how the Commission might define “material relation- ship.” See, e.g., Comments of MobiPCS at 1; Comments of Suncom at 1; Comments of USCC at 2-3, 5. 69 See, e.g., Comments of NTCA at 7-8; Comments of RTG at 4-5. 70 Comments of John Staurulakis, Inc. at 3. 71 Comments of RTG at 5. Tree and other proponents of a broad definition main- tain that the definition of material relationship should include, “without limitation, management agreements, trademark license agreements, joint marketing agree- ments, future interest agreements (such as puts, calls, options, and warrants), and long-term de facto and spec- trum manager leasing arrangements.” 68 19. Rural service providers oppose the proposal to define “material relationship” in a manner that would preclude small businesses from entering into operational agreements with large wireless carriers. 69 As explained by one commenter, many small and rural wireless com- panies “have entered into management, marketing or other non-equity arrangements with large wireless car- riers which enable them to provide quality wireless ser- vices to the rural areas they are licensed to serve.” 70 Another commenter notes that “the Commission should not consider roaming agreements evidence of a ‘material relationship’ since to do so would eliminate almost every small rural carrier from enjoying DE status.” 71 20. In seeking comment on spectrum leasing, we asked “what, if any standard should be used to deter- mine whether spectrum leasing is a material relation- ship for the purpose of any additional restriction on the 20a 72 Further Notice, 21 FCC Rcd at 1761 ¶ 16. 73 See, e.g., Comments of Wirefree Partners at 8-9; Comments of CTIA at 4. 74 See, e.g., Comments of Council Tree at 52; see generally Comments of MobiPCS at 1; Comments of Suncom at 1; Comments of USCC at 2-3, 5. availability of designated entity benefits that we might adopt.” 72 A few commenters argued that the Commis- sion should not reverse the guidance provided in the Secondary Markets proceeding. 73 As noted above, a number of others generally agreed that the Commission should adopt Council Tree’s proposal for material rela- tionships, presumably including its suggestion that leas- ing should be included in the types of material relation- ships that should trigger a Commission restriction of the award of designated entity benefits. 74 21. Discussion. In defining “material relationship,” we seek to balance a designated entity applicant’s need for flexibility to structure its business relationships against our statutory obligation to award these small business benefits only to entities intended by statute to be eligible. In our experience in administering the des- ignated entity program over the last several years, we have witnessed a growing number of complex agree- ments between designated entities and those with whom they choose to enter into financial and operational rela- tionships. Although some of these agreements may have contributed to the wireless industry becoming a thriving sector of the nation’s economy, the relationships under- pinning such contracts underscore the need for stricter regulatory parameters to ensure, as Congress intended, that: (1) benefits are awarded to provide opportunities for designated entities to become robust independent 21a 75 See, e.g., Comments of MMTC at 6 (“some of the largest national incumbent wireless carriers have received from their DE partners ex- clusive access to valuable spectrum and network capacity that other- wise could have been used to offer new services and induce the national wireless incumbents to better respond to the needs of the market- place.”). 76 See, e.g., Comments of RTG at 5. facilities-based service providers with the ability to pro- vide new and innovative services to the public; and (2) the Commission employs methods to prevent unjust en- richment. 75 22. We agree with commenters that certain agree- ments have the potential to significantly influence a des- ignated entity licensee’s decisions regarding its provi- sion of service and, therefore, also have the potential to be abused, absent the appropriate safeguards. Yet, we also recognize the concerns of many, especially rural carriers, that argue that small businesses face practical difficulties in providing service and that stress that des- ignated entity licensees must have the ability to enter into operational contracts, such as roaming, interconnec- tion, and switch-sharing, with other, often large, provid- ers in order to be in a position to provide valuable tele- communications service to the public. 76 23. In considering how to evaluate which specific relationships should trigger additional eligibility restric- tions, we conclude that certain agreements, by their very nature, are generally inconsistent with an appli- cant’s or licensee’s ability to achieve or maintain desig- nated entity eligibility because they are inconsistent with Congress’s legislative intent. In this regard, where an agreement concerns the actual use of the designated entity’s spectrum capacity, it is the agreement, as op- 22a 77 Promoting Efficient Use of Spectrum through Elimination of Barriers to the Development of Secondary Markets, WT Docket No. 00-230, Second Report and Order, Order on Reconsideration, and Second Further Notice of Proposed Rulemaking, 19 FCC Rcd 17503, 17538, 17541, 17544 ¶¶ 71, 76, 82 (2004) (“Secondary Markets Second Report and Order”). 78 Id. at 17541-42 ¶ 77. 79 Comments of Wirefree Partners at 8. posed to the party with whom it is entered into, that causes the relationship to be ripe for abuse and creates the potential for the relationship to impede a designated entity’s ability to become a facilities-based provider, as intended by Congress. 24. As we indicated in the Secondary Markets Sec- ond Report and Order, “Congress specifically intended that, in order to prevent unjust enrichment, the licensee receiving designated entity benefits actually provide facilities-based services as authorized by its license.” 77 In that proceeding, the Commission stated that leasing by a designated entity licensee of “substantially all of the spectrum capacity of the licensee” would cause attri- bution that would likely lead to a loss of eligibility, and that the leasing of a “small portion” of such capacity where there was no other relationship between the par- ties likely would not result in a finding of attribution. 78 Although at least one commenter argues that the Com- mission’s existing leasing rules provide adequate protec- tion to ensure that the relationship between the parties “remains one of contract and not control,” 79 as articu- lated in the Further Notice and this decision, we are modifying our rules to include additional safeguards to our designated eligibility determinations that look be- yond controlling relationships to those that have the 23a 80 See discussion infra ¶¶ 28-30. 81 See id. 82 If a designated entity licensee disaggregates its license, determina- tions of impermissible and attributable material relationships will be potential to influence a designated entity in a manner contrary to that intended by Congress. 25. Building on our Secondary Markets policies and in consideration of the record we have before us, we modify our rules regarding eligibility for designated en- tity benefits for applicants or licensees that have agree- ments that create material relationships, as defined and explained herein. Specifically, except as grandfathered below, 80 we conclude that an applicant or licensee has “impermissible material relationships” when it has agreements with one or more other entities for the lease (under either spectrum manager or de facto transfer leasing arrangements) or resale (including under a wholesale arrangement) of, on a cumulative basis, more than 50 percent of its spectrum capacity of any individ- ual license. Such “impermissible material relationships” render the applicant or licensee (i) ineligible for the award of designated entity benefits, and (ii) subject to unjust enrichment on a license-by-license basis. Fur- thermore, except as grandfathered below, 81 we find that an applicant or licensee has an “attributable material relationship” when it has one or more agreements with any individual entity, including entities and individuals attributable to that entity, for the lease (under either spectrum manager or de facto transfer leasing arrange- ments) or resale (including under a wholesale arrange- ment) of, on a cumulative basis, more than 25 percent of the spectrum capacity of any individual license that is held by the applicant or licensee. 82 The “attributable 24a made based upon its remaining spectrum license. For example, if a des- ignated entity licensee disaggregates 5 MHz of a 10 MHz license, it cannot have spectrum leasing or resale arrangements for more than 2.5 MHz of spectrum, pursuant to the “impermissible material relation- ships” restriction, and any spectrum leasing or resale arrangements with one individual entity for more than 1.25 MHz of spectrum will re- sult in the attribution of revenues and assets, pursuant to the “attrib- utable material relationships” restriction. 83 During the first five years of the license term, broadband PCS en- trepreneurs that have not yet met their five-year construction require- ments will be prohibited from entering into any impermissible material relationships with entities of any size. They will also be prohibited from entering into attributable material relationships if those relationships bring their attributable gross revenues or total assets above the finan- cial caps established in section 24.709. After build-out or the first five years of the license term, broadband PCS entrepreneurs that are par- ticipating in the installment payment plan and enter into impermissible or attributable material relationships will be subject to installment pay- ment unjust enrichment pursuant to section 1.2111(c). See 47 C.F.R. §§ 1.2110, 1.2111, 24.709, 24.839. material relationship” with that entity will be attributed to the applicant or licensee for the purposes of determin- ing the applicant’s or licensee’s (i) eligibility for desig- nated entity benefits, and (ii) liability for unjust enrich- ment on a license-by-license basis. 83 26. As stated above, our experience in administering the designated entity program and our review of the record developed in response to our Further Notice leads us to conclude that these definitions of material relationship are necessary to ensure that the recipient of our designated entity benefits is an entity that uses its licenses to directly provide facilities-based telecom- munications services for the benefit of the public; that the Commission employs methods to prevent unjust en- richment; and that our statutory-based benefits are 25a 84 See Secondary Markets Second Report and Order, 19 FCC Rcd at 17538, 17541, 17544 ¶¶ 71, 76, 82. awarded only to those that Congress intended to receive them. 27. Spectrum manager and de facto transfer leasing agreements and resale agreements (including wholesale arrangements) with a single entity for 25 percent and less of the designated entity licensee’s total spectrum capacity on a license-by-license basis, or cumulative agreements with multiple entities for 50 percent or less of a designated entity licensee’s total spectrum capacity on a license-by-license basis will continue to be reviewed under our existing designated entity eligibility rules and, pursuant to existing rules and policies, may result in unjust enrichment obligations. 84 Through the deci- sions we make today, we will ensure that a designated entity licensee will preserve at least half of its spectrum capacity of each of its licenses for which it has been awarded and retained designated entity benefits for the provision of service as a facilities-based provider for the benefit of the public, while still having flexibility to en- gage in agreements that are intended to provide it with access to valuable capital, thus better furthering the goals of the statutory designated entity program. 28. Grandfathering and Applicability of Material Relationships. Recognizing that there are numerous agreements in existence that might fall within our newly defined “impermissible material relationships” and “at- tributable material relationship,” we will apply these eligibility restrictions on a prospective basis. Therefore, we will not employ our new restrictions to reconsider any designated entity benefits previously awarded to 26a licensees prior to the release date of this Second Report and Order or to determine designated entity benefits in an application for a license, an authorization, or an as- signment or transfer of control or a spectrum lease that was filed with the Commission before the release date of this Second Report and Order that is still pending ap- proval. Accordingly, we will grandfather the existence of impermissible and attributable material relationships that were in existence before the release date of this Second Report and Order for the purposes of assessing unjust enrichment payments on benefits previously awarded or pending award, as discussed above. In as- sessing the imposition of unjust enrichment for future events, if any, we will consider unjust enrichment impli- cations on a license-by-license basis. 29. Such relationships, are not, however, generally grandfathered for the purposes of determining an appli- cant’s eligibility for the award of designated entity bene- fits in future auctions or for the purposes of determining eligibility for benefits in the context of an assignment, transfer of control, spectrum lease or reportable eligibil- ity event after the release date of this Second Report and Order. Except as limited by our grandfathering provisions, the rules we adopt today will apply to all de- terminations of eligibility for all designated entity bene- fits with regard to any application filed to participate in auctions in which bidding begins after the effective date of the rules, as well as to all applications for an authori- zation, an assignment or transfer of control, a spectrum lease, or reports of events affecting a designated entity’s ongoing eligibility filed on or after the release date of 27a 85 For example, if an applicant seeking to participate in an upcoming auction has an existing impermissible material relationship on a single license, it will be ineligible for the award of designated entity benefits in that auction, regardless of the significance of that one license in terms of the applicant’s revenue or the scope of its operations. This is true even if the impermissible material relationship was entered into prior to the release of this order and thus grandfathered for purposes of unjust enrichment. Similarly, if it is an attributable material rela- tionship at issue, then the gross revenues of the entity with which the applicant has such a relationship are counted against the applicant and may affect its eligibility. this Second Report and Order. 85 Grandfathering the eligibility of all prior designated entity structures that involve impermissible and/or attributable material rela- tionships would allow these designated entities to con- tinue to acquire additional licenses and designated en- tity benefits using a structure that the Commission has determined would permit a third party to leverage im- proper influence over a designated entity in a manner that is inconsistent with the Congressional purposes for the designated entity program. Applying our rules in this manner is consistent with how the Commission cur- rently determines an applicant’s eligibility for designat- ed entity benefits and how it applies its unjust enrich- ment obligations. 30. To address concerns of several commenters, we will, however, grandfather certain relationships that were in existence before the release date of this Second Report and Order in the context of eligibility for future benefits. Specifically, an applicant will not be considered to be ineligible for benefits based solely on an “attribu- table material relationship” or “impermissible material relationships” of certain of its affiliates (as specifically defined in section 1.2110(c)(5)(i)(C)), provided that the 28a 86 For example, Newco is an applicant seeking designated entity status in an auction in which bidding begins after the effective date of the rules. Investor is a controlling interest of Newco. Investor also is a controlling interest of Existing DE. Existing DE previously was awarded designated entity benefits and has impermissible material relationships based on leasing agreements entered into before the release date of this order with a third party, Lessee, that were in com- pliance with the Commission’s eligibility standards prior to the effective date of the rules adopted herein. In this example, Newco would not be prohibited from acquiring designated entity benefits solely because of the existing impermissible material relationships of its affiliate, Exist- ing DE. Newco, Investor, and Existing DE, however, would need to en- ter into a contractual prohibition that prevents Existing DE from contributing to the total financing of Newco. 87 See 47 C.F.R. § 1.2110(b). Under the example in the preceding note, Newco would have to attribute the gross revenues of its affiliate, Existing DE, in establishing eligibility for designated entity benefits, but would not have to attribute the gross revenue of Lessee. agreement that forms the basis of the affiliate’s “attrib- utable material relationship” or “ impermissible mate- rial relationship” is otherwise in compliance with the Commission’s designated entity eligibility rules, was entered into prior to the release date of this Second Re- port and Order, and is subject to a contractual prohibi- tion that prevents the affiliate from contributing to the designated entity’s total financing. The purpose of this grandfathering is to provide a means for controlling in- terests of existing designated entities to have an ability to seek the award of designated entity benefits in future auctions or to acquire designated entity licenses in the secondary market through new and independent affili- ates, even if it is affiliated with an existing designated entity that has impermissible and/or attributable mate- rial relationships that were in existence prior to the re- lease date of the decision. 86 The attribution rules are not affected by this grandfathering. 87 In taking this action, 29a 88 See id. § 1.2111(b)-(e). 89 See 47 U.S.C. § 309(j)(4)(E); see also id. § 309(j)(3)(C). 90 Council Tree suggested a reimbursement obligation on a licensee that acquires a license with a bidding credit and subsequently, in the first five years of its license term, makes a change in its “material rela- tionships” that would result in its loss of eligibility for the bidding cred- it, or seeks to assign or transfer control of the license to an entity that would not qualify for the same level of bidding credits, pursuant to any eligibility restriction that we adopt. Further Notice, 21 FCC Rcd at 1763 ¶ 20; Council Tree Proposal at 15. 91 Further Notice, 21 FCC Rcd at 1763 ¶ 20. we seek to ensure that the additional eligibility require- ments we adopt today do not unnecessarily restrict ap- plicants seeking designated entity benefits for relation- ships that were previously permissible under our rules. C. Unjust Enrichment 31. We also make changes to our unjust enrichment rules to provide additional safeguards designed to better ensure that designated entity benefits go to their in- tended beneficiaries. 88 As discussed below, one of our primary objectives in administering our designated en- tity program is to prevent unjust enrichment. 89 Accord- ingly, in conjunction with the eligibility restrictions we adopt above, we also modify our rules and strengthen our unjust enrichment schedule for licenses acquired with bidding credits. 32. Further Notice. In the Further Notice, we sought comment on whether we should adopt revisions to our unjust enrichment rules, as proposed by Council Tree, 90 or whether we should adopt other revisions to our unjust enrichment rules. 91 The Commission also asked whether reimbursement obligations should apply 30a 92 Id. 93 Id. 94 Id. 95 Id.; Council Tree Proposal at 16. 96 See, e.g., Comments of Aloha Partners at 5; Comments of Carroll Wireless at 8; Comments of Wirefree Partners at 14-15; Comments of Council Tree at 59. if a licensee takes on new investment, or also where it enters into any new financial or operational relationship that would render the licensee ineligible for a bidding credit. 92 Pursuant to any eligibility restriction that we might adopt, we asked over what portion of the license term such unjust enrichment provisions should apply. 93 33. Additionally, we sought comment in the Further Notice on Council Tree’s proposal that an unjust enrich- ment payment should not be required in the case of “natural growth” of the revenues attributed to an incum- bent carrier above the established benchmark. 94 In- stead, Council Tree suggests that the reimbursement obligation should apply only where the licensee takes on new investment, or enters into any operational agree- ment, that would have disqualified the licensee for the bidding credit at the time of the licensee’s initial applica- tion. 95 34. Comments. Of the commenters discussing pro- posed changes in the unjust enrichment policies, some contend that the Commission should continue to apply the current unjust enrichment standard. 96 These enti- ties argue that the current unjust enrichment rules are sufficient and provide adequate protection. Thus, they 31a 97 See, e.g., Comments of Aloha at 5; Comments of Carroll Wireless at 8. 98 See, e.g., Comments of STX at 2; Comments of U.S. Wirefree at 4; Comments of MMTC at 15; Comments of Council Tree at 15-16. 99 Comments of STX at 2. 100 Comments of MMTC at 15. 101 Id. 102 Competitive Bidding Second Report and Order, 9 FCC Rcd at 2394 ¶ 258. conclude that no increased regulation is needed or ap- propriate. 97 35. Other commenters argue for the implementation of stricter unjust enrichment rules. 98 STX supports “stricter unjust enrichment rules so that the U.S. Trea- sury may be made whole in the event that a designated entity turns out to have been merely a front organized to secure bidding credits for a large incumbent wireless service provider.” 99 MMTC suggests that the Commis- sion should consider adjusting its reimbursement obliga- tions to require 100 percent of the value of the bidding credit. 100 MMTC further suggests that “the Commission should consider expanding the unjust enrichment stan- dard to encompass the entire license term and not just the first five years.” 101 36. Discussion. We agree with MMTC and STX that adoption of stricter unjust enrichment rules, appli- cable to all designated entities, will promote the objec- tives of the designated entity program. The designated entity and unjust enrichment rules were adopted to en- sure the creation of new telecommunications businesses owned by small businesses that will continue to provide spectrum-based services. 102 In addition, the unjust en- richment rules provide a deterrent to speculation and 32a 103 Id. at 2385, 2394 ¶¶ 211, 259. See also H.R. REP. NO. 103-111, at 257-58 (1993) (Conference Agreement adopted House provisions, in relevant part, with amendments. H.R. CONF. REP. NO. 103-213, at 483 (1993)); Secondary Markets Second Report and Order, 19 FCC Rcd at 17538 ¶ 71. 104 See discussion infra note 116 and accompanying text. 105 See discussion infra note 116 and accompanying text. participation in the licensing process by those who do not intend to offer service to the public, or who intend to use bidding credits to obtain a license at a discount and later to sell it at the full market price for a windfall profit. 103 By extending the unjust enrichment period to ten years, we increase the probability that the desig- nated entity will develop to be a competitive facilities- based service provider. 37. We adopt the following ten-year unjust enrich- ment schedule for licenses acquired with bidding credits. For the first five years of the license term, if a desig- nated entity loses its eligibility for a bidding credit for any reason, 104 including but not limited to, entering into an “impermissible material relationship” or an “attrib- utable material relationship,” seeking to assign or trans- fer control of a license, or entering into a de facto trans- fer lease with an entity that does not qualify for bidding credits, 100 percent of the bidding credit, plus interest, is owed. For years six and seven of the license term, 75 percent of the bidding credit, plus interest, is owed. For years eight and nine, 50 percent of the bidding credit, plus interest, is owed, and for year ten, 25 percent of the bidding credit, plus interest, is owed. If a designated entity loses its eligibility for the same level of bidding credit that it originally received for any reason, 105 in- cluding but not limited to, entering into an “impermis- 33a 106 We also note that the provisions of section 1.2112(e) of the Com- mission’s rules may also apply. 47 C.F.R. § 1.2112(e) (discussing the as- sessment of unjust enrichment in the context of the partition and/or dis- aggregation of licenses). 107 See id. 108 Licensees may, under section 1.946(e) of our rules, request an ex- tension of time to meet the applicable construction requirements. 47 C.F.R. § 1.946(e). Additionally, licensees may also request a waiver of the construction requirement, and this request must meet the require- ments of section 1.925 of our rules. 47 C.F.R § 1.925. We note that we will undertake careful scrutiny of requests for extension of the con- struction requirements filed by designated entities consistent with our rules, obligations under the Communications Act, and legal precedent, sible material relationship” or an “attributable material relationship,” seeking to assign or transfer control of a license, or entering into a de facto transfer lease with an entity that does not qualify for the same level of bidding credits, this unjust enrichment schedule will be applied to the difference between the original bidding credit and the bidding credit for which the designated entity, as- signee, or assignor is eligible. 106 38. In addition to revising the unjust enrichment payment schedule, we will impose a requirement that the Commission must be reimbursed for the entire bid- ding credit amount owed, plus interest, if a designated entity loses its eligibility for a bidding credit for any reason, 107 including but not limited to, entering into an “impermissible material relationship” or an “attribu- table material relationship,” seeking to assign or trans- fer control of a license, or entering into a de facto trans- fer lease with an entity that is not eligible for bidding credits prior to the filing of the notification informing the Commission that the construction requirements ap- plicable at the end of the license term have been met. 108 34a and that we will consider, as part of our review, whether the extension request is an effort to defeat the objectives of our designated entity pro- gram. If a designated entity is successful in obtaining an extension of the construction requirements beyond the initial license term, the requirement that the Commission must be reimbursed for the entire bidding credit amount, plus interest, prior to the filing of the notifica- tion informing the Commission that the applicable construction require- ments will continue to apply until such notifications are filed. For example, if a designated entity seeks to assign a license with a bidding credit to an entity that is not eligi- ble for bidding credits eight years after the grant of the license and prior to the filing of the construction notifi- cation, 100 percent of the bidding credit, plus interest, will be owed, rather than the 50 percent unjust enrich- ment payment that would have been due had the con- struction notification been on file with the Commission, pursuant to the revised unjust enrichment schedule, above. 39. We impose the above-mentioned reimbursement obligations on any licensee that acquires licenses with bidding credits and subsequently loses its eligibility for a bidding credit for any reason because the implementa- tion of such a policy is consistent with the policies under- lying the Commission’s designated entity and unjust enrichment requirements. By expanding the unjust en- richment period and requiring full payment of the bid- ding credit until a license has been constructed, we are fulfilling Congress’s mandate that designated entities are given the opportunity to participate in the provision of spectrum-based services, while ensuring that entities that are not eligible for designated entity benefits can- not benefit from the designated entity program by ac- quiring the licenses or entering into impermissible or attributable material relationships with a designated 35a 109 See 47 U.S.C § 309(j)(4)(E); see also id. § 309(j)(3)(C). 110 We note that, although the Commission did not adopt a permissi- ble growth exception for bidding credit unjust enrichment, it did adopt a permissible growth exception for set-aside, or closed bidding, licenses and installment payments. Compare 47 C.F.R. § 1.2111(d) with id. §§ 1.2111(c)(2), and id. § 24.709(a)(2). 111 Cf. 47 C.F.R. § 1.2111(c)(2) (establishing that “permissible growth” does not result in unjust enrichment in the context of install- ment payments); id. § 24.709(a)(2) (establishing that permissible growth does not result in the loss of eligibility to hold set-aside, or closed bid- ding, licenses). entity after it acquires a license at auction or in the sec- ondary market. 109 40. We agree with Council Tree’s proposal that un- just enrichment payments should not be required for licenses held by the designated entity in the case of “na- tural” or “permissible” growth of the gross revenues of either a designated entity or an investor in a designated entity. Currently, there are no permissible growth pro- visions associated with bidding credits. 110 However, Commission practice has been that a designated entity will not owe unjust enrichment for its licenses if the des- ignated entity’s increased gross revenues, or the in- creased gross revenues of any controlling interest or affiliate, are due to nonattributable equity investments, debt financing, revenue from operations or other invest- ments, business development, or expanded service. 111 Commission precedent states that the Commission eval- uates an applicant’s or licensee’s eligibility for desig- nated entity benefits and determines whether unjust enrichment is owed at the time the relevant application or notification (e.g., transfer of control or assignment) is 36a 112 See Applications of TeleCorp PCS, Inc., Tritel, Inc, and Indus, Inc., WT Docket No. 00-1589, Memorandum Opinion and Order, 16 FCC Rcd 3716, 3737 ¶ 49 (Wireless Tele. Bur. 2000) (“TeleCorp-Tritel Order”); D&E Communications, Inc., Order, 15 FCC Rcd 61, 67 ¶ 12 (Auctions & Ind. Analysis Div., Wireless Tele. Bur. 1999) (“D&E Com- munications”). 113 See Amendment of Commission’s Rules Regarding Installment Payment Financing for Personal Communications Services (PCS) Licenses, WT Docket No. 97-8200-1589, Memorandum Opinion and Order, 14 FCC Rcd 20543, 20545-46 ¶¶ 6-8 (1999); see also TeleCorp- Tritel Order, 16 FCC Rcd at 3734 ¶ 46; D&E Communications, 15 FCC Rcd at 67 ¶ 12. 114 See discussion supra ¶¶ 28-30 (discussing the grandfathering of impermissible and attributable material relationships that were in exis- tence before the release date of this Second Report and Order for the purposes of assessing unjust enrichment penalties on benefits previ- ously awarded). filed. 112 Under the policies adopted in this Second Re- port and Order, the Commission similarly would evalu- ate an applicant’s or licensee’s eligibility for designated entity benefit at the time it files an application regard- ing a reportable eligibility event, as required in the new section 1.2114 that we adopt herein. Thus, if the desig- nated entity seeks to acquire licenses on the secondary market or in future auctions, all of the designated en- tity’s gross revenues, along with the gross revenues of its controlling interests and affiliates, will be attributed to the designated entity. 113 41. Finally, we agree with Cook Inlet’s general con- cern that retroactive penalties not be imposed upon pre- existing designated entities. Thus, as discussed fully above, we grandfather the applicability of these rules under certain circumstances. 114 37a D. Implementation 42. In this section, we explain how we intend to uti- lize the tools for preventing abuse of the designated en- tity program that are already at our disposal in our rules, and we describe certain minor rule modifications that we adopt in order to make these tools more effec- tive. To achieve this purpose, we will use the following combination of existing and new measures to ensure that designated entity incentives benefit solely those parties intended to receive them under both our rules and sec- tion 309(j) of the Communications Act of 1934, as amended (“Communications Act”). First, we will review the agreements to which designated entity applicants and licensees are parties. Second, we will require that applicants and licensees seek advance Commission ap- proval for all events that might affect their ongoing eli- gibility for designated entity benefits. Third, we will impose periodic reporting requirements on designated entities. Fourth, we will conduct audits, including ran- dom audits, of those claiming designated entity benefits. In this section we also provide guidance as to how our rules and procedures should be followed by applicants for the upcoming Advanced Wireless Services (“AWS”) auction. 43. Review of Agreements. In applying our control- ling interest standard, Commission staff has carefully reviewed agreements between applicants claiming desig- nated entity status and other existing wireless carriers. In these cases, staff has usually undertaken discussions with such designated entity applicants in order to obtain revisions to agreements to ensure that entities with whom they have partnered are not an attributable con- trolling interest or affiliate obviating the applicant’s 38a eligibility for designated entity benefits. This review is necessarily specific to each relationship, since no two sets of agreements and no two sets of factual circum- stances are exactly the same. 44. In light of the steps we are taking in this Second Report and Order to aid our ability to ensure that only eligible entities obtain designated entity benefits, we will undertake a thorough review of the long-form appli- cation (FCC Form 601) filed by every winning bidder claiming designated entity benefits and will carefully review all relevant contracts, agreements, letters of in- tent, and other such documents affecting that applicant. This review remains essential to our assessment of des- ignated entity eligibility under the controlling interest standard and will be even more critical in ensuring that the rules and policies adopted in this Second Report and Order are fully effectuated. Thus, we will require that all designated entity applicants that are winning bidders at an auction file all relevant contracts, agreements, let- ters of intent, and other such documents affecting that applicant as part of the long-form application (FCC Form 601). In order to implement this rule, we delegate to the Bureau the authority to determine the method for designated entities to submit the appropriate and rele- vant documents. We note, however, that no licenses will be granted until all relevant contracts, agreements, let- ters of intent, and other such documents affecting that applicant are finalized. 45. Further, we will also thoroughly review all rele- vant contracts, agreements, letters of intent, and other such documents affecting an applicant, which claims designated entity eligibility, seeking to acquire licenses with designated entity benefits in the secondary market 39a 115 Obtaining prior approval for events that could possible effect an entity’s designated entity eligibility is consistent with our practices for reviewing applications for the assignment or transfer of control of designated entity licenses. See 47 C.F.R. § 1.948(c)(1)(i). 116 Such events include changes in the ownership structure of the designated entity and agreements (e.g., management, credit, trade- mark, marketing, and facilities agreements) entered into between des- ignated entity licensees and third parties that the Commission has not previously reviewed. New section 1.2114(c) provides that such filings (e.g., transfers of control, assignments, spectrum man- ager leases). Commission staff has requested such docu- ments from entities acquiring designated entity licenses in the secondary market, especially when the applicant is a newly-created entity that has not been passed on as a designated entity in the past or where it appears that the corporate structure of a designated entity has changed. Thus, we will, as we have in the past, request designated entity applicants to forward copies of their agreements to Commission staff for review. 46. Event-Based and Annual Reporting Require- ments. In light of the changes that we are making to the designated entity rules, the Commission will require additional information from applicants and licensees in order to ensure compliance with the policies and rules adopted herein. We also hereby adopt rules as shown in Appendix B, authorizing modifications to be made, as necessary, to and the creation, if necessary, of FCC forms to implement the rule changes adopted herein. Although many of these rule changes are minor, we highlight the following changes to our rules. Specifically, we adopt a new rule, section 1.2114, to require that des- ignated entities seek approval 115 for any event in which they are involved that might affect their ongoing eligibil- ity, 116 even if the event would not have triggered a re- 40a will be treated as if they are transfer of control applications under sec- tion 1.1102 for purposes of determining the appropriate application fees. 117 47 C.F.R. § 1.948(j). 118 The record supports such an approach. See, e.g. Comments of Cook Inlet at 21 (suggesting that the Commission require each desig- nated entity to submit an annual report detailing the actions it took dur- ing the past period with respect to the licenses it holds as well as any actions taken by its limited financial partners. It believes that the Com- mission would have some empirical evidence of the degree of day-to-day porting requirement under our rules. 117 Such events— known as “reportable eligibility events”—will also in- clude those that result in an “impermissible material relationship” or an “attributable material relationship.” We note that applications seeking approval of these “reportable eligibility events” will be considered sub- stantial (i.e., not pro forma) pursuant to the Commis- sion’s rules or precedent and will not be approved until any applicable unjust enrichment is paid. 47. Additionally, we will revise section 1.2110 of the Commission’s rule to require designated entity licensees to file an annual report with the Commission, which will, at a minimum, include a list and summaries of all agree- ments and arrangements (including proposed agree- ments and arrangements) that relate to eligibility for designated entity benefits. In addition to a summary of each agreement or arrangement, this list must include the parties (including affiliates, controlling interests, and affiliates of controlling interests) to each agreement or arrangement, as well as the dates on which the par- ties entered into each agreement or arrangement. An- nual reports will be filed no later than, and up to five business days before, the anniversary of the designated entity’s license grant. 118 41a control actually exercised by the parties who purport to be in de facto control of these designated entity licensees). 119 See 47 C.F.R. § 1.2110(j). 120 See id. § 1.2110(j), (n). 121 Comments of MMTC at 13-14. 48. We consider adoption of these reporting require- ments to be a foreseeable component of the designated entity eligibility rules we adopt today, and we believe them to be necessary to the successful implementation of these rules. We also consider these requirements to be an extension of the existing responsibility of desig- nated entities to retain and make available, on an ongo- ing basis, all agreements related to their eligibility. 119 Furthermore, we delegate to the Bureau the authority to implement the necessary modifications to FCC forms and the Universal Licensing System (ULS) to imple- ment these rule changes and to determine the content of, and filing procedures for, the new annual filing re- quirement. 49. Audits. Pursuant to our existing rules, the Com- mission has broad power to conduct audits at any time and for any reason, including at random, of applicants and licensees claiming designated entity benefits. 120 In its comments, MMTC urges the Commission to employ its existing audit power and regularly conduct random audits to “uncover manipulation of the [designated en- tity] program irrespective of the type of business in which a [designated entity] applicant’s partner is en- gaged.” 121 MMTC recommends that these audits “incor- porate site visits to offices and physical plants, inter- views with staff and meaningful inquiries into the man- agement of the licenses,” explaining that these efforts would be “more likely to yield discoveries of improper 42a 122 Id. at 14. 123 Comments of Cook Inlet at 21. 124 Auction of Advanced Wireless Services Licenses Scheduled for June 29, 2006, Comment Sought on Reserve Prices or Minimum Open- ing Bids and Other Procedures, AU Docket No. 06-30, Public Notice, 21 FCC Rcd 794 (2006). activity than cursory paper-base[d] audits which would allow the audited entity to craft creative responses to audit requests.” 122 Cook Inlet, in suggesting the imposi- tion of periodic reporting requirements, noted above, explains that such requirements, along with “the possi- bility of a further audit [,] might dissuade some abuse of the Commission’s rules. . . . ” 123 50. We agree that our audit authority is an effective method by which to ascertain the initial and ongoing eligibility of the claimants of designated entity benefits. Applicants and licensees should therefore understand that the Commission can and will audit their continued designated entity eligibility as circumstances may neces- sitate or at will. Moreover, based on the significance of the upcoming AWS auction, we commit to audit the eligi- bility of every designated entity that wins a license in that auction at least once during the initial license term. In order to effectively conduct these audits, we delegate to the Bureau the authority to implement and create procedures to perform such audits. 51. Pending Auction Provisions. As noted in the Further Notice, we intend any changes adopted in this proceeding to apply to AWS licenses currently sched- uled to be offered in an auction beginning June 29, 2006. 124 We noted that in light of the current auction schedule, any changes that we adopt in this proceeding may become effective after the deadline for filing appli- 43a 125 Cf. 47 C.F.R. 1.2105(a)(2)(iv) (parallel statement currently re- quired as of the date of filing the short-form application). Pursuant to its delegated authority to conduct auctions, the Wireless Telecommuni- cations Bureau will establish any detailed procedures necessary for making required amendments and announce such procedures by public notice. See id. §§ 0.131, 0.331. 126 As noted in the Further Notice, while prior certifications may be a prerequisite to eligibility, applicants still must demonstrate compli- ance with all applicable Commission rules, including eligibility for any bidding credits, at the time the Commission is ready to grant a license, regardless of previously applicable rules. See Implementation of the Commercial Spectrum Enhancement Act and Modernization of the Commission’s Competitive Bidding Rules and Procedures, Report and Order, 21 FCC Rcd 891, 909 n.84 (2006); see also Celtronix Telemetry, Inc. v. FCC, 272 F.3d 585, 587 (D.C. Cir. 2001), cert. denied, 536 U.S. 923 (2002) (affirming Commission application of installment payment rules that were revised after initial grant of license). 127 While CTIA expresses some concern regarding the amendment of short form applications, the public interest benefits associated with requiring entities to amend their applications and certify that they are qualified as a designated entity pursuant to our modified rules, out- weigh any concerns raised in the record. cations to participate in that auction. We sought com- ment on our proposal to require applicants to amend their applications on or after the effective date of the rule changes with a statement declaring, under penalty of perjury, that the applicant is qualified as a designated entity pursuant to section 1.2110 of the Commission’s rules effective as of the date of the statement. 125 We also noted that in the event applicants fail to file such a state- ment pursuant to procedures announced by public no- tice, they will be ineligible to qualify as a designated entity. 126 52. The vast majority of commenters did not address this issue. 127 Under Commission rules, applicants as- serting designated entity eligibility in a Commission 44a 128 See 47 C.F.R. § 1.2105(a)(2)(iv). auction are required to declare, under penalty of per- jury, that they are qualified as a designated entity under section 1.2110 of the Commission’s rules. 128 After re- viewing the record and considering the public interest benefits associated with our proposal, we will require entities applying as designated entities to amend their applications for the AWS auction on or after the effec- tive date of the rule changes with a statement declaring, under penalty of perjury, that the applicant is qualified as a designated entity pursuant to section 1.2110 of the Commission’s rules effective as of the date of the state- ment. IV. SECOND FURTHER NOTICE OF PROPOSED RULE MAKING * * * * * V. CONCLUSION 93. For all of the reasons set forth above, we modify our rules for determining the eligibility of applicants for size-based benefits in the context of competitive bidding and issue a Second Notice of Proposed Rule Making to consider whether we should adopt additional restrictions to further safeguard the benefits reserved for desig- nated entities. VI. PROCEDURAL MATTERS A. Regulatory Flexibility Analyses 94. As required by the Regulatory Flexibility Act, see 5 U.S.C. § 604, the Commission has prepared a Final 45a 129 See 5 U.S.C. § 603. Regulatory Flexibility Analysis, set forth below at Ap- pendix C. 95. An Initial Regulatory Flexibility Analysis (“IRFA”) for the Second Further Notice is attached at Appendix D. 129 Comments on the IRFA should be la- beled as IRFA Comments, and should be submitted pur- suant to the filing dates and procedures set forth below. B. Comment Filing Procedures 96. Pursuant to sections 1.415 and 1.419 of the Com- mission’s rules, 47 C.F.R §§ 1.415, 1.419, interested par- ties may file comments on or before 60 days after publi- cation in the Federal Register and may file reply com- ments on or before 90 days after publication in the Fed- eral Register. All filings related to this Second Further Notice of Proposed Rule Making should refer to WT Docket No. 05-211. Comments may be filed using: (1) the Commission’s Electronic Comment Filing System (ECFS), (2) the Federal Government’s eRulemaking Portal, or (3) by filing paper copies. See Electronic Fil- ing of Documents in Rule Making Proceedings, 63 FR 24121 (1998). 97. Electronic Filers: Comments may be filed elec- tronically using the Internet by accessing the ECFS: http://www.fcc.gov/cgb/ecfs/ or the Federal eRulemak- ing Portal: http://www.regulations.gov. Filers should follow the instructions provided on the website for sub- mitting comments. For ECFS filers, if multiple docket or rule making numbers appear in the caption of this proceeding, filers must transmit one electronic copy of the comments for each docket or rule making number 46a referenced in the caption. In completing the transmittal screen, filers should include their full name, U.S. Postal Service mailing address, and the applicable docket or rule making number. Parties may also submit an elec- tronic comment by Internet e-mail. To get filing in- structions, filers should send an e-mail to ecfs@fcc.gov, and include the following words in the body of the mes- sage, “get form.” A sample form and directions will be sent in response. 98. Paper Filers: Parties who choose to file by paper must file an original and four copies of each filing. Fil- ings can be sent by hand or messenger delivery, by com- mercial overnight courier, or by first-class or overnight U.S. Postal Service mail (although we continue to expe- rience delays in receiving U.S. Postal Service mail). All filings must be addressed to the Commission’s Secre- tary, Office of the Secretary, Federal Communications Commission. • The Commission’s contractor will receive hand- delivered or messenger-delivered paper filings for the Commission’s Secretary at 236 Massa- chusetts Avenue, N.E., Suite 110, Washington, DC 20002. The filing hours at this location are 8:00 a.m. to 7:00 p.m. All hand deliveries must be held together with rubber bands or fasteners. Any envelopes must be disposed of before enter- ing the building. • Commercial overnight mail (other than U.S. Pos- tal Service Express Mail and Priority Mail) must be sent to 9300 East Hampton Drive, Capitol Heights, MD 20743. 47a • U.S. Postal Service first-class, Express, and Pri- ority mail should be addressed to 445 12th Street, SW, Washington DC 20554. C. Paperwork Reduction Act Analysis 99. This Second Report and Order contains new or modified information collection requirements subject to the Paperwork Reduction Act of 1995 (PRA), Public Law 104-13. It has been submitted to the Office of Manage- ment and Budget (OMB) for review under Section 3507(d) of the PRA. OMB, the general public, and other Federal agencies are invited to comment on the new or modified information collection requirements contained in this proceeding. In addition, we note that pursuant to the Small Business Paperwork Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4), we previously sought specific comment on how the Commission might “further reduce the information collection burden for small business concerns with fewer than 25 employees.” 100. In this Second Report and Order, we have as- sessed the effects of our new restriction on the award of designated entity benefits where an applicant or licensee has agreements, which create a material relationship, with one or more other entities for the lease (under ei- ther spectrum manager or de facto transfer leasing ar- rangements) or resale (including under a wholesale ar- rangement) of a portion of its spectrum capacity. We find that the rule we adopt will best ensure that the Commission can continue to award designated entity benefits to entities that Congress intended. While the new rule may impose a new information collection on small businesses, including those with fewer than 25 em- ployees, we conclude that this information collection is 48a necessary to ensure that the benefits of the Commis- sion’s designated entity program are reserved only for legitimate small businesses. 101. This Second Further Notice contains proposed new or modified information collection requirements. The Commission, as part of its continuing effort to re- duce paperwork burdens, invites the general public and the Office of Management and Budget (“OMB”) to com- ment on the information collection requirements con- tained in this document, as required by the Paperwork Reduction Act of 1995, Public Law 104-13. Public and agency comments are due 60 days after the date of pub- lication in the Federal Register. Comments should ad- dress: (a) whether the proposed collection of informa- tion is necessary for the proper performance of the func- tions of the Commission, including whether the informa- tion shall have practical utility; (b) the accuracy of the Commission’s burden estimates; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of infor- mation technology. In addition, pursuant to the Small Business Paperwork Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4), we seek specific com- ment on how we might “further reduce the information collection burden for small business concerns with fewer than 25 employees.” D. Congressional Review Act 102. The Commission will include a copy of this Sec- ond Report and Order and Second Further Notice in a report it will send to Congress and the Government Ac- 49a countability Office pursuant to the Congressional Re- view Act, see 5 U.S.C. 801(a)(1)(A). E. Ordering Clauses 103. Accordingly, IT IS ORDERED that, pursuant to sections 4(i), 303(r), and 309(j) of the Communications Act of 1934, as amended, 47 U.S.C. sections 154(i), 303(r), and 309(j), this Second Report and Order is hereby ADOPTED and Part 1 of the Commission’s rules, 47 C.F.R. Part 1, is AMENDED as set forth be- low in Appendix B, effective 30 days after publication in the Federal Register, except for the grandfathering pro- visions which are effective upon release. 104. IT IS FURTHER ORDERED that pursuant to sections 4(i), 303(r), and 309(j) of the Communications Act of 1934, as amended, 47 U.S.C. sections 154(i), 303(r), and 309(j), this Second Further Notice of Pro- posed Rule Making is HEREBY ADOPTED. 105. IT IS FURTHER ORDERED that, pursuant to 47 U.S.C. § 155(c) and 47 C.F.R. §§ 0.131(c) and 0.331, the Chief of the Wireless Telecommunications Bureau IS GRANTED DELEGATED AUTHORITY to pre- scribe and set forth procedures for the implementation of the provisions adopted herein. 50a 106. IT IS FURTHER ORDERED that the Commis- sion’s Consumer and Governmental Affairs Bureau, Ref- erence Information Center, SHALL SEND a copy of this Second Report and Order and Second Further No- tice, including the Final Regulatory Flexibility Analysis and the Initial Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Ad- ministration. FEDERAL COMMUNICATIONS COMMISSION Marlene H. Dortch Secretary 51a APPENDIX A Commenters Comments 1. Aloha Partners, L.P. (“Aloha”) 2. Antares, Inc. (“Antares”) 3. Carroll Wireless, L.P. (“Carroll Wireless”) 4. Centennial Communications Corp. (“Centennial”) 5. Columbia Capital LLC (“Columbia Capital”) 6. Communications Advisory Counsel (“CAC”) 7. Comscape Telecommunications, Inc. (“Comscape”) 8. Cook Inlet Region, Inc. (“Cook Inlet”) 9. Council Tree Communications, Inc. (“Council Tree”) 10. CTIA—The Wireless Association (“CTIA”) 11. Dobson Communications Corporation (“Dobson”) 12. Doyon Communications, Inc. (“Doyon”) 13. Dull, Arvin D. 14. John Staurulakis, Inc. 15. Leap Wireless International, Inc. (“Leap”) 16. Madison Dearborn Partners, LLC (“Madison Dearborn”) 17. MetroPCS Communications, Inc. (“MetroPCS”) 18. Minority Media and Telecommunications Council (“MMTC”) 52a 19. MobiPCS 20. National Association of Broadcasters (“NAB”) 21. National Hispanic Media Coalition (“NHMC”) 22. National Telecommunications Cooperative Associa- tion (“NTCA”) 23. NTCH, Inc. 24. NTCH, Inc, dba Clear Talk (“Clear Talk”) 25. Paging Systems, Inc. (“Paging Systems”) 26. Patrick, Levi 27. Poplar Associates, LLC (“Poplar”) 28. Rural Telecommunications Group, Inc. (“RTG”) 29. STX Wireless, LLC (“STX”) 30. Suncom Wireless, Inc. (“Suncom”) 31. T-Mobile USA, Inc. (“T-Mobile”) 32. United States Cellular Corporation (“USCC”) 33. U.S. Wirefree 34. Verizon Wireless (“Verizon Wireless”) 35. Wirefree Partners III, LLC (“Wirefree Partners”) 36. Wireless Broadband Service Providers Association (“WBSPA”) 37. Wireless Communications Association International, Inc. (“WCAI”) 53a Reply Comments 1. Antares, Inc. (“Antares”) 2. Blooston Rural De Colalition (“Blooston”) 3. Cablevision Systems Corporation (“CSC”) 4. Cingular Wireless, LLC (“Cingular”) 5. Consumers Union 6. Cook Inlet Region, Inc. (“Cook Inlet”) 7. Council Tree Communications, Inc. (“Council Tree”) 8. Ericsson, Inc. (“Ericsson”) 9. Leap Wireless International, Inc. (“Leap”) 10. Minority Media and Telecommunications Council (“MMTC”) 11. Royal Street Communications, LLC (“Royal Street”) 12. Rural Carriers 13. T-Mobile USA, Inc. (“T-Mobile”) 14. United States Cellular Corporation (“USCC”) 15. U.S. Wirefree 16. Verizon Wireless (“Verizon Wireless”) 17. Wirefree Partners III, LLC (“Wirefree Partners”) 18. Wireless Broadband Service Providers Association (“WBSPA”) 54a * Indicates that more than one ex parte submission was filed. Notice of Ex Parte Presentations 1. Carroll Wireless et al (“Carroll”) 2. Cook Inlet Region, Inc. (“Cook Inlet”) * 3. Council Tree Communications, Inc. (“Council Tree”) * 4. CTIA—The Wireless Association (“CTIA”) 5. Doyon Communications, Inc. (“Doyon”) 6. Madison Dearborn Partners, LLC (“Madison Dearborn”) 7. Media Access Project (“MAP”) * 8. MetroPCS Communications, Inc. (“MetroPCS”) * 9. Minority Media and Telecommunications Council (“MMTC”) 10. National Hispanic Media Coalition (“NHMC”) * 11. National Telecommunications Cooperative Associa- tion (“NTCA”) 12. Royal Street Communications, LLC (“Royal Street”) * 13. T-Mobile USA, Inc. (“T-Mobile”) * 14. Transactional Transparency and Related Outreach Subcommittee 15. U.S. Department of Justice 16. Verizon Wireless (“Verizon Wireless”) * 17. Wirefree Partners III, LLC (“Wirefree Partners”) 55a APPENDIX B Final Rules PART 1—PRACTICE AND PROCEDURE For the reasons discussed in the preamble, the FCC amends parts 1 of the Code of Federal Regulations to read as follows: 1. The authority citation for part 1 is revised to read as follows: Authority: 15 U.S.C. 79 et seq.; 47 U.S.C. 151, 154(i), 154(j), 155, 157, 225, 303(r), and 309. 2. In § 1.913, paragraph (a) introductory text and the first sentence of paragraph (b) are revised and para- graph (a)(6) is added to read as follows: § 1.913 Application and notification forms; electronic and manual filing. (a) Application and notification forms. Applicants, li- censees, and spectrum lessees (see § 1.9003) shall use the following forms and associated schedules for all ap- plications and notifications: * * * * * (6) FCC Form 609, Application to Report Eligibility Event. FCC Form 609 is used by licensees to apply for Commission approval of reportable eligibility events, as defined in § 1.2114. (b) Electronic filing. Except as specified in paragraph (d) of this section or elsewhere in this chapter, all appli- cations and other filings using the application and notifi- cation forms listed in this section or associated sched- 56a ules must be filed electronically in accordance with the electronic filing instructions provided by ULS. * * * * * * * * 3. Revise paragraph (b) introductory text and add paragraph (b)(5) to § 1.919 to read as follows: § 1.919 Ownership information. * * * * * (b) Any applicant or licensee that is subject to the re- porting requirements of §1.2112 or § 1.2114 shall file an FCC Form 602, or file an updated form if the ownership information on a previously filed FCC Form 602 is not current, at the time it submits: * * * * * (5) An application reporting any reportable eligibility event, as defined in § 1.2114. * * * * * 4. Revise paragraph (a)(2)(ii)(B) of § 1.2105 to read as follows: § 1.2105 Bidding application and certification procedures; prohibition of collusion. (a) * * * (2) * * * (ii)(B) Applicant ownership and other information, as set forth in 1.2112. * * * * * 57a 5. In paragraph § 1.2110, paragraphs (b)(1)(i)-(ii) and (j) are revised, paragraphs (n) and (o) are redesignated as paragraphs (o) and (p), and paragraphs (b)(3)(iv) and (n) are added to read as follows: § 1.2110 Designated entities. * * * * * (b) * * * (1) Size attribution. (i) The gross revenues of the applicant (or licensee), its affiliates, its controlling interests, the affiliates of its controlling interests, and the entities with which it has an attributable material relationship shall be attributed to the applicant (or licensee) and considered on a cumu- lative basis and aggregated for purposes of determining whether the applicant (or licensee) is eligible for status as a small business, very small business, or entrepre- neur, as those terms are defined in the service-specific rules. An applicant seeking status as a small business, very small business, or entrepreneur, as those terms are defined in the service-specific rules, must disclose on its short- and long-form applications, separately and in the aggregate, the gross revenues for each of the previous three years of the applicant (or licensee), its affiliates, its controlling interests, the affiliates of its controlling interests, and the entities with which it has an attribut- able material relationship. (ii) If applicable, pursuant to § 24.709, the total assets of the applicant (or licensee), its affiliates, its controlling interests, the affiliates of its controlling interests, and the entities with which it has an attributable material relationship shall be attributed to the applicant (or li- 58a censee) and considered on a cumulative basis and aggre- gated for purposes of determining whether the applicant (or licensee) is eligible for status as an entrepreneur. An applicant seeking status as an entrepreneur must disclose on its short- and long-form applications, sepa- rately and in the aggregate, the gross revenues for each of the previous two years of the applicant (or licensee), its affiliates, its controlling interests, the affiliates of its controlling interests, and the entities with which it has an attributable material relationship. * * * * * (3) * * * (iv) Applicants or licensees with material relationships. (A) Impermissible material relationships. An applicant or licensee that would otherwise be eligible for desig- nated entity benefits under this section and applicable service-specific rules shall be ineligible for such benefits if the applicant or licensee has an impermissible mate- rial relationship. An applicant or licensee has an imper- missible material relationship when it has arrangements with one or more entities for the lease or resale (includ- ing under a wholesale agreement) of, on a cumulative basis, more than 50 percent of the spectrum capacity of any one of the applicant’s or licensee’s licenses. (B) Attributable material relationships. An applicant or licensee must attribute the gross revenues (and, if appli- cable, the total assets) of any entity, (including the con- trolling interests, affiliates, and affiliates of the control- ling interests of that entity) with which the applicant or licensee has an attributable material relationship. An applicant or licensee has an attributable material rela- 59a tionship when it has one or more arrangements with any individual entity for the lease or resale (including under a wholesale agreement) of, on a cumulative basis, more than 25 percent of the spectrum capacity of any one of the applicant’s or licensee’s licenses. (C) Grandfathering. (1) Licensees. An impermissible or attributable mate- rial relationship shall not disqualify a licensee for previ- ously awarded benefits with respect to a license awarded before April 25, 2006, based on spectrum lease or resale (including wholesale) arrangements entered into before April 25, 2006. (2) Applicants. An impermissible or attributable mate- rial relationship shall not disqualify an applicant seeking eligibility in an application for a license, authorization, assignment, or transfer of control or for partitioning or disaggregation filed before April 25, 2006, based on spectrum lease or resale (including wholesale) arrange- ments entered into before April 25, 2006. Any applicant seeking eligibility in an application for a license, authori- zation, assignment, or transfer of control or for parti- tioning or disaggregation filed after April 25, 2006, or in an application to participate in an auction in which bid- ding begins on or after [30 days after Federal Register publication], need not attribute the material relation- ship(s) of those entities that are its affiliates based solely on section 1.2110(c)(5)(i)(C) if those affiliates en- tered into such material relationship(s) before April 25, 2006, and are subject to a contractual prohibition pre- venting them from contributing to the applicant’s total financing. 60a Example to paragraph (C)(2): Newco is an applicant seeking designated entity status in an auction in which bidding begins after the effective date of the rules. In- vestor is a controlling interest of Newco. Investor also is a controlling interest of Existing DE. Existing DE previously was awarded designated entity benefits and has impermissible material relationships based on leas- ing agreements entered into before April 25, 2006, with a third party, Lessee, that were in compliance with the Commission’s designated eligibility standards prior to April 25, 2006,. In this example, Newco would not be prohibited from acquiring designated entity benefits solely because of the existing impermissible material relationships of its affiliate, Existing DE. Newco, Inves- tor, and Existing DE, however, would need to enter into a contractual prohibition that prevents Existing DE from contributing to the total financing of Newco. * * * * * (j) Designated entities must describe on their long- form applications how they satisfy the requirements for eligibility for designated entity status, and must list and summarize on their long-form applications all agree- ments that affect designated entity status such as part- nership agreements, shareholder agreements, manage- ment agreements, spectrum leasing arrangements, spec- trum resale (including wholesale) arrangements, and all other agreements, including oral agreements, establish- ing, as applicable, de facto or de jure control of the en- tity or the presence or absence of impermissible and attributable material relationships. Designated entities also must provide the date(s) on which they entered into each of the agreements listed. In addition, designated entities must file with their long-form applications a 61a copy of each such agreement. In order to enable the Commission to audit designated entity eligibility on an ongoing basis, designated entities that are awarded eli- gibility must, for the term of the license, maintain at their facilities or with their designated agents the lists, summaries, dates, and copies of agreements required to be identified and provided to the Commission pursuant to this paragraph and to § 1.2114. * * * * * (n) Annual reports. Each designated entity licensee must file with the Commission an annual report within five business days before the anniversary date of the designated entity’s license grant. The annual report shall include, at a minimum, a list and summaries of all agreements and arrangements (including proposed agreements and arrangements) that relate to eligibility for designated entity benefits. In addition to a summary of each agreement or arrangement, this list must include the parties (including affiliates, controlling interests, and affiliates of controlling interests) to each agreement or arrangement, as well as the dates on which the par- ties entered into each agreement or arrangement. An- nual reports will be filed no later than, and up to five business days before, the anniversary of the designated entity’s license grant. (o) Gross revenues. * * * (p) Total assets. * * * 6. Revise paragraphs (a), (b) introductory text, the first sentence of paragraph (c)(2), the first sentence of paragraph (c)(3), (d)(1), and (d)(2) of § 1.2111 to read as follows: 62a § 1.2111 Assignment or transfer of control: unjust enrich- ment. (a) Reporting requirement. An applicant seeking ap- proval for a transfer of control or assignment (otherwise permitted under the Commission’s Rules) of a license within three years of receiving a new license through a competitive bidding procedure must, together with its application for transfer of control or assignment, file with the Commission’s statement indicating that its li- cense was obtained through competitive bidding. Such applicant must also file with the Commission the associ- ated contracts for sale, option agreements, management agreements, or other documents disclosing the local con- sideration that the applicant would receive in return for the transfer or assignment of its license (see § 1.948). This information should include not only a monetary purchase price, but also any future, contingent, in-kind, or other consideration (e.g., management or consulting contracts either with or without an option to purchase; below market financing). (b) Unjust enrichment payment: set-aside. As speci- fied in this paragraph an applicant seeking approval for a transfer of control or assignment (otherwise permitted under the Commission’s Rules) of, or for entry into a material relationship (see §§ 1.2110, 1.2114) (otherwise permitted under the Commission’s rules) involving, a license acquired by the applicant pursuant to a set-aside for eligible designated entities under § 1.2110(c), or which proposes to take any other action relating to own- ership or control that will result in loss of eligibility as a designated entity, must seek Commission approval and may be required to make an unjust enrichment payment (Payment) to the Commission by cashier’s check or wire 63a transfer before consent will be granted. The Payment will be based upon a schedule that will take account of the term of the license, any applicable construction benchmarks, and the estimated value of the set-aside benefit, which will be calculated as the difference be- tween the amount paid by the designated entity for the license and the value of comparable non-set-aside license in the free market at the time of the auction. The Com- mission will establish the amount of the Payment and the burden will be on the applicants to disprove this amount. No payment will be required if: * * * (c) * * * (2) If a licensee that utilizes installment financing un- der this section seeks to make any change in ownership structure or to enter into a material relationship (see § 1.2110) that would result in the licensee losing eligibil- ity for installment payments, the licensee shall first seek Commission approval and must make full payment of the remaining unpaid principal and any unpaid interest ac- crued through the date of such change as a condition of approval. * * * (3) If a licensee seeks to make any change in ownership or to enter into a material relationship (see § 1.2110) that would result in the licensee qualifying for a less favorable installment plan under this section, the li- censee shall seek Commission approval and must adjust its payment plan to reflect its new eligibility status. * * * (d) * * * 64a (1) A licensee that utilizes a bidding credit, and that during the initial term seeks to assign or transfer con- trol of a license to an entity that does not meet the eligi- bility criteria for a bidding credit, will be required to reimburse the U.S. Government for the amount of the bidding credit, plus interest based on the rate for ten year U.S. Treasury obligations applicable on the date the license was granted, as a condition of Commission approval of the assignment or transfer. If, within the initial term of the license, a licensee that utilizes a bid- ding credit seeks to assign or transfer control of a li- cense to an entity that is eligible for a lower bidding credit, the difference between the bidding credit ob- tained by the assigning party and the bidding credit for which the acquiring party would qualify, plus interest based on the rate for ten year U.S. treasury obligations applicable on the date the license is granted, must be paid to the U.S. Government as a condition of Commis- sion approval of the assignment or transfer. If, within the initial term of the license, a licensee that utilizes a bidding credit seeks to make any ownership change or to enter into a material relationship (see § 1.2110) that would result in the licensee losing eligibility for a bid- ding credit (or qualifying for a lower bidding credit), the amount of the bidding credit (or the difference between the bidding credit originally obtained and the bidding credit for which the licensee would qualify after restruc- turing or entry into a material relationship), plus inter- est based on the rate for ten year U.S. treasury obliga- tions applicable on the date the license is granted, must be paid to the U.S. Government as a condition of Com- mission approval of the assignment or transfer or of a reportable eligibility event (see § 1.2114). 65a (2) Payment schedule. (i) The amount of payments made pursuant to para- graph (d)(1) of this section will be 100 percent of the value of the bidding credit prior to the filing of the noti- fication informing the Commission that the construction requirements applicable at the end of the initial license term have been met. If the notification informing the Commission that the construction requirements applica- ble at the end of the initial license term have been met, the amount of the payments will be reduced over time as follows: (A) A loss of eligibility in the first five years of the li- cense term will result in a forfeiture of 100 percent of the value of the bidding credit (or in the case of eligibil- ity changing to qualify for a lower bidding credit, 100 percent of the difference between the bidding credit received and the bidding credit for which it is eligible); (B) A loss of eligibility in years 6 and 7 of the license term will result in a forfeiture of 75 percent of the value of the bidding credit (or in the case of eligibility chang- ing to qualify for a lower bidding credit, 75 percent of the difference between the bidding credit received and the bidding credit for which it is eligible); (C) A loss of eligibility in years 8 and 9 of the license term will result in a forfeiture of 50 percent of the value of the bidding credit (or in the case of eligibility chang- ing to qualify for a lower bidding credit, 50 percent of the difference between the bidding credit received and the bidding credit for which it is eligible); and (D) A loss of eligibility in year 10 of the license term will result in a forfeiture of 25 percent of the value of the 66a bidding credit (or in the case of eligibility changing to qualify for a lower bidding credit, 25 percent of the dif- ference between the bidding credit received and the bid- ding credit for which it is eligible). (ii) These payments will have to be paid to the United States Treasury as a condition of approval of the assign- ment, transfer, ownership change, or reportable eligibil- ity event (see §1.2114). * * * * * 7. In § 1.2112, add new paragraphs (b)(1)(iii) and (b)(2)(vii), redesignate paragraph (b)(1)(iii) as (b)(1)(iv), and revise redesignated paragraph (b)(1)(iv) and para- graphs (b)(2)(iii) and (v) of to read as follows: § 1.2112 Ownership disclosure requirements for applica- tions. * * * * * (b) * * * (1) * * * (iii) List all parties with which the applicant has entered into arrangements for the spectrum lease or resale (in- cluding wholesale agreements) of any of the capacity of any of the applicant’s spectrum. (iv) List separately and in the aggregate the gross reve- nues, computed in accordance with § 1.2110, for each of the following: The applicant, its affiliates, its controlling interests, the affiliates of its controlling interests, and the entities with which it has an attributable material relationship; and if a consortium of small businesses, the members comprising the consortium. 67a * * * * * (2) * * * (iii) List and summarize all agreements or instruments (with appropriate references to specific provisions in the text of such agreements and instruments) that support the applicant’s eligibility as a small business under the applicable designated entity provisions, including the establishment of de facto or de jure control or the pres- ence or absence of impermissible and attributable mate- rial relationships. Such agreements and instruments include articles of incorporation and bylaws, partnership agreements, shareholder agreements, voting or other trust agreements, management agreements, franchise agreements, spectrum leasing arrangements, spectrum resale (including wholesale) arrangements, and any other relevant agreements (including letters of intent), oral or written; (iv) * * * (v) List separately and in the aggregate the gross reve- nues, computed in accordance with § 1.2110, for each of the following: the applicant, its affiliates, its controlling interests, affiliates of its controlling interests, and par- ties with which it has attributable material relation- ships; and if a consortium of small businesses, the mem- bers comprising the consortium; and (vi) * * * (vii) List and summarize any agreements in which the applicant has entered into arrangements for the lease or resale (including wholesale agreements) of any of the spectrum capacity of the license that is the subject of the application. 68a 8. Add new section 1.2114 to read as follows: § 1.2114 Reporting of Eligibility Event. (a) A designated entity must seek Commission approval for all reportable eligibility events. A reportable eligi- bility event is: (1) Any spectrum lease (as defined in § 1.9003) or resale arrangement (including wholesale agreements) with one entity or on a cumulative basis that would cause a li- censee to lose eligibility for installment payments, a set- aside license, or a bidding credit (or for a particular level of bidding credit) under § 1.2110 and applicable service-specific rules. (2) Any other event that would lead to a change in the eligibility of a licensee for designated entity benefits. (b) Documents listed on and filed with application. A designated entity filing an application pursuant to this section must— (1) List and summarize on the application all agree- ments and arrangements (including proposed agree- ments and arrangements) that give rise to or otherwise relate to a reportable eligibility event. In addition to a summary of each agreement or arrangement, this list must include the parties (including each party’s affili- ates, its controlling interests, the affiliates of its control- ling interests, its spectrum lessees, and its spectrum resellers and wholesalers) to each agreement or ar- rangement, as well as the dates on which the parties en- tered into each agreement or arrangement. (2) File with the application a copy of each agreement and arrangement listed pursuant to this paragraph. 69a (3) Maintain at its facilities or with its designated agents, for the term of the license, the lists, summaries, dates, and copies of agreements and arrangements re- quired to be provided to the Commission pursuant to this section. (c) Application fees. The application reporting the eli- gibility event will be treated as a transfer of control for purposes of determining the applicable application fees as set forth in § 1.1102. (d) Streamlined approval procedures. (1) The eligibility event application will be placed on public notice once the application is sufficiently complete and accepted for filing (see § 1.933). (2) Petitions to deny filed in accordance with § 309(d) of the Communications Act must comply with the provi- sions of § 1.939, except that such petitions must be filed no later than 14 days following the date of the Public Notice listing the application as accepted for filing. (3) No later than 21 days following the date of the Pub- lic Notice listing an application as accepted for filing, the Wireless Telecommunications Bureau (Bureau) will grant the application, deny the application, or remove the application from streamlined processing for further review. (4) Grant of the application will be reflected in a Public Notice (see § 1.933(a)(2)) promptly issued after the grant. (5) If the Bureau determines to remove an application from streamlined processing, it will issue a Public No- tice indicating that the application has been removed 70a from streamlined processing. Within 90 days of that Public Notice, the Bureau will either take action upon the application or provide public notice that an addi- tional 90-day period for review is needed. (e) Public notice of application. Applications under this subpart will be placed on an informational public notice on a weekly basis (see § 1.933(a)). (f) Contents of the application. The application must contain all information requested on the applicable form, any additional information and certifications required by the rules in this chapter, and any rules pertaining to the specific service for which the application is filed. (g) The designated entity is required to update any change in a relationship that gave rise to a reportable eligibility event. 71a 203 See generally 5 U.S.C. § 603. The RFA, see 5 U.S.C. §§ 601—612, has been amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996). 204 Implementation of the Commercial Spectrum Enhancement Act and Modernization of the Commission’s Competitive Bidding Rules and Procedures, WT Docket No. 05-211, Further Notice of Proposed Rule Making, 21 FCC Rcd 1753 (2006), 71 FR 6992 (February 10, 2006). 205 See generally 5 U.S.C. § 604. 206 See, e.g., Competitive Bidding Second Report and Order, 9 FCC Rcd 2348 (1994); Part 1 Fifth Report and Order, 15 FCC Rcd 15293 APPENDIX C Final Regulatory Flexibility Analysis As required by the Regulatory Flexibility Act (RFA), 203 an Initial Regulatory Flexibility Analysis (IRFA) was incorporated into the Further Notice of Proposed Rule Making (“Further Notice”) in WT Docket No. 05-211. The Commission sought written public com- ment in the Further Notice on possible changes to its competitive bidding rules, as well as on the IRFA. 204 One commenter addressed the IRFA. This Final Regu- latory Flexibility Analysis conforms to the IRFA. 205 A. Need for, and Objectives of, the Second Report and Order This Second Report and Order adopts modifications to the Commission’s rules for determining the eligibility of applicants for size-based benefits in the context of competitive bidding. Over the last decade, the Commis- sion has engaged in numerous rulemakings and adjudi- catory investigations to prevent companies from circum- venting the objectives of the designated entity eligibility rules. 206 To that end, in determining whether to award 72a (2000); Application of ClearComm, L.P., Memorandum Opinion and Order, 16 FCC Rcd 18627 (2001). 207 Competitive Bidding Second Report and Order, 9 FCC Rcd at 2396, ¶ 277. 208 Id. at 2397 ¶ 278. designated entity benefits, the Commission adopted a strict eligibility standard that focused on whether the applicant maintained control of the corporate entity. 207 The Commission’s objective in employing such a stan- dard was “to deter the establishment of sham companies in a manner that permits easy resolution of eligibility issues without the delay of administrative hearings.” 208 The Commission intends its small business provisions to be available only to bona fide small businesses. Consequently, the rules as modified by the Second Report and Order provide that certain material relation- ships of an applicant for designated entity benefits will be a factor in determining the applicant’s eligibility. The Second Report and Order provides that if an appli- cant or licensee has agreements that together enable it to lease or resell more than 50 percent of the spectrum capacity of any individual licenses, the applicant or li- censee will be ineligible for designated entity benefits. Further, the Second Report and Order also provides that if an applicant or licensee has agreements with any other entity, including entities or individuals attribut- able to that other entity that enable the applicant or licensee to lease or resell more than 25 percent of the spectrum capacity of any individual licenses, the other entity will be attributed to the applicant or licensee when determining the applicant’s or licensee’s eligibility for designated entity benefits. Finally, the modifica- tions of the Second Report and Order strengthen the 73a 209 47 U.S.C. §309(j)(4)(D). Commission’s unjust enrichment rules to better deter attempts at circumvention and to recapture designated entity benefits when there has been a change in eligibil- ity on a license-by-license basis. Similarly, to ensure our continued ability to safeguard the award of designated entity benefits, we provide clarification regarding how the Commission will implement its rules concerning au- dits and we refine our rules with respect to the report- ing obligations of designated entities. These rule modifications will enhance the Commis- sion’s ability to carry out Congress’s statutory plan in accordance with the intent of Congress that every recip- ient of designated entity benefits uses its licenses di- rectly to provide facilities-based telecommunications services for the benefit of the public. In making these changes to the rules, the Commission takes another im- portant step in fulfilling its statutory mandate to facili- tate the participation of small businesses in the provi- sion of spectrum based services. 209 B. Summary of Significant Issues Raised By Public Comment in Response to the IRFA The National Telecommunications Cooperative As- sociation filed comments in response to the IRFA stat- ing, among other things, that the Commission must take steps to minimize the economic impact of its proposed rules on small entities. NTCA asserts that the Commis- sion must tailor its rules narrowly enough to target only real abuse, rather than capturing all rural telephone companies with any ties to a large in-region wireless 74a 210 Comments of NTCA at 9. 211 5 U.S.C. § 603(b)(3). 212 Id. § 601(6). 213 Id. § 601(3) (incorporating by reference the definition of “small business concern” in the Small Business Act, 15 U.S.C. § 632). Pur- suant to the RFA, the statutory definition of a small business applies “unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public com- ment, establishes one or more definitions of such term which are appro- priate to the activities of the agency and publishes such definition(s) in the Federal Register.” Id. § 601(3). 214 Id. § 601(4). provider, or it should exempt rural telephone companies from the rules’ provision. 210 C. Description and Estimate of the Number of Small Entities to Which the Proposed Rules Will Apply The RFA directs agencies to provide a description of and, where feasible, an estimate of the number of small entities that may be affected by the proposed rules, if adopted. 211 The RFA generally defines the term “small entity” as having the same meaning as the terms “small organization,” “small business,” and “small gov- ernmental jurisdiction.” 212 The term “small business” has the same meaning as the term “small business con- cern” under the Small Business Act. 213 A small business concern is one which: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the SBA. A small organization is generally “any not-for-profit enterprise which is independently owned and operated and is not dominant in its field.” 214 Nationwide, as of 75a 215 Independent Sector, The New Nonprofit Almanac & Desk Refer- ence (2002). 216 5 U.S.C. § 601(5). 217 U.S. Census Bureau, Statistical Abstract of the United States: 2006, Section 8, page 272, Table 415. 218 We assume that the villages, school districts, and special districts are small, and total 48,558. See U.S. Census Bureau, Statistical Ab- stract of the United States: 2006, section 8, page 273, Table 417. For 2002, Census Bureau data indicate that the total number of county, mu- nicipal, and township governments nationwide was 38,967, of which 35,819 were small. Id. 219 See SBA, Programs and Services, SBA Pamphlet No. CO-0028, at page 40 (July 2002). 2002, there were approximately 1.6 million small organi- zations. 215 The term “small governmental jurisdiction” is defined generally as “governments of cities, towns, townships, villages, school districts, or special districts, with a population of less than fifty thousand.” 216 Census Bureau data for 2002 indicate that there were 87,525 local governmental jurisdictions in the United States. 217 We estimate that, of this total, 84,377 entities were “small governmental jurisdictions.” 218 Thus, we estimate that most governmental jurisdictions are small. Nation- wide, there are a total of approximately 22.4 million small businesses, according to SBA data. 219 The changes and additions to the Commission’s rules adopted in the Second Report and Order are of general applicability to all services, applying to all enti- ties of any size that seek eligibility to participate in Commission auctions as a designated entity and/or that hold licenses won through competitive bidding that are subject to designated entity benefits. Accordingly, this FRFA provides a general analysis of the impact of the proposals on small businesses rather than a service by 76a 220 This figure is as of March 29, 2006. service analysis. The number of entities that may apply to participate in future Commission auctions is un- known. The number of small businesses that have par- ticipated in prior auctions has varied. In all of our auc- tions held to date, 1,975 out of a total of 3,545 qualified bidders either have claimed eligibility for small business bidding credits or have self-reported their status as small businesses as that term has been defined under rules adopted by the Commission for specific services. 220 In addition, we note that, as a general matter, the num- ber of winning bidders that qualify as small businesses at the close of an auction does not necessarily represent the number of small businesses currently in service. Also, the Commission does not generally track subse- quent business size unless, in the context of changes in control, changes in material relationships or assign- ments or transfers, unjust enrichment issues are impli- cated. D. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements The Commission will require additional information from applicants in order to ensure compliance with the policies and rules adopted by the Second Report and Order. For example, designated entity applicants that have filed applications to participate in an auction for which bidding will begin on or after the effective date of the rules, will be required to amend their applications on or after the effective date of the rule changes with a statement declaring, under penalty of perjury, that the applicant is qualified as a designated entity pursuant to the Commission’s rules effective as of the date of the 77a 221 See generally 47 C.F.R. §§ 1.948, 1.9020(i), 1.9030(h), (i). 222 See 5 U.S.C. § 603. statement. In addition, the Commission adopts rules to make modifications, as necessary, to FCC forms related to auction, licensing, and leasing applications. Specifi- cally, the modifications will require that designated enti- ties report any relevant material relationship(s), as de- fined in newly adopted sections of 1.2110, reached after the date the rules are published in the Federal Register, even if the material relationship between the designated entity and the other entity would not have triggered a reporting requirement under the rules prior to this Sec- ond Report and Order. 221 E. Steps Taken to Minimize Significant Economic Im- pact on Small Entities, and Significant Alternatives Considered The RFA requires an agency to describe any signifi- cant alternatives that it has considered in reaching its proposed approach, which may include the following four alternatives (among others): “(1) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance or reporting requirements under the rule for small entities; (3) the use of perfor- mance rather than design standards; and (4) an exemp- tion from coverage of the rule or any part thereof for small entities.” 222 The Further Notice sought comment on several op- tions for modifying its designated entity eligibility rules and specifically sought comment from small entities. 78a 223 See id. § 801(a)(1)(A). The options included various ways to consider whether the Commission should award designated entity benefits where an applicant for such benefits also had financial or operational agreements with a larger entity. In consid- ering these options, for the purposes of determining des- ignated entity eligibility, the Commission defined the ef- fect of entering certain agreements. By adopting the rules in the Second Report and Order, the Commission will enhance its ability to carry out Congress’s statutory plan that every recipient of designated entity benefits uses their licenses directly to provide facilities-based telecommunications services, for the benefit of the pub- lic. F. Report to Congress The Commission will send a copy of the Second Re- port and Order, including this FRFA, in a report to be sent to Congress pursuant to the SBREFA. 223 In addi- tion, the Commission will send a copy of the Second Re- port and Order, including the FRFA, to the Chief Coun- sel for Advocacy of the SBA. A copy of the Second Re- port and Order and the FRFA (or summaries thereof) will also be published in the Federal Register. 79a 224 See generally 5 U.S.C. § 603. The RFA, see 5 U.S.C. §§ 601-612, has been amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996). 225 See 5 U.S.C. § 603(a). 226 See id. APPENDIX D Initial Regulatory Flexibility Analysis As required by the Regulatory Flexibility Act (RFA), 224 the Commission has prepared this Initial Reg- ulatory Flexibility Analysis (IRFA) of the possible sig- nificant economic impact on small entities by the policies and rules proposed in the Second Further Notice of Pro- posed Rule Making (“Second Further Notice”). Written public comments are requested on this IRFA. Com- ments must be identified as responses to the IRFA and must be filed by the deadlines for comments provided in this Second Further Notice. The Commission will send a copy of the Second Further Notice, including this IRFA, to the Chief Counsel for Advocacy of the Small Business Administration (SBA). 225 In addition, the Sec- ond Further Notice and the IRFA (or summaries there- of) will be published in the Federal Register. 226 A. Need for, and Objectives of, the Proposed Rules The initial Further Notice in this proceeding tenta- tively concluded that it should restrict the award of des- ignated entity benefits to an otherwise qualified appli- cant where it has a “material relationship” with a “large in-region incumbent wireless service provider.” The Commission sought comment on how it should define the elements of such a restriction. Based on the Commis- sion’s experience in administering the designated entity 80a 227 See, e.g., Competitive Bidding Second Report and Order, 9 FCC Rcd 2348 (1994); Part 1 Fifth Report and Order, 15 FCC Rcd 15293 (2000); Application of ClearComm, L.P., Memorandum Opinion and Order, 16 FCC Rcd 18627 (2001). 228 Competitive Bidding Second Report and Order, 9 FCC Rcd at 2396 ¶ 277. program and the record developed in response to the Further Notice, this Second Further Notice seeks fur- ther comment on those issues, including comment to obtain additional economic evidence regarding how and under what circumstances an entity’s size might affect its relationships and agreements with designated entity applicants and licensees. The Second Further Notice also seeks comment on whether the Commission should adopt additional rule changes that would restrict the award of designated entity benefits under certain cir- cumstances and in connection with relationships with certain types of entities and individuals with high per- sonal net worth, including whether and how in-region relationships and personal net worth should be consid- ered in determining eligibility for designated entity ben- efits. Over the last decade, the Commission has engaged in numerous rulemakings and adjudicatory investiga- tions to prevent companies from circumventing the ob- jectives of the designated entity eligibility rules. 227 To that end, in determining whether to award designated entity benefits, the Commission adopted a strict eligibil- ity standard that focused on whether the applicant main- tained control of the corporate entity. 228 The Commis- sion’s objective in employing such a standard was “to deter the establishment of sham companies in a manner that permits easy resolution of eligibility issues without 81a 229 Id. at 2397 ¶ 278. 230 5 U.S.C. § 603(b)(3). 231 Id. § 601(6). 232 Id. § 601(3) (incorporating by reference the definition of “small business concern” in the Small Business Act, 15 U.S.C. § 632). Pur- suant to the RFA, the statutory definition of a small business applies “unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public com- ment, establishes one or more definitions of such term which are ap- propriate to the activities of the agency and publishes such definition(s) in the Federal Register.” Id. § 601(3). the delay of administrative hearings.” 229 The Commis- sion intends its small business provisions to be available only to bona fide small businesses. B. Legal Basis The proposed actions are authorized under Sections 4(i), 303(r), and 309(j) of the Communications Act of 1934, as amended, 47 U.S.C. Sections 154(i), 303(r), and 309(j). C. Description and Estimate of the Number of Small Entities to Which the Proposed Rules Will Apply The RFA directs agencies to provide a description of and, where feasible, an estimate of the number of small entities that may be affected by the proposed rules, if adopted. 230 The RFA generally defines the term “small entity” as having the same meaning as the terms “small organization,” “small business,” and “small gov- ernmental jurisdiction.” 231 The term “small business” has the same meaning as the term “small business con- cern” under the Small Business Act. 232 A small business concern is one which: (1) is independently owned and 82a 233 Id. § 601(4). 234 Independent Sector, The New Nonprofit Almanac & Desk Refer- ence (2002). 235 5 U.S.C. § 601(5). 236 U.S. Census Bureau, Statistical Abstract of the United States: 2006, Section 8, page 272, Table 415. 237 We assume that the villages, school districts, and special districts are small, and total 48,558. See U.S. Census Bureau, Statistical Ab- stract of the United States: 2006, section 8, page 273, Table 417. For 2002, Census Bureau data indicate that the total number of county, mu- nicipal, and township governments nationwide was 38,967, of which 35,819 were small. Id. 238 See SBA, Programs and Services, SBA Pamphlet No. CO-0028, at 40 (July 2002). operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the SBA. A small organization is generally “any not-for-profit enterprise which is independently owned and operated and is not dominant in its field.” 233 Nationwide, as of 2002, there were approximately 1.6 million small organi- zations. 234 The term “small governmental jurisdiction” is defined as “governments of cities, towns, townships, villages, school districts, or special districts, with a pop- ulation of less than fifty thousand.” 235 Census Bureau data for 2002 indicate that there were 87,525 local gov- ernmental jurisdictions in the United States. 236 We esti- mate that, of this total, 84,377 entities were “small gov- ernmental jurisdictions.” 237 Thus, we estimate that most governmental jurisdictions are small. Nationwide, there are a total of approximately 22.4 million small busi- nesses, according to SBA data. 238 83a 239 This figure is as of March 29, 2006. Any proposed changes or additions to the Commis- sion’s Part 1 rules that may be made as a result of the Second Further Notice would be of general applicability to all services, applying to all entities of any size that apply to participate in Commission auctions. Accord- ingly, this IRFA provides a general analysis of the im- pact of the proposals on small businesses rather than a service by service analysis. The number of entities that may apply to participate in future Commission auctions is unknown. The number of small businesses that have participated in prior auctions has varied. In all of our auctions held to date, 1,975 out of a total of 3,545 quali- fied bidders either have claimed eligibility for small business bidding credits or have self-reported their sta- tus as small businesses as that term has been defined under rules adopted by the Commission for specific ser- vices. 239 In addition, we note that, as a general matter, the number of winning bidders that qualify as small businesses at the close of an auction does not necessarily represent the number of small businesses currently in service. Also, the Commission does not generally track subsequent business size unless, in the context of assign- ments or transfers, unjust enrichment issues are impli- cated. D. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements The Commission will not require additional report- ing, recordkeeping or other compliance requirements pursuant to this Second Further Notice. 84a 240 See 5 U.S.C. § 603. E. Steps Taken to Minimize Significant Economic Im- pact on Small Entities, and Significant Alternatives Considered The RFA requires an agency to describe any signifi- cant alternatives that it has considered in reaching its proposed approach, which may include the following four alternatives (among others): (1) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance or reporting requirements under the rule for small entities; (3) the use of perfor- mance, rather than design, standards; and (4) an exemp- tion from coverage of the rule or any part thereof for small entities. 240 The initial Further Notice in this proceeding tenta- tively concluded that it should restrict the award of des- ignated entity benefits to an otherwise qualified appli- cant where it has a “material relationship” with a “large in-region incumbent wireless service provider.” The Commission sought comment on how it should define the elements of such a restriction. Based on the Commis- sion’s experience in administering the designated entity program and the record developed in response to the Further Notice, this Second Further Notice seeks fur- ther comment on those issues, including comment to obtain additional economic evidence regarding how and under what circumstances an entity’s size might affect its relationships and agreements with designated entity applicants and licensees. The Second Further Notice also seeks comment on whether the Commission should 85a adopt additional rule changes that would restrict the award of designated entity benefits under certain cir- cumstances and in connection with relationships with certain types of entities and individuals with high per- sonal net worth, including whether and how in-region relationships and personal net worth should be consid- ered in determining eligibility for designated entity ben- efits. The Second Further Notice seeks guidance from the industry on how it should define the elements of any restrictions it might adopt regarding the award of desig- nated entity benefits. Small entity comments are specif- ically requested. F. Federal Rules that May Duplicate, Overlap, or Con- flict with the Proposed Rule None. 86a STATEMENT OF CHAIRMAN KEVIN J. MARTIN Re: Implementation of the Commercial Spectrum En- hancement Act and Modernization of the Commis- sion’s Competitive Bidding Rules and Procedures, WT Docket No. 05-211, Second Report and Order and Second Further Notice of Proposed Rule Mak- ing. We initiated this proceeding to examine our rules governing designated entities to better achieve the pur- pose of ensuring that small businesses have an opportu- nity to participate in the provision of spectrum-based services. Today’s order adopts several measures to help accomplish that goal. Specifically, we strengthen our unjust enrichment and spectrum leasing rules for desig- nated entities in order to provide additional incentives for small businesses receiving bidding credits to offer facilities-based service. We also further the integrity of the designated entity program by implementing random audits, additional document and transaction reviews, and periodic reporting. Together, these measures sig- nificantly strengthen the designated entity program. In the further notice portion of this item, we ask whether additional safeguards are necessary to reduce the opportunity for manipulation of our rules governing the provision of bidding credits to small businesses. I look forward to working with my colleagues as we con- tinue to develop the record in this proceeding. 87a STATEMENT OF COMMISSIONER MICHAEL J. COPPS Re: Implementation of the Commercial Spectrum En- hancement Act and Modernization of the Commis- sion’s Competitive Bidding Rules and Procedures, WT Docket No. 05-211, Second Report and Order and Second Further Notice of Proposed Rule Mak- ing. In this age when telecommunications companies seem only to grow larger and larger, it is important to have programs that encourage competition from smaller entrepreneurs. This is exactly what the Designated En- tity (DE) program is all about and it is why we must do everything we can to make this program perform as in- tended. Small companies must have a fighting chance to compete with industry giants to obtain valuable spec- trum. In an era of consolidation, the program is espe- cially important to rural areas that might otherwise re- main underserved. Quite frankly, rural America seems too often to have been pushed off the big companies’ radar scopes. This is a central reason why I remain strongly committed to small carriers’ participation in spectrum auctions. It is good policy; it also happens to be the law. But let’s be candid. Whenever government attempts to provide incentive programs for small business, there are those who try to twist the rules in order to gain un- warranted entry into these programs. We have seen this in many business sectors and we have unfortunately experienced such chicanery and cheating in telecom too. We must not allow the bad apple to spoil the bushel, however. Instead we need good rules to curb the chica- nery. Recent experience teaches us that we must move quickly to curb abuses of the DE program. News reports 88a indicate that, in prior auctions, entities with deep pock- ets helped themselves to discounts they were never meant to enjoy. This unacceptable behavior threatens the integrity of our auctions and, worse, it cheats con- sumers. It costs taxpayers millions of dollars in foregone revenue. It also means that spectrum goes to those most willing and able to manipulate the rules of the game, rather than to the entities Congress actually in- tended to benefit. And it denies consumers the benefits of new and all-too-rare competition. So, our job is to deny wealthy companies or individuals any opportunity to misuse the DE discount to outbid small carriers—the very carriers the DE program is meant to protect. Today we take meaningful steps in the right direc- tion. We do so in time to apply new rules to the large and important Advanced Wireless Services (AWS) auc- tion scheduled for this summer. I am grateful to the Chairman for his role in moving this item along in time to have these rules apply to the AWS auction. And I am grateful to him and to my other colleagues for their sup- port of strong measures to prevent fraud and unjust enrichment by those who would seek to abuse this valu- able program. In particular, I am pleased that by strengthening our unjust enrichment rules we take away the incentive for speculators to try to masquerade as legitimate DEs. Under our new rules, bidders who ben- efit from the 25 percent discount must forfeit that dis- count if they then turn around and sell some or all of their license rights to someone else. By eliminating the payoff for this “flipping” of licenses, we discourage sham buyers from participating in the first place. And most importantly, we reserve the DE program for companies that actually intend to use their spectrum to serve cus- tomers. 89a I am also pleased that we commit to thoroughly re- view the application and all relevant documents for each and every winning bidder claiming DE status. Addition- ally, we pledge to audit every DE at least once during the initial license term. These are two important safe- guards against sham bidders, and I am glad the Com- mission agreed to implement them as well. There is more to do to ensure the ongoing integrity and credibility of the DE program. For instance, I have real questions about whether a company should be able to qualify for the DE discount if it is owned in large part by a multi-billion-dollar wireless company—or any multi-billion-dollar communications company, for that matter. I believe the unjust enrichment reforms we an- nounce today will go a long way towards eliminating the worst abuses of this kind. But we still need to consider whether additional partnership restrictions are warrant- ed. At the same time, we must also be cautious about overshooting the mark and harming the very small car- riers and entrepreneurs that Congress meant to protect. Legitimate DEs must have access to capital to compete meaningfully against the large carriers. I would not support any measures that improperly compromised their ability to do so. The limited time available to us for consideration of this item did not allow us to resolve these questions. I would have preferred launching this proceeding last summer so as to facilitate a more thorough review in time for comprehensive action today. But given the im- portance of both the upcoming AWS auction and the DE program, I think that the item we announce today is the most prudent course to protect the core values of the 90a DE program. Certainly, we must be careful not to rush into further changes without full consideration of all their consequences, unintended as well as intended. I hope we will keep working on this program because an- other huge auction in the 700 MHz spectrum is not far off and we should have the program working as flaw- lessly as possible by then. In the meantime, I applaud the changes we make today to curb fraud and unjust enrichment and I thank my colleagues for their coopera- tive work to achieve these results. 91a STATEMENT OF COMMISSIONER JONATHAN S. ADELSTEIN APPROVING IN PART, DISSENTING IN PART Re: Implementation of the Commercial Spectrum En- hancement Act and Modernization of the Commis- sion’s Competitive Bidding Rules and Procedures, WT Docket No. 05-211, Second Report and Order and Second Further Notice of Proposed Rule Mak- ing. I must dissent from a large portion of this decision because it fails to accomplish the very specific goals the Commission outlined in the Further Notice and Pro- posed Rule Making (FNPRM) in this proceeding. While I endorse the narrow adjustments to the Designated Entity (DE) program that we adopt today, the majority falls far short of making the meaningful modifications to the DE program that were almost universally supported by commenters in this proceeding. I am disappointed that we were unable to follow through on our tentative conclusion from earlier this year, and believe that the Second FNPRM we adopt today is unnecessarily broad and complicated, and significantly ignores the full and complete record before us. On January 27, 2006, my colleagues and I adopted an FNPRM in which we tentatively concluded that we should modify our Part 1 rules to restrict the award of designated entity benefits to an otherwise qualified des- ignated entity where it has a “material relationship” with a “large in-region incumbent wireless service pro- vider.” This position was supported by a large and di- 92a 241 “It is extremely positive and encouraging that the Commission has decided to take this opportunity to change its Designated Entity program rules so as to make available more fair and reasonable op- portunities for bona fide designated entities to secure the critical spec- trum necessary to compete in the face of ever-increasing industry con- solidation dominated by large incumbent wireless service providers.” Comments of STX Wireless, LLC. 242 “It is not unreasonable or unfair for the Commission to update its designated entity program to take into account the greatly increased concentration of spectrum resources in the hands of the national wire- less carriers. By limiting access of the national carriers to bid credit benefits, the Commission can effectively refocus its designated entity policies to expand opportunities for successful small business participa- tion in the wireless industry.” Reply Comments of United States Cellu- lar Corporation at 2-3. 243 “As carriers whose collective share of the wireless market is 89-90 percent, the five largest incumbents have the most to lose from the en- try of facilities-based competitors into the wireless market, and there- fore have the strongest incentives to manipulate the DE program in a manner that forestalls the competition that the DE program was meant to engender.” Reply Comments of the Minority Media and Telecommu- nications Council (MMTC) at 3. verse group of commenters ranging from DEs 241 to Tier II carriers, 242 the minority community 243 to rural tele- 93a 244 “The Commission’s tentative conclusion that it should modify its Part 1 rules to restrict the award of DE benefits such as bidding credits to an otherwise qualified DE where it has a ‘material relationship’ with a large, in-region incumbent wireless service provider is consistent with Section 309(j) of the Communications Act of 1934, as amended.” Com- ments of The Rural Telecommunications Group, Inc. and The Organiza- tion for the Promotion and Advancement of Small Telecommunications Companies. 245 “It is important that DEs have sources of capital and industry experience on which to rely, but allowing national wireless carriers to perform these functions is no longer good policy in light of their over- whelming dominance in the industry.” Letter from 10 Members of the Congressional Black Caucus to Chairman Kevin Martin (March 3, 2006). 246 “The Department supports the Federal Communications Com- mission’s proposal to deny designated entity benefits to entities that have a material relationship with a large in-region incumbent wireless service provider or a large entity that has a significant interest in com- munications services.” Ex Parte Letter of the Department of Justice (March 17, 2006). phone companies, 244 and even members of Congress 245 and the Department of Justice. 246 Yet, in a troubling and curious reversal, less than three months later, I stand alone in dissenting from our decision today to not to close this obvious loophole. It is stunning that we have failed to take any meaningful ac- tion to specifically address the single biggest issue fac- ing the DE program given the overwhelming support in the record to do so. We missed a real opportunity to shut down what almost everyone recognizes has the po- tential for the largest abuse of our DE program: giant wireless companies using false fronts to get spectrum on the cheap. During the past month, there has been considerable discussion about an alternative proposal to our original 94a 247 “It would be wholly inconsistent with the promotion of these ob- jectives for the Commission to limit the sources of capital and expertise available to new entrants in the complex wireless industry beyond the largest national carriers identified in the rulemaking who dominate the industry.” Letter from Congressman Edolphus Towns and Congress- woman Diane Watson to Commissioners Michael Copps and Jonathan Adelstein (April 7, 2006). tentative conclusion—a limitation on investment in DEs by all providers of communications services over a given revenue threshold. While we do not vote on that pro- posal here, many commenters argued that this approach would not have tightened the DE program, but rather that the approach would have killed it. I certainly had concerns that the proposal, as structured, would have cast a wide net over the DE program—limiting funding to the DE community from almost all FCC-regulated companies, manufacturers, and service providers, whe- ther circuit or IP-based. Not surprisingly, the proposal to adopt a low revenue threshold was loudly opposed by a number of significant voices including members of Congress, 247 two subcommittees of the FCC’s own Advi- sory Committee on Diversity for Communications in the 95a 248 “The [Subcommittees] believe the Commission should receive the input of the full Committee before taking steps in response to the FNPRM released February 3, 2006 in WT Docket No. 05-211, recent reports regarding which suggest that the Commission may substan- tially undermine opportunities for diversity of ownership and other goals mandated by Section 309(j) of the Communications Act. Ac- cordingly, the Subcommittee asks the Commission to convene the full Committee as soon as possible with respect to this matter.” Statement of The Transactional Transparency and Related Outreach Subcommit- tee and the Career Advancement Subcommittee of the Advisory Com- mittee on Diversity for Communications in the Digital Age (April 6, 2006). 249 “Imposing severe new limitations on DEs sourcing investments from a broad category of companies defined as having revenues of $125 million or more will have the effect of killing the DE program.” Ex Parte of Carroll Wireless, LP, CSM Wireless, LLC, Leap Wireless Int’l, Inc. United States Cellular Corp., TA Associates, 3G PCS, LLC, Royal Street Commc’ns, LLC, MetroPCS Commc’ns, Inc., Catalyst Investors and Council Tree Commc’ns, Inc. (April 5, 2006) (“Carroll Wireless et al”). 250 “Such ruling would effectively dismantle the DE Program as mandated by Congress. We urge the Commission to maintain the most important diversity tool at its disposal, stay with the clear record in this case and proceed with finalizing its Tentative Conclusion in this pro- ceeding.” Ex Parte of Doyon, Ltd., Koniag Development Corp., St. George Tanaq Corp. Chugach Alaska Corp., and Bethel Native Corp. (April 7, 2006). 251 Ex Parte of Carroll Wireless et al. Digital Age, 248 current and former DEs, 249 and a quintet of Native Alaskan Corporation CEOs. 250 Some argue that so-called DE reform was really a disguise to elimi- nate an avenue of competition to incumbent wireless companies. 251 Notwithstanding the flaws in this proposal, I have been willing to consider a variety of alternatives to our tentative conclusion that would have responded to com- 96a plaints by large wireless carriers that they were being unfairly singled out or that we were ignoring our prece- dent of conducting market by market analyses in looking at spectrum issues. Moreover, if the wireless loophole was adequately addressed in a final decision, I was will- ing to consider a revenue-based restriction that affected all FCC regulatees provided that a revenue threshold was based on the record, not one that could indiscrimi- nately shut down the DE program. But inexplicably, no deal could be struck. Ultimately, it was easier for the majority to make a few minor changes to the DE pro- gram than close the loophole that is recognized by al- most everyone but this Commission. Of course, I support the changes made in this item as DE reform has been an important issue to me for some period of time. In my separate statement to the FNPRM, I talked about a tighter review of DE applica- tions involving large wireless carriers and am pleased that we have extended a thorough Wireless Telecommu- nications Bureau review to all DE applications. And I applaud the efforts of MMTC in highlighting the need for a more rigorous audit program and advancing pro- posals that form the basis for those we adopt today. MMTC, like many others in this proceeding, provided thoughtful comments and discussion on the DE pro- gram, and has helped create the record that allows us to make at least some changes to the DE program prior to the upcoming AWS auction. Finally, I must add that I am troubled by the tone and approach of the Second FNPRM. I believe it dis- proportionally relies on the perceived status of the com- munications marketplace in assessing changes to the DE program. While I recognize the dual statutory goals 97a highlighted in the item of ensuring opportunities for DEs and preventing unjust enrichment, we also have an obligation to promote competition and innovation in the wireless industry pursuant to Section 309(j)(3)(B), and the DE program is an appropriate vehicle to further that objective. I worry that the Second FNPRM, in- stead of suggesting proposals that could promote the effectiveness and integrity of DEs, could ultimately lead to determinations that do more harm to potential compe- tition in the communications marketplace than truly protect the program. The item seems to ignore the well- developed record in proposing an unnecessarily compli- cated and expansive review of perceived problems of the DE program when the solutions already are right in front of us. 98a 1 Implementation of the Commercial Spectrum Enhancement Act and Modernization of the Commission’s Competitive Bidding Rules and Procedures, Second Report and Order and Second Further Notice of Proposed Rule Making, 21 FCC Rcd 4753 (2006) (“Designated Entity Second Report and Order” and “Second Further Notice of Proposed Rule Making”). APPENDIX B FEDERAL COMMUNICATIONS COMMISSION WASHINGTON, D.C. 20554 WT Docket No. 05-211 IN THE MATTER OF IMPLEMENTATION OF THE COMMERCIAL SPECTRUM ENHANCEMENT ACT AND MODERNIZATION OF THE COMMISSION’S COMPETITIVE BIDDING RULES AND PROCEDURES Adopted: June 1, 2006 Released: June 2, 2006 ORDER ON RECONSIDERATION OF THE SECOND REPORT AND ORDER I. INTRODUCTION 1. In this Order on Reconsideration, on our own mo- tion, we clarify certain aspects of the Second Report and Order in this proceeding (“Designated Entity Second Report and Order”). 1 We also address certain proce- dural issues raised in filings submitted in response to 99a 2 See, e.g., Petition for Expedited Reconsideration dated May 5, 2006 (“Petition for Expedited Reconsideration”) filed jointly by Council Tree Communications, Inc. (“Council Tree”), the Minority Media and Tele- communications Council (“MMTC”), and Bethel Native (“Bethel Native”); Motion for Expedited Stay Pending Reconsideration or Judi- cial Review dated May 5, 2006 filed jointly by Council Tree (“Motion for Expedited Stay”), MMTC and Bethel Native; CTIA—The Wireless Association Opposition to Motion for Expedited Stay Pending Recon- sideration or Judicial Review dated May 11, 2006; T-Mobile USA, Inc. Opposition to Stay dated May 12, 2006; Supplement to Motion for Expe- dited Stay Pending Reconsideration or Judicial Review and Petition for Expedited Reconsideration dated May 17, 2006, filed jointly by Council Tree, MMTC, and Bethel Native (“Supplement”); Further Supplement to Motion for Expedited Stay dated May 25, 2006, filed jointly by Coun- cil Tree, MMTC, and Bethel Native (“Further Supplement”). 3 Implementation of the Commercial Spectrum Enhancement Act and Modernization of the Commission’s Competitive Bidding Rules and Procedures, WT Docket No. 05-211, Further Notice of Proposed Rule Making, 21 FCC Rcd 1753 (2006) (“Further Notice”). 4 See Letter from Messrs. Steve C. Hillard and George T. Laub, Council Tree Communications, Inc. to Marlene H. Dortch, Secretary, Federal Communications Commission, WT Docket Nos. 02-353, 04-356, RM-10956 (June 13, 2005) (Council Tree ex parte). the Designated Entity Second Report and Order. 2 As the record on reconsideration has not yet closed, how- ever, we may deal with additional issues raised by inter- ested parties at a later date. II. BACKGROUND 2. In the Further Notice of Proposed Rule Making in this docket, 3 we sought comment on a proposal by Council Tree that we restrict the award of designated entity benefits to designated entities that have what Council Tree only generally referred to as “material relationships” with large in-region incumbent wireless service providers. 4 We asked for comment on each of 100a 5 Further Notice, 21 FCC Rcd at 1760 ¶ 13. 6 See id. § 1.2110. The Commission establishes small business size standards on a service-specific basis, taking into consideration the char- acteristics and capital requirements of the particular service. 47 C.F.R. § 1.2110(c)(1). In the Part 1 Fifth Report and Order, the Commission, in light of the Adarand decision, declined to adopt special provisions for minority- and women-owned businesses but noted that minority- and women-owned businesses that qualify as small businesses may take ad- vantage of the provisions the Commission has adopted for small bus- inesses. Amendment of Part 1 of the Commission’s Rules—Competi- tive Bidding Procedures, WT Docket No. 97-82, Order on Reconsider- ation of the Third Report and Order, Fifth Report and Order, and Fourth Further Notice of Proposed Rule Making, 15 FCC Rcd 15293, 15319 ¶ 48 (2000) (“Part 1 Fifth Report and Order”) (citing Adarand Constructors, Inc. v. Pena, 515 U.S. 200, 227 (1995)). On several oc- casions, the Commission has declined to adopt bidding credits for large telephone companies that serve rural areas. See, e.g., Implementation of Section 309(j) of the Communications Act—Competitive Bidding, PP Docket No. 93-253, Fifth Memorandum Opinion and Order, 10 FCC Rcd 403, 457-58, 462-63 ¶¶ 100, 111 (1994) (“Competitive Bidding Fifth MO&O”); Amendment of Part 1 of the Commission’s Rules—Competi- tive Bidding Procedures, Order on Reconsideration of the Third Report and Order, Fifth Report and Order, and Fourth Notice of Proposed Rule Making, 15 FCC Rcd 15293, 15320-21 ¶¶ 51-52 (2000); Realloca- tion and Service Rules for the 698-746 MHz Spectrum Band (Television Channels 52-59), GN Docket No. 01-74, Report and Order, 17 FCC Rcd the elements of this proposal, including what types of “material relationships” should trigger a restriction on the availability of designated entity benefits and what types of entities other than large in-region incumbent wireless service providers should be covered. 5 3. In the Designated Entity Second Report and Or- der, after reviewing the diverse comments filed in the record and taking into consideration what we have learned in administering the designated entity benefits program, 6 we revised our rules (“Part 1” rules) 7 to in 101a 1022, 1090-91 ¶ 176 (2002). The Commission determines eligibility for its small business provisions based on an entity’s size determined pur- suant to attribution rules. 47 C.F.R. § 1.2110(b)(1)-(3). But see Amend- ment of Part 1 of the Commission’s Rules—Competitive Bidding Pro- cedures, Second Order on Reconsideration of the Third Report and Order and Order on Reconsideration of the Fifth Report and Order, 18 FCC Rcd 10180, 10191-94 ¶¶ 16-18 (2003) (establishing exemption for rural telephone cooperatives from the requirement that gross revenues of entities controlled by an applicant’s officers and directors be attrib- uted to the applicant), modified on reconsideration, Second Order on Reconsideration of the Fifth Report and Order, 20 FCC Rcd 1942 (2005); 47 C.F.R. § 1.2110(b)(3)(iii) (exempting rural telephone cooper- atives from attributing the gross revenues of its officers and directors). 7 See 47 C.F.R. § 1.2101 et. seq. 8 Section 309(j)(4)(D) directs the Commission to issue regula- tions to “ensure” that designated entities “are given the opportunity to participate in the provision of spectrum-based services.” 47 U.S.C. § 309(j)(4)(D). We believe that the word “participate” in this directive contemplates significant involvement in the provision of services to the public, not merely passive ownership of a license to spectrum used by others to provide service. This view is supported by the legislative his- clude certain “material relationships” as factors in de- termining designated entity eligibility. Specifically, we adopted rules to limit the award of designated entity benefits to any applicant or licensee that has “impermis- sible material relationships” or an “attributable material relationship” created by certain agreements with one or more other entities for the lease or resale (including under a wholesale arrangement) of its spectrum capac- ity. We found that these additional eligibility restric- tions were necessary to meet our statutory obligations and to ensure that, in accordance with the intent of Con- gress, every recipient of the Commission’s designated entity benefits is an entity that uses its licenses to di- rectly provide facilities-based telecommunications ser- vices for the benefit of the public. 8 In particular, we deter 102a tory of Section 309(j), in which Congress explains that the reason for imposing anti-trafficking restrictions and unjust enrichment payment obligations on entities that receive small business benefits is to deter “participation in the licensing process by those who have no intention of offering service to the public.” H.R. REP. NO. 103-111, at 257-58 (1993) (Conference Agreement adopted House provisions, in relevant part, with amendments. H.R. CONF. REP. NO. 103-213, at 483 (1993)). 9 Designated Entity Second Report and Order, FCC 06-52, at ¶ 21. mined that the relationships underpinning such leasing and resale agreements underscored the need for stricter regulatory parameters to ensure that benefits were re- served to provide opportunities for designated entities to become robust independent facilities-based service providers with the ability to provide new and innovative services to the public, and to prevent the unjust enrich- ment of unintended beneficiaries. 9 4. In the Further Notice, we also sought comment on whether, if we adopted a new restriction on the award of bidding credits to designated entities, we should adopt revisions to our unjust enrichment rules. We asked over what portion of the license term the unjust enrichment provisions should apply if we decided to re- quire reimbursement by licensees that, either through a change of “material relationships” or assignment or transfer of control of the license, lose their eligibility for a bidding credit pursuant to any eligibility restriction that we might adopt. In the Designated Entity Second Report and Order, after reviewing the filings in the re- cord and taking into account our experience with spec- trum auctions and licensing, we adopted rule modifica- tions to strengthen our unjust enrichment rules in order to better deter entities from attempting to circumvent our designated entity eligibility requirements and to re- capture designated entity benefits when ineligible enti- 103a 10 See 47 C.F.R. § 1.2111. ties control licenses held by designated entities or exert impermissible influence over a designated entity. 10 Spe- cifically, as discussed fully below, we adopted a ten-year unjust enrichment schedule for licenses acquired with bidding credits. 5. Finally, in the Designated Entity Second Report and Order, in order to ensure our continued ability to safeguard the award of designated entity benefits, we explained how we will implement our rules concerning audits, particularly with respect to designated entities that win licenses in the upcoming AWS auction, and re- fined our rules with respect to the reporting obligations of designated entities. In the reconsideration order we adopt today, we provide guidance on these implementa- tion rules as well as on the substantive rules mentioned above. 6. Since Federal Register publication of the Desig- nated Entity Second Report and Order, several parties have submitted filings in this docket addressing various aspects of the order. As mentioned, we take note of sev- eral of these herein, including a series of filings submit- ted jointly by the Minority Media and Telecommunica- tions Council (“MMTC), Council Tree Communications, Inc. (“Council Tree”), and Bethel Native Corporation (“Bethel Native”) (together, “Joint Petitioners”), among which are a petition for expedited reconsideration and two supplements, a motion for expedited stay pending reconsideration or judicial review, and several lengthy ex parte notices. Other parties, including T-Mobile USA, Inc. (“T-Mobile”) and CTIA have filed pleadings in opposition to those of Joint Petitioners. 104a III. DISCUSSION 7. On our own motion, we address arguments that it would violate section 309(j)(3)(E)(ii) of the Communica- tions Act to apply the new designated entity rules adop- ted in the Designated Entity Second Report and Order to the licenses offered in Auction No. 66. We also ad- dress arguments that the Commission did not provide sufficient notice under the Administrative Procedure Act and Regulatory Flexibility Act before adopting its material relationship rules and new unjust enrichment rules. With respect to our material relationship rules, we clarify how we will evaluate impermissible and at- tributable material relationships, including those that are grandfathered, for the purpose of determining eligi- bility for designated entity benefits and the imposition of unjust enrichment. We also respond to arguments that our expansion of the unjust enrichment payment schedule to ten years, and requirement of reimburse- ment of the entire bidding credit amount by designated entities that lose their eligibility for a bidding credit prior to filing the applicable construction notification were arbitrary and capricious. In addition, we clarify that the ten-year schedule applies only to licenses grant- ed after release of the Designated Entity Second Report and Order. Finally, we clarify that our new rule relating to reportable eligibility events includes events that might affect a designated entity’s eligibility under either our new material relationship or existing controlling in- terest standards. A. Section 309(j)(3)(E)(ii) 8. In this section, we address the claim by the Joint Petitioners that adoption of our new rules contravened 105a 11 Petition for Expedited Reconsideration at 22-23. 12 See 47 U.S.C. § 309(j)(3)(E)(ii). 13 Auction of Automated Maritime Telecommunications System Li- censes Scheduled for August 21, 2005, Public Notice, 20 FCC Rcd 7811 (2005). section 309(j)(3)(E)(ii) of the Communications Act. 11 Joint Petitioners specifically assert that our application of the new designated entity rules to the licenses offered in Auction No. 66 violates the section 309(j)(3)(E)(ii) directive that the Commission ensure that, after it is- sues bidding rules, “interested parties have sufficient time to develop business plans, assess market condi- tions, and evaluate the availability of equipment for the relevant services.” 12 We disagree. 9. As an initial matter, we reject Joint Petitioners’ basic assumption that the new designated entity rules implicate section 309(j)(3)(E)(ii) at all. While that provi- sion instructs the Commission to promote the objective of ensuring that interested parties “after the issuance of bidding rules” have “a sufficient time to develop busi- ness plans, assess market conditions, and evaluate the availability of Federal Communications Commission equipment for the relevant services,” the new desig- nated entity rules do not constitute “bidding rules” for purposes of section 309(j)(3)(E)(ii). As the Commission has explained, this provision does not require the Com- mission “to postpone an auction until every external fac- tor that might influence a bidder’s business plan is re- solved with absolute certainty.” 13 Rather, we have indi- cated that the provision applies to “auction-specific in- formation” and “specific mechanisms relating to day-to- day auction conduct including, for example, the struc- ture of bidding rounds and stages, establishment of min- 106a 14 Amendment of Part 1 of the Commission’s Rules—Competitive Bidding Procedures, Third Report and Order and Second Further No- tice of Proposed Rulemaking, 13 FCC Rcd 374, 448 (1997). At the same time, we retained the flexibility to announce minor changes and clari- fications to such mechanisms at any time before the auction. Id. at 448- 49. 15 See Further Notice at ¶ 21. imum opening bids or reserve prices, minimum accept- able bids, initial maximum eligibility for each bidder, activity requirements for each stage of the auction, ac- tivity rule waivers, criteria for determining reductions in eligibility, information regarding bid withdrawal and bid removal, stopping rules, and information relating to auction delay, suspension, or cancellation.” 14 In this case, the new designated entity rules included neither auction-specific information nor specific mechanisms relating to day-to-day auction conduct. Therefore, we do not believe that they fall under the rubric of section 309(j)(3)(E)(ii). 10. Even if, however, we were to agree with the Joint Petitioners that the new designated entity rules somehow implicate section 309(j)(3)(E)(ii), we would still reject their contention that the Commission’s action here runs afoul of the statutory provision. We note that parties were on notice for many months of the Commis- sion’s intent to apply the changes to the designated en- tity rules adopted in this proceeding to licenses issued in Auction No. 66. 15 They thus had ample warning that a change in the designated entity rules was coming and should have been prepared to react as soon as the new rules were announced. Additionally, while the Joint Pe- titioners complain that the then-existing short-form fil- ing deadline for Auction No. 66 was two weeks after the release of the new designated entity rules, auction appli- 107a 16 See 47 C.F.R. § 1.2105(c). As applicants are well aware, filing a short-form application does not commit an applicant to actually partici- pate in the auction or to make any kind of payments to the Commis- sion. See, e.g., Time Warner Cable May Bid in Wireless Auction, MarketWatch.com, May 10, 2006 (www.marketwatch.com, visited May 22, 2006) (“The company added that filing the application ‘does not obli- gate Time Warner Cable or other companies to bid in the auction, but it provides us the flexibility to take part should we decide it makes busi- ness sense to do so.’”). And while filing an application to participate in the auction does subject applicants to certain regulatory restrictions, in practice, these restrictions do not bar a wide array of potential changes parties might wish to make to their business plans. 17 See Auction of Advanced Wireless Services Licenses Rescheduled for August 9, 2006, Revised Schedule, Filing Requirements and Supple- mental Procedures for Auction No. 66, Public Notice, FCC 06-71 (rel. May 19, 2006). cants are permitted, even after the short-form filing deadline, to take a variety of steps “to develop business plans, assess market conditions, and evaluate the avail- ability of equipment for the relevant services,” including adding non-controlling investors at any time before or during the auction. 16 11. In any event, the Commission has rescheduled the deadline for filing short-form applications to partici- pate in Auction No. 66, and interested parties now have until June 19, 2006, or 54 days after the release of the Designated Entity Second Report and Order to file their applications. 17 The auction itself now is scheduled to take place on August 9, 2006, or more than three months after the Commission announced its new designated en- tity rules. In our expert judgment, even assuming that section 309(j)(3)(E)(ii) applies to these rules, this sched- ule provides applicants with more than sufficient time to adjust business plans and reevaluate market conditions 108a 18 The third element covered by Section 309(j)(3)(E)(ii)—evaluation of equipment availability—is not relevant under the circumstances here; neither the change in the designated entity rules nor the delay in the Auction No. 66 schedule would have had any conceivable effect on a potential bidder’s evaluation of equipment availability. 19 We note that in its Further Supplement to Motion for Expedited Stay (“Further Supplement”), Joint Petitioners assert that “the Com- mission has established a standard practice that significant changes to the core bidding rules contained in Subpart Q will only become effective sixty days following publication in the Federal Register.” Further Sup- plement at 2, n.2 (emphasis in original). Contrary to Joint Petitioners’ assertion, the Commission always has evaluated how much time is need- ed in order to satisfy the Section 309(j)(3)(E)(ii) objectives as an ad hoc determination based on our expert assessment of all the factors, in- cluding the extent of the rule changes involved, the circumstances of the given auction and service at issue, the conditions of the market and the public needs during the general timeframe of the auction, and the po- tentially competing considerations of the other relevant statutory objec- tives in Section 309(j) (and in other applicable provisions) of the Com- munications Act. Rather than acknowledge this fact, the Joint Petition- ers concoct a “standard practice” based solely on the Commission pro- viding such a sixty-day period when it “established a uniform set of pro- visions for all auctionable services” by modifying rules governing status as a designated entity; governing auction application and payment issues; and governing competitive bidding design, procedure, and tim- ing issues. See Amendment of Part 1 of the Commission’s Rules— Competitive Bidding Procedures, Third Report and Order and Second Further Notice of Proposed Rule Making in WT Docket No. 97-82, 13 FCC Rcd 374, 377-79 (1997) (three page “executive summary”). The scope of the Designated Entity Second Report and Order is hardly so broad. Finally, we note again that Auction No. 66 is now scheduled to commence more than three months after release of the Second Report and Order. in light of the new designated entity rules. 18 Along these lines, we note that Joint Petitioners nowhere provide any estimate of what would be a sufficient period of time for designated entities to adjust to the new rules. 19 Rather, they appear to argue that so long as the new 109a 20 Motion for Expedited Stay at 4-5. As explained infra, the Commis- sion strongly disagrees with this claim. 21 See Declaration of Steve C. Hilliard, Council Tree Communications, Inc., at ¶ 8 (attached to Further Supplement to Motion for Expedited Stay). See also Further Supplement to Motion for Expedited Stay at 10 (“BNC’s or Council Tree’s circumstances would not and will not change until the FCC’s rules change.”). rules are in place, they will be unable to participate in the auction. For example, while Bethel Native Corpora- tion contends that it will be able to participate in Auc- tion No. 66 if the new rules were no longer to apply to the licenses awarded in the auction, nowhere does it make a similar representation that it would be able to participate in Auction No. 66 if given a sufficient period of time to adjust to the new rules, which is not surpris- ing given Joint Petitioners’ claim that the new rules “have the practical effect of eviscerating a designated entity’s access to capital.” 20 Likewise, Council Tree claims: “[I]t will be virtually impossible as a practical matter to reconstruct or develop new business plans or financing alternatives for Designated Entities so long as the new rules are on the books. A mere postponement of the AWS auction is not sufficient under these circum- stances.” 21 As a result, it is apparent that the Joint Peti- tioners’ real objection is to the substance of the new rules and not to questions of timing under section 309(j)(3)(E)(ii). 12. Additionally, it is important to note that section 309(j)(3) requires the Commission to balance several statutory objectives. As the Commission has previously stated, “while Section 309(j)(3)(E) directs the Commis- sion to provide interested parties adequate time to pre- pare prior to an auction, the statute also requires that the Commission promote several other objectives in ex- 110a 22 Auction of Automated Maritime Telecommunications System Lic- enses Scheduled for August 21, 2005, Public Notice, 20 FCC Rcd 7811 (2005). 23 See, e.g., T-Mobile Reply Comments at 4. 24 See, e.g,. Comments of T-Mobile USA, Inc., AU Docket No. 06-3 at 2 (filed Feb. 14, 2006). 25 Comments of Rural Telecommunications Group and Organization for the Promotion and Advancement of Small Telecommunications Companies at 6. ercising its competitive bidding authority, including the rapid deployment of new technologies and services to the public, promotion of economic opportunity and com- petition, recovery for the public of a portion of the value of the spectrum and avoidance of unjust enrichment, and efficient and intensive use of the spectrum.” 22 Two of these other statutory objectives are of particular impor- tance here: (1) promoting the development and rapid deployment of new technologies, products, and services public; and (2) avoiding unjust enrichment. We believe that these objectives impose on us here an obligation to avoid unnecessary or unreasonable delays of Auction No. 66. We have evidence that potential bidders have an immediate need for the licenses that will be offered in Auction No. 66 23 and that delaying the auction would impair the rapid deployment of affordable wireless ser- vice to the public. 24 Indeed, there is evidence in the re- cord that suggests that delaying the auction further will impede the ability of smaller entities to successfully ob- tain licenses in Auction No. 66, 25 even though Joint Peti- tioners claim that our new rules will deter small busi- nesses from participating in the auction. The alternative proposed by the Joint Petitioners of holding Auction No. 66 as currently scheduled but setting aside our new des- ignated entity rules with respect to the licenses offered 111a 26 Petition for Expedited Reconsideration at 4-8. 27 See, e.g., Ex Parte of the U.S. Department of Justice at 4 (support- ing the strengthening of designated entity rules due to the fact that designated entities in the past have not always been truly independent competitive actors). 28 Further Supplement at 2. 29 See Council Tree Comments at viii, 61-62. Petitioner Minority Media and Telecommunications Council also espoused this view. See Comments of Minority Media and Telecommunications Council at 7-8. 30 See id. at 61. in that auction, 26 would put us in the position of neglect- ing our statutory duty to avoid unjust enrichment by assuring that designated entity benefits go to those enti- ties that use their licenses to provide facilities-based services for the benefit of the public. 27 The additional alternative proposed by Joint Petitioners of delaying the auction to allow further comment on the rules adopted in the Designated Entity Second Report and Order 28 would constitute unreasonable delay in light of our stat- utory obligation to promote the development and rapid deployment of services for the benefit of the public. For all of these reasons, we continue to believe that we have reasonably balanced the objectives set forth in section 309(j)(3) and that proceeding with the auction as sched- uled would best serve the public interest. 13. Finally, it is worth noting that Council Tree, in its comments in this proceeding, previously supported the Commission’s proposal to apply new designated en- tity rules to the licenses offered in Auction No. 66. 29 And, at the same time, Council Tree took the position that Auction No. 66 should not be delayed. 30 When Council Tree made these comments, it was well aware of the general timeframe under which the Commission was 112a 31 See id. at 61. 32 See, e.g., Caribbean Shippers Ass’n, Inc. v. Surface Transp. Bd., 145 F.3d 1362 (D.C. Cir. 1998); Harbor Ins. Co. v. Schnabel Found. Co., 946 F.2d 930, 937 & n.5 (D.C. Cir. 1991) (subcontractor asserted con- tractor was negligent for relying on subcontractor’s advice). 33 Supplement to Motion for Expedited Stay Pending Reconsideration or Judicial Review and Petition for Expedited Reconsideration at 9. 34 Supplement to Motion for Expedited Stay Pending Reconsideration or Judicial Review and Petition for Expedited Reconsideration at 7-10. operating, both with respect to this proceeding as well as the date of the auction. Indeed, recognizing the po- tentially tight time window at issue, Council Tree even urged the Commission, if necessary, to make the new designated entity rules effective immediately upon pub- lication in the Federal Register, rather than with the normal thirty-day delay, so that the new rules could ap- ply to the licenses offered in Auction No. 66, and the auction could be held on time. 31 And this was despite the fact that Council Tree was advocating even broader changes to the designated entity rules than those the Commission ultimately decided to adopt. In light of this history, we believe that Council Tree’s current claim that the Commission has violated section 309(j)(3)(E)(ii) by applying the new designated entity rules to the li- censes offered in Auction No. 66 and delaying the auc- tion for over one month runs afoul of what the United States Court of Appeals for the District of Columbia Circuit has termed the “chutzpah doctrine.” 32 B. Material Relationships 14. Notice. In their Supplement, Joint Petitioners argue that we violated the Administrative Procedure Act 33 by adopting the new material relationship rules. 34 113a 35 Northeast Md. Waste Disposal Auth. v. EPA, 358 F.3d 936, 951 (D.C. Cir. 2004). 36 Id. 37 Id. 38 Id. 39 Further Notice ¶ 6. They contend, first, that we failed to give sufficiently specific notice, and thus sufficient opportunity for com- ment, on the new restrictions on leasing and resale ar- rangements. Second, they argue that we made certain aspects of the rules immediately effective without the requisite statutory notice. We find both claims uncon- vincing. 15. It is settled that an agency “is not required to adopt a final rule that is identical to the proposed rule.” 35 In fact, “[a]gencies are free—indeed, they are encouraged—to modify proposed rules as a result of the comments they receive.” 36 If they were not free to do so, agencies “could learn from the comments on [their] pro- posals only at the peril of subjecting [themselves] to rulemaking without end.” 37 As long as parties could have anticipated that the rule ultimately adopted was “possible,” it is considered a “logical outgrowth” of the original proposal, and there is no violation of the APA’s notice requirements. 38 16. Applying these standards, it is clear that there was ample notice of the new material relationship rules in this case. The Further Notice emphasized the Commis- sion’s ongoing commitment “to prevent[ing] companies from circumventing the objectives of the designated en- tity eligibility rules” 39 and to ensuring that “its small business provisions [are] available only to bona fide 114a 40 Id. ¶ 7. 41 Id. ¶ 12. 42 Id. ¶ 13. 43 Id.; see also id. ¶ 19 (asking whether “additional entities” should be added to the list of those with which a designated entity may not have a “material relationship” without losing its status). We offered as an ex- ample of such a relationship one between “an otherwise qualified desig- nated entity and an ‘entity with significant interests in communications services.’” Id. ¶ 13. Our use of “such as” before this example makes clear that it was not the only one contemplated. In any event, insofar as the Commission sought comment on a far broader definition of the class of entities with whom a designated entity’s material relationship might trigger the restriction of benefits, it should have been obvious to commenters that there was a possibility that an adopted restriction could apply to any relationships that the Commission deemed to be “material.” small businesses.” 40 After discussing existing rules, we noted Council Tree’s concern that those rules did “not adequately prevent large corporations from structuring relationships in a manner that allows them to gain ac- cess to benefits reserved for small businesses.” 41 We then took note of Council Tree’s specific proposal for addressing this concern, namely that designated entity benefits be withheld from any prospective licensee that has a “material relationship” with a “large, in-region incumbent wireless service provider.” 42 While we tenta- tively proposed adoption of Council Tree’s rule, we also sought comment “on whether other ‘material relation- ships’ . . . should trigger a restriction on the award of designated entity benefits.” 43 Similarly, we asked whether limiting the prohibited “material relationships” to “large incumbent wireless service providers” or enti- ties “with significant interests in communications ser- vices” would be “sufficient to address any concerns that 115a 44 Further Notice ¶ 15. 45 Further Notice ¶ 13. 46 Id. 47 Id. ¶ 16. We noted that where “substantially all of the spectrum ca- pacity of the licensee is to be leased” would effectively create an affiliate relationship between lessor and lessee, while lease of only “a small por- tion” of the capacity would not. See id. ¶ 16 n.38. our designated entity program may be subject to poten- tial abuse from larger corporate entities.” 44 17. In addition to contemplating a broad range of entities beyond the narrow category proposed by Coun- cil Tree, the Further Notice made clear that we were considering several approaches to defining a “material relationship.” We noted that Council Tree proposed that a “material relationship” would exist based on, inter alia, “any material operational arrangement . . . (such as management, joint marketing, trademark, or other arrangements.)” 45 We did not tentatively propose adopt- ing that definition, however, but instead broadly sought comment “on the specific nature of the relationship that should trigger such a restriction.” 46 18. Contrary to Council Tree’s claim that it had no notice that an arrangement such as lease or resale could constitute a “material relationship,” the Further Notice specifically contemplated it. We noted that in our Sec- ondary Markets proceeding, we had concluded “that cer- tain spectrum manager leases between a designated entity licensee and a non-designated entity lessee would cause the spectrum lessee to become an attributable affiliate of the licensee, thus rendering the licensee ineli- gible for designated entity benefits and making such a spectrum lease impermissible.” 47 We then sought com- ment on whether we should follow a similar approach 116a 48 Id. 49 Id. 50 See, e.g., Comments of CTIA—The Wireless Association filed Feb- ruary 24, 2006; Comments of Verizon Wireless filed February 24, 2006; Comments of Cook Inlet Region, Inc. filed February 24, 2006; Com- ments of The Minority Media and Telecommunications Council filed February 24, 2006; Comments of National Hispanic Media Coalition filed February 24, 2006. 51 Comments of Dobson Communications Corporation at 2 (filed Feb- ruary 24, 2006). here: “We seek comment on what, if any, standard should be used to determine whether a spectrum leasing arrangement is a ‘material relationship’ for the purpose of any additional restriction on the availability of desig- nated entity benefits that we might adopt.” 48 We went on to ask “whether other arrangements should be taken into account” and “[i]f so, what arrangements should we consider?” 49 19. The comments filed in response to the Further Notice reflected the broad scope of the questions posed there, and they ranged from those suggesting a com- plete overhaul of the Commission’s designated entity eligibility rules to those recommending that we maintain the status quo. 50 Commenting parties clearly under- stood that the Commission was contemplating rule changes that would extend beyond material relation- ships with incumbent wireless carriers. For example, Dobson Communications Corporation noted that the Commission had sought comment “as to whether . . . restrictions should be placed on DEs that partner with other large companies that are not in-region wireless carriers.” 51 Dobson urged the Commission to do so, ar- guing that “[i]f it is proven true that the benefits de- signed for small businesses are instead being realized by 117a 52 Id. 53 Comments of Council Tree Communications, Inc. at 35-41 (filed February 24, 2006). 54 See, e.g., Comments of MMTC at 6 & n.16 (discussing spectrum lease and resale arrangements as examples of entities “manipulating the [DE] program”); Comments of Council Tree filed February 24, 2006, at 50 (“material operating arrangement” should cover all arrange- ments other than “non-discriminatory roaming” agreement or “short- term de facto transfer leasing arrangement”); Reply Comments of Council Tree filed March 3, 2006, at 31 (discussing resale arrangements between DEs and incumbent wireless carriers). 55 Designated Entity Second Report and Order ¶ 23. large strategic investors, it surely should not matter whether that investor is an in-region incumbent wireless service provider or not.” 52 Council Tree, on the other hand, argued that the prohibition should remain nar- rowly circumscribed to only large incumbent wireless carriers. 53 Likewise, parties clearly understood that arrangements such as spectrum leases could constitute “material relationships” and commented on the sub- ject. 54 20. Based on a review of those comments, and given our experience in awarding designated entity benefits, we determined that we should modify our rules to achieve Congress’s objectives of preventing unjust en- richment and promoting true participation by designa- ted entities in the provision of spectrum-based services for the benefit of the public. We concluded that “certain agreements” between designated entities and others are “by their very nature . . . generally inconsistent with Congress’s legislative intent,” regardless of what other kind of entity they involve. 55 Specifically, we explained that “where an agreement concerns the actual use of the designated entity’s spectrum capacity, it is the agree- 118a 56 Designated Entity Second Report and Order ¶ 23. ment, as opposed to the party with whom it is entered into, that causes the relationship to be ripe for abuse and creates the potential for the relationship to impede a designated entity’s ability to become a facilities-based provider, as intended by Congress.” 56 Accordingly, we adopted rules in the Designated Entity Second Report and Order to limit the award of designated entity bene- fits to any applicant or licensee that has “impermissible material relationships” or an “attributable material rela- tionship” created by agreements with one or more other entities for the lease or resale (including under a whole- sale arrangement) of its spectrum capacity. 21. These rules were a logical outgrowth of the ques- tions we asked in the Further Notice and are well within the scope of the inquiry initiated there. The fact that we elected to adopt a definition of material relationship that differed from that specifically proposed by Council Tree does not mean that we failed to provide notice of the rule modifications we ultimately adopted. We therefore re- ject Joint Petitioners’ APA notice claim regarding the material relationship rules. 22. Second, we also disagree with the Joint Petition- ers’ contention that we made certain aspects of the rules immediately effective and find that such an argument is based on a gross misreading of the rule. The reference to the date of the release in the new rule did not impose any consequences on parties immediately following the date of release. Rather, once the rules became effec- tive—30 days after Federal Register publication—ac- tions taken following the release might affect a party’s status, but only if not undone in the period before the 119a rule became effective. Thus, parties had the requisite period of notice to adjust in response to the new rule. 23. Requests for General Clarification. In addition to the arguments raised by the Petitioners, after releas- ing the Designated Entity Second Report and Order staff received a number of questions seeking general advice regarding how the Commission intended to im- plement its rule modifications. We therefore clarify how we will consider: (1) the meaning of “spectrum capacity” in the context of material relationships, (2) grandfather- ing, and (3) applicability of the rules to particular ser- vices. 24. Material Relationships. A number of questions have been raised regarding how the Commission will evaluate impermissible and attributable material rela- tionships for the purposes of determining eligibility for both designated entity benefits and the imposition of unjust enrichment. In the Designated Entity Second Report and Order, we concluded that an applicant or licensee has “impermissible material relationships” when it has agreements with one or more other entities for the lease (under either spectrum manager or de facto transfer leasing arrangements) or resale (including un- der a wholesale arrangement) of, on a cumulative basis, more than 50 percent of the spectrum capacity of any individual license. We decided that such “impermissible material relationships” would render the applicant or licensee (i) ineligible for the award of future designated entity benefits, and (ii) subject to unjust enrichment on a license-by-license basis. We further concluded that an applicant or licensee has an “attributable material rela- tionship” when it has one or more agreements with any individual entity, including entities and individuals 120a 57 Designated Entity Second Report and Order at ¶ 27. attributable to that entity, for the lease (under either spectrum manager or de facto transfer leasing arrange- ments) or resale (including under a wholesale arrange- ment) of, on a cumulative basis, more than 25 percent of the spectrum capacity of any individual license that is held by the applicant or licensee. We decided that such an “attributable material relationship” would be attrib- uted to the applicant or licensee for the purposes of de- termining the applicant’s or licensee’s (i) eligibility for future designated entity benefits, and (ii) liability for un- just enrichment on a license-by-license basis. As stated in the Designated Entity Second Report and Order, the Commission’s policy is to assure that a designated entity preserves at least half of the spectrum capacity of each license for which the designated entity has been award- ed and retained designated entity benefits in exchange for the provision of service as a facilities-based provider for the benefit of the public. 57 25. Meaning of Spectrum Capacity. We also take this opportunity to clarify how we will measure compli- ance with the thresholds we adopted in our definitions of material relationships. The restrictions we adopted re- garding impermissible and attributable material rela- tionships require a designated entity to assess the per- centage of its spectrum capacity that will be leased (un- der either spectrum manager or de facto transfer leas- ing arrangements) or subject to resale (including under a wholesale arrangement). Since release of the Desig- nated Entity Second Report and Order, parties have asked us to clarify the meaning of “spectrum capacity.” Accordingly, we provide additional guidance on deter- 121a 58 See 47 C.F.R. §1.2111(e). mining the percentage of a designated entity’s spectrum capacity involved in lease or resale agreements. 26. We observe, as an initial matter, that there are a number of ways “spectrum capacity” could be defined. It would be difficult for the Commission to enumerate every possible means by which a licensee could lease or make its spectrum capacity available to another party to resell. By adopting “spectrum capacity” as a measure- ment, we sought to provide licensees with some flexibil- ity to tailor their agreements to their business needs. We thus are reluctant to employ only a single measure of “spectrum capacity.” Nevertheless, to assist desig- nated entities as they evaluate secondary market trans- actions, we clarify that if they meet the spectrum capac- ity thresholds on a MHz * pops basis, the Commission will find them in compliance. The MHz * pops basis is consistent with the Commission’s current method of ap- portioning unjust enrichment when licenses are parti- tioned and/or disaggregated and provides a meaningful measure here. 58 However, while meeting the spectrum capacity thresholds on a MHz * pops basis is sufficient to comply with our rules, it is not the only means of com- pliance. In other words, any entity meeting the thresh- olds on a MHz * pops basis will be found in compliance, but entities not meeting the thresholds on a MHz * pops basis may also be found in compliance based on other factors. The MHz * pops measure is intended as a safe harbor; it is not meant to limit complying with the rules in other ways that we cannot fully anticipate at this time. We recognize that our decision not to enumerate all other means of compliance necessarily leaves some uncertainty, but we think that the MHz * pops safe har- 122a bor provides sufficient certainty while allowing licensees and the Commission flexibility to conduct a more contex- tual analysis. 27. Grandfathering. In the Designated Entity Sec- ond Report and Order, we explained that we would not employ our new restrictions to reconsider the eligibility for any designated entity benefits that had been award- ed to licensees prior to the April 25, 2006, release date of the decision or to determine eligibility for designated entity benefits in an application for a license, an authori- zation, or an assignment or transfer of control, or a spectrum lease that had been filed with the Commission before, and was still pending approval on, that date. 28. We received a number of inquiries regarding how the Commission will consider future agreements that were “agreed upon” prior to the release date of our decision. We therefore offer the following explanation. Agreements entered into by a designated entity—and, to the extent required, approved by or pending approval by the Commission—no later than April 24, 2006 that concern the lease or resale of the designated entity’s spectrum capacity after the release date of the Desig- nated Entity Second Report and Order are grandfath- ered for the purposes of existing eligibility benefits and the imposition of unjust enrichment to the extent that the designated entity has no discretion as to the future lease or resale. For example, if a designated entity li- censee had entered into an agreement on or before April 24, 2006 pursuant to which it was required to make 26 percent of its spectrum capacity available to Company B for resale purposes in 2007, that agreement would be grandfathered and therefore would not affect the licen- see’s eligibility for existing designated entity benefits 123a 59 The agreement would still count toward any assessment of whether the designated entity retained a controlling interest in the license, how- ever. 60 We note that the designated entity would not be able to make this legal commitment without the advance approval of the Commission. See 47 C.F.R. § 1.2114. for that license nor would it trigger any future unjust enrichment obligations for that license. Even though Company B could not begin reselling the designated en- tity’s spectrum until 2007, its unequivocal right to do so had been contractually established before the release date of the Designated Entity Second Report and Order. 59 29. If, however, the agreement allowed the desig- nated entity to decide at some future point in time whether it would make spectrum available to Company B for resale purposes, and the designated entity did not legally commit itself to the resale until after April 24, 2006, the agreement for resale would, on the date the designated entity made the legal commitment, give rise to an attributable material relationship and also would be considered in calculating whether the designated en- tity had entered into impermissible material relation- ships. 60 Accordingly, the agreement might have implica- tions for the designated entity’s ongoing eligibility for designated entity benefits for that license and unjust en- richment obligations. This result would occur even if the agreement had, prior to the release date of the Desig- nated Entity Second Report and Order, already been re- viewed and approved by the Commission. Thus, the ap- plicability of grandfathering to the future lease or resale of spectrum in a pre-existing agreement depends on whether or not the provision was a “done deal” such 124a 61 This analysis is analogous to the one we use for evaluating whether the future ownership interests of a designated entity’s investor are to be treated as “fully diluted” and thus immediately attributable to the designated entity. See Competitive Bidding Fifth MO&O, 10 FCC Rcd at 454-56, ¶¶ 93-96. 62 See Promoting Efficient Use of Spectrum through Elimination of Barriers to the Development of Secondary Markets, WT Docket No. 00-230, Second Report and Order, Order on Reconsideration, and Second Further Notice of Proposed Rulemaking, 19 FCC Rcd 17503, 17528-36 ¶¶ 51-66 (2004) (“Secondary Markets Second Report and Order”). 63 See 47 C.F.R. § 1.9005; Promoting Efficient Use of Spectrum Through Elimination of Barriers to the Development of Secondary Markets, Report and Order and Further Notice of Proposed Rulemak- ing, 18 FCC Rcd 20604 (2003) (Report and Order and Further Notice, respectively), Erratum, 18 FCC Rcd 24817 (2003); Secondary Markets Second Report and Order, 19 FCC Rcd 17503 (2004). that, prior to April 25, 2006, the decision to lease or to allow the resale of spectrum was no longer within the discretion of the designated entity. 61 30. Applicability of Material Relationships Rules to Certain Services. There has also been some question about the applicability of the new material relationship rules with regard to agreements to lease spectrum in the 700 MHz Guard Band Manager Service and those other services not covered by our secondary market leasing policies. 62 Consequently, we clarify that the new mate- rial relationship rules will apply only to those services in which leasing is permitted under our secondary markets rules. 63 C. Unjust Enrichment 31. Notice. In their petition for expedited reconsid- eration of the Designated Entity Second Report and 125a 64 Petition for Expedited Reconsideration at 18-22. These parties also argue that the Commission released its new unjust enrichment provi- sions too close to the short-form application deadline for Auction No. 66. Id. at 5-6. 65 Further Notice at ¶ 20. 66 Id. 67 Id.; see 47 U.S.C. § 309(j)(4)(E); 47 C.F.R. § 1.2111(d). Order, the Joint Petitioners argue that the Commission violated the Administrative Procedure Act by giving inadequate notice and opportunity for comment prior to adopting new unjust enrichment provisions. 64 This claim is refuted by the plain language of the Further Notice and by the Joint Petitioners’ own filings in response to it. 32. In the Further Notice, we observed that the Com- mission’s existing rules “require the payment of unjust enrichment when an entity that acquires its license with small business benefits loses its eligibility for such bene- fits or transfers a license to another entity that is not eligible for the same level of benefits.” 65 We also noted that Council Tree had proposed extending this “reim- bursement obligation” to any licensee that acquires a license with the help of a bidding credit but then “makes a change in its ‘material relationships’ or seeks to assign or transfer control of the license to an entity that would result in its loss of eligibility for the bidding credit pur- suant to any eligibility restriction that we adopt.” 66 Ac- cording to Council Tree, strengthening the unjust en- richment rules was “necessary to fulfill the Commis- sion’s statutory obligation to prevent unjust enrich- ment.” 67 The Further Notice sought comment both on Council Tree’s specific proposal and on whether we should seek to strengthen the unjust enrichment rules 126a 68 Further Notice at ¶ 20. 69 Id. 70 Id. “in some other manner.” 68 We also asked a series of questions about the scope of the reimbursement obliga- tion, seeking comment on whether it should be triggered only “where the licensee takes on new investment” or also when it “enters into any new ‘material financial rela- tionship’ or ‘material operational relationship’ that would have rendered the licensee ineligible for a bidding credit.” 69 Finally, while we noted Council Tree’s propos- al for a five-year reimbursement obligation, we did not even tentatively propose adopting it; instead, we asked “over what portion of the license term should . . . un- just enrichment provisions apply?” 70 33. Notwithstanding the broad scope of the ques- tions asked by the Further Notice, Council Tree claims that parties had no notice that we were contemplating any changes to our unjust enrichment rules other than those specifically proposed by Council Tree. As the above discussion of the Further Notice makes clear, we did not put ourselves in such a straitjacket, and it would have been unreasonable for any party to believe that we had done so. Nowhere did we say we would consider only a five-year reimbursement obligation or that we would artificially limit the rule changes only to relation- ships with particular entities. 34. Indeed, the comments filed in response to the Further Notice demonstrate that parties did in fact un- derstand the scope of the contemplated changes to the unjust enrichment rules. Council Tree itself squarely acknowledged that “[t]he Commission also seeks com- 127a 71 Comments of Council Tree at 58 (citing the Further Notice at ¶ 20). 72 Id. 73 Designated Entity Second Report and Order, FCC 06-52, at ¶ 35, referencing the Comments of MMTC at 15. Without explanation, MMTC proposed that the Commission adopt such a change in its unjust enrichment rules only after “initiating a [new] inquiry,” i.e. rule making. MMTC expressly acknowledged, however, that in the Further Notice “[t]he Commission asks whether it should expand the scope of its unjust enrichment rules[.]” Given acknowledgement of this request, it is un- clear why MMTC sought a further proceeding to adopt its proposal. 74 Id. 75 Designated Entity Second Report and Order, FCC 06-52, at ¶ 35, referencing the Comments of STX at 2. ment regarding over what portion of the license term should the unjust enrichment provisions apply.” 71 Coun- cil Tree went on to advocate retention of a five-year time period. 72 On the other hand, MMTC, another of the Joint Petitioners now claiming lack of notice, urged “the Commission [to] consider expanding the unjust enrich- ment standard to encompass the entire license term and not just the first five years.” 73 MMTC also suggested that the Commission consider adjusting its reimburse- ment obligations to require repayment of 100 percent of the value of the bidding credit. 74 Similarly, STX sup- ported “stricter unjust enrichment rules so that the U.S. Treasury may be made whole in the event that a desig- nated entity turns out to have been merely a front orga- nized to secure bidding credits for a large incumbent wireless service provider.” 75 35. The changes we ultimately adopted to our unjust enrichment rules were clearly within the scope of the revisions contemplated by the Further Notice or, at a minimum, a logical outgrowth of them. Indeed, had we only revised the five-year unjust enrichment schedule 128a 76 See Designated Entity Second Report and Order, FCC 06-52, at ¶ 31; see also 47 C.F.R. § 1.2111(b)-(e). 77 See Designated Entity Second Report and Order, FCC 06-52, at ¶ 36. 78 See Designated Entity Second Report and Order, FCC 06-52, at ¶ 37. 79 See Designated Entity Second Report and Order, FCC 06-52, at ¶ 38. for certain types of transactions but not for others, we would have risked creating an illogical scheme that would have created an incentive for designated entities to prioritize certain types of transactions over others. For all of these reasons, we reject the Joint Petitioner’s APA notice claim. 36. Impact of New Rules. In the Designated Entity Second Report and Order, we adopted changes to our unjust enrichment rules to ensure that designated entity benefits go to their only intended beneficiaries. 76 We agreed with commenters that the adoption of stricter unjust enrichment rules would increase the probability that the designated entity would develop into a competi- tive facilities-based service provider and deter specula- tion by those who do not intend to offer service to the public, or who intend to use bidding credits to obtain a license at a discount and later to sell it at the full market price for a windfall profit. 77 37. We therefore modified our unjust enrichment rules to expand the unjust enrichment payment schedule from five to ten years. 78 Further, we required that the Commission be reimbursed for the entire bidding credit amount owed if a designated entity loses its eligibility for a bidding credit prior to the filing of the applicable construction notifications. 79 Specifically, we adopted the 129a 80 See Designated Entity Second Report and Order, FCC 06-52, at ¶ 46, n.116 (discussing additional events that could result in a possible loss of designated entity eligibility). 81 Designated Entity Second Report and Order, FCC 06-52, at ¶ 37. 82 Id. 83 Id. If a designated entity loses its eligibility for the same level of bidding credit that it originally received for any reason, this unjust en- richment schedule will be applied to the difference between the original bidding credit and the bidding credit for which the designated entity, assignee, or assignor is eligible. See id. We also noted that the provi- sions of section 1.2112(e) of the Commission’s rules may also apply. See id. n.106 (citing 47 C.F.R. § 1.2112(e) (discussing the assessment of un- just enrichment in the context of the partition and/or disaggregation of licenses)). following ten-year unjust enrichment schedule for li- censes acquired with bidding credits. For the first five years of the license term, if a designated entity loses its eligibility for a bidding credit for any reason, 80 including but not limited to, entering into an “impermissible mate- rial relationship” or an “attributable material relation- ship,” seeking to assign or transfer control of a license, or entering into a de facto transfer lease with an entity that does not qualify for bidding credits, 100 percent of the bidding credit, plus interest, is owed. 81 For years six and seven of the license term, 75 percent of the bidding credit, plus interest, is owed. 82 For years eight and nine, 50 percent of the bidding credit, plus interest, is owed, and for year ten, 25 percent of the bidding credit, plus interest, is owed. 83 We also imposed a requirement that the Commission must be reimbursed for the entire bid- ding credit amount owed, plus interest, if a designated entity loses its eligibility for a bidding credit for any 130a 84 Designated Entity Second Report and Order, FCC 06-52, at ¶ 46, n.116 (discussing additional events that could result in a possible loss of designated entity eligibility). 85 Designated Entity Second Report and Order, FCC 06-52, at ¶ 38. For example, if a designated entity seeks to assign a license with a bid- ding credit to an entity that is not eligible for bidding credits eight years after the grant of the license and prior to the filing of the con- struction notification, 100 percent of the bidding credit, plus interest, will be owed, rather than the 50 percent unjust enrichment payment that would have been due had the construction notification been on file with the Commission, pursuant to the revised unjust enrichment sche- dule, above. Id. 86 Petition for Expedited Reconsideration at 3-4. 87 Petition for Expedited Reconsideration at 10. reason, 84 including but not limited to, entering into an “impermissible material relationship” or an “attribut- able material relationship,” seeking to assign or transfer control of a license, or entering into a de facto transfer lease with an entity that is not eligible for bidding cred- its prior to the filing of the notification informing the Commission that the construction requirements applica- ble at the end of the license term have been met. 85 38. Joint Petitioners assert that the new provisions will eliminate designated entities’ access to capital and financing. For several reasons, these claims do not jus- tify reconsideration of the recent rule changes. 39. First, Joint Petitioners contend that the new unjust enrichment rules “have the practical effect of eliminating a designated entity’s access to capital by closing an accepted exit path if the business is not going well.” 86 This is so because, according to Joint Petition- ers, “private equity and other investors frequently ad- here to three to seven year investment horizons, with five being an accepted average.” 87 Joint Petitioner’s 131a 88 Ex parte Letter from James N. Perry, Jr., Managing Director for Madison Dearborn Partners, LLC to Marlene H. Dortch, Federal Communications Commission (dated March 31, 2006) in WT Docket No. 03-66 at 1. 89 See, e.g., Amendment of Parts 1, 21, 73, 74 and 101 of the Commis- sion’s Rules to Facilitate the Provision of Fixed and Mobile Broadband Access, Educational and Other Advanced Services in the 2150-2162 and 2500-2690 MHz Bands, WT Docket No. 03-66, Third Memorandum Opinion and Order, FCC 06-46 (rel. April 27, 2006), at ¶¶ 258-60 (com- ments of Madison Dearborn Partners, Inc., various schools and univer- sities, George Mason University Instructional Foundation, Inc.). 90 Nextel Opposition to Petition for Reconsideration in WT Docket No. 03-66 at 18-19. 91 See, generally, Amendment of Parts 1, 21, 73, 74 and 101 of the Commission’s Rules to Facilitate the Provision of Fixed and Mobile assertions regarding “accepted averages” do not demon- strate, however, that designated entities access to capi- tal will be eliminated. Indeed, we are not convinced that three to seven years is a reasonable timeframe for inves- tors to expect to recover their capital investments in facilities to provide spectrum-based services. In a re- cently concluded proceeding addressing the leasing of Educational Broadcast Service spectrum, a broad cross- section of commenters, including a private equity invest- ment firm, 88 submitted evidence that insufficient capital would flow to businesses that want to develop that spec- trum if the length of spectrum lease terms was limited to fifteen years. 89 These parties argued that lessees needed access to the spectrum for thirty years or more in order to provide the necessary certainty to justify capital investment in the band. 90 The Commission was “persuaded by the analyses presented by commenters indicating the difficulty that commercial lessees may have in obtaining financing if leases are limited to a shorter duration” than thirty years. 91 Given our recent 132a Broadband Access, Educational and Other Advanced Services in the 2150-2162 and 2500-2690 MHz Bands, WT Docket No. 03-66, Third Memorandum Opinion and Order, FCC 06-46 (rel. April 27, 2006), ¶268 (permitting EBS licensees to enter into leases with terms of up to 30 years based on “analyses presented by commenters indicating the difficulty that commercial lessees may have in obtaining financing if leases are limited to a shorter duration”). 92 Id. finding that access to Educational Broadcast Service spectrum for longer than fifteen years is essential to at- tract the capital needed to deploy facilities for spectrum based services, we are not convinced that the appropri- ate investment horizon for designated entity status should be only three to seven years. 92 Designated entity benefits are offered to ensure that small businesses have an opportunity to participate in the provision of spectrum-based services, not to ensure the short-term “exit strategies” of parties providing capital. The Com- mission strengthened its rules to ensure that those that receive such benefits were properly motivated to build out their spectrum and provide services for the benefit of the public by closing off the opportunity to sell li- censes awarded with bidding credits for huge profits without ever having to provide actual facilities based services. The Joint Petitioners’ predictions regarding the new rules’ effect on venture capital alone are not a basis for reconsidering the rules. 40. Second, even if some sources of financing and capital would no longer be available on the same terms as before, the adoption of new rules is not arbitrary and capricious, or otherwise contrary to law. The Commis- sion must balance the various statutory objectives of Section 309(j), and based on the record in response to the Further Notice and many years of experience, we 133a 93 See Designated Entity Second Report and Order, FCC 06-52, at ¶ 36. 94 Secondary Markets Second Report and Order at ¶ 70. 95 See id. found that the new unjust enrichment rules are neces- sary to increase the probability that designated entities will develop into facilities-based providers of service for the benefit of the public. 93 Again, it is neither the Com- mission’s statutory responsibility nor its intent merely to provide small businesses with generalized economic opportunities in connection with spectrum licenses. 94 The Commission has not been charged with providing entities with a path to financial success, but rather with an obligation to facilitate opportunities for small busi- nesses to provide spectrum based services to the pub- lic. 95 Therefore, it is our responsibility to create strong incentives for designated entities to use spectrum to provide facilities-based service to the public instead of holding their licenses and selling them for profit. We believe that our new rules create appropriate incentives in this regard while still affording designated entities the opportunity to achieve financial success by providing service to the public. It is important to remember that designated entities are provided with bidding credits in order to enable them to obtain spectrum and then pro- vide facilities-based service to the public. To the extent that they do not do so, but instead sell their licenses to others in the marketplace at market prices, we believe that it is reasonable that they no longer be allowed to enjoy the benefit of obtaining spectrum at below-market prices. 41. Clarification. We believe that clarification is warranted of our statement in the Designated Entity 134a 96 Designated Entity Second Report and Order, FCC 06-52, at ¶ 41. 97 See Letter from Carl W. Northrop, counsel for Salmon PCS, LLC, to Marlene H. Dortch, Secretary, FCC, WT Docket No. 05-211 (filed May 11, 2006). 98 See Rules Appendix. 99 47 U.S.C. § 1.2114. 100 47 C.F.R. § 1.2114(a). Second Report and Order that “retroactive penalties [will] not be imposed on preexisting designated enti- ties.” 96 Specifically, we clarify that the newly-adopted ten-year unjust enrichment schedule applies only to li- censes that are granted after the release of the Desig- nated Entity Second Report and Order. 97 Likewise, the requirement that the Commission be reimbursed for the entire bidding credit amount owed if a designated entity loses its eligibility for a bidding credit prior to the filing of the notifications informing the Commission that the construction requirements applicable at the end of the license term have been met applies only to those licenses that are granted on or after the April 25, 2006 release date of the Designated Entity Second Report and Order. We also make corresponding corrections to section 1.2111 of our rules. 98 D. Review of Agreements, Annual Reporting Require- ments, and Audits 42. We also take this opportunity to clarify and em- phasize certain aspects of section 1.2114, our newly- adopted rule relating to reportable eligibility events. 99 As the rule expressly states, “[a] designated entity must seek Commission approval for all reportable eligibility events.” 100 As discussed in the Designated Entity Sec- 135a 101 See Designated Entity Second Report and Order, FCC 06-52, at ¶ 46, note 115 and accompanying text. 102 See Designated Entity Second Report and Order, FCC 06-52, at ¶ 47, note 116 and accompanying text. 103 See Designated Entity Second Report and Order, FCC 06-52, at ¶ 48. 104 See Designated Entity Second Report and Order, FCC 06-52, at ¶¶ 42-50. ond Report and Order, 101 we emphasize that section 1.2114 requires prior Commission approval for a report- able eligibility event. We also clarify that a reportable eligibility event includes any event that might affect a designated entity’s ongoing eligibility, under either our material relationship or controlling interest standards, 102 and we correct new section 1.2114(a) accordingly. Al- though we affirm that we have delegated authority to the Wireless Telecommunications Bureau (“Bureau”) to implement our rule changes on reporting, 103 we antici- pate that the Bureau’s procedures will provide the means by which parties will apply for approval of all such arrangements. Such approval may require modifi- cations to the terms of the parties’ arrangements or un- just enrichment payments based on the impact of such arrangements on designated entity eligibility. We also take this opportunity to affirm our conclusions in the Designated Entity Second Report and Order with re- gard to the implementation of our regulations relating to the review of long-form applications and agreements to determine designated entity eligibility under the con- trolling interest standard. We also affirm our event- based and annual reporting requirements as well as our commitment to audit the eligibility of every designated entity that wins a license in the AWS auction at least once during the initial term. 104 136a 105 See Supplement of Council Tree, MMTC and Bethel Native at 3- 7. 106 5 U.S.C. §§ 603, 611(a),(c). See United States Cellular Corpora- tion v. FCC, 254 F.3d 78 (D.C. Cir. 2001); Allied Local & Regional Mfrs. Caucus v. EPA, 215 F.3d 61, 79 (D.C. Cir. 2000). 107 See Further Notice, Initial Regulatory Flexibility Analysis, 21 FCC Rcd 1753 (2006). We also note that one of Joint Petitioners’ pri- mary claims—that retroactive application of the unjust enrichment rules violates the RFA—has been rendered moot by this Order on Re- consideration, which clarifies that the ten-year unjust enrichment sche- dule applies only to licenses initially granted to designated entities after April 25, 2006. E. Regulatory Flexibility Act 43. We also disagree with the claims of the Joint Petitioners that our recently adopted rules violate the Regulatory Flexibility Act (“RFA”). 105 Among other things, the Joint Petitioners assert that we failed to pro- vide adequate notice in the Initial Regulatory Flexibility Analysis (“IRFA”) about the scope of the proposed rules, their application to current designated entity li- censees, or the ten-year unjust enrichment schedule for licenses acquired with bidding credits. We note as an initial matter that the IRFA is not subject to judicial review. Section 611 of the RFA expressly prohibits courts from considering claims of non-compliance with the initial regulatory flexibility analysis requirement of RFA section 603. 106 Moreover, Joint Petitioners have not articulated the legal basis for their claim that a pur- ported lack of notice constitutes an independent viola- tion of the RFA. In any case, we have demonstrated above that the Further Notice (the substance of which was incorporated by reference in the IRFA) provided ample notice of the possible rule changes at issue here. 107 For the same reason, any claim about the sufficiency of 137a 108 108 See 5 U.S.C. § 605(a) (“Any Federal agency may perform the analyses required by sections 602, 603, and 604 of this title in conjunc- tion with or as a part of any other agenda or analysis required by any other law if such other analysis satisfies the provisions of such sec- tions.”). 109 See Designated Entity Second Report and Order, FCC 06-52, at ¶ 8. the Final Regulatory Flexibility Analysis (“FRFA”) based on charges of inadequate notice and lack of oppor- tunity for comment is also without merit. 44. We also disagree with the claims of the Joint Petitioners that we failed to describe significant alterna- tives to the rules we adopted in order to minimize any significant economic impact on small entities as required by the RFA. The Final Regulatory Flexibility Analysis (“FRFA”) in the Second Report and Order referred to the substantive part of the Order, which discussed in great depth the impact of the rules on small businesses, alternatives considered, and why the Commission adop- ted the rules at issue. Reiteration of the discussion of the impact on small businesses in the FRFA is not re- quired by the RFA, 108 and such reiteration would have been repetitive here, as analyses of alternatives related to small businesses infuse the decision. In adopting our rule modifications to better achieve Congress’s plan, we fully explained that we were finding a “reasonable bal- ance between the competing goals of first, providing designated entities with reasonable flexibility in being able to obtain needed financing from investors and, sec- ond, ensuring that the rules effectively prevent entities ineligible for designated entity benefits from circum- venting the intent of the rules by obtaining those bene- fits indirectly, through their investments in qualified businesses.” 109 Consistent with previous changes we 138a 110 Id. 111 See Designated Entity Second Report and Order, FCC 06-52, at ¶ 23. 112 United States Cellular Corporation v. FCC, 254 F.3d 78 (D.C. Cir. 2001)(holding that “[p]urely procedural . . . RFA section 604 re- quires nothing more than that the agency file a FRFA demonstrating a ‘reasonable good faith effort to carry out [RFA’s] mandate.’ Alenco Communications, Inc. v. FCC, 201 F.3d 608, 625 (5th Cir. 2000).”). have made to our designated entity rules, the rule modi- fications at issue were the result of trying to maintain this balance in “the face of a rapidly evolving telecom- munications industry, legislative changes, judicial deci- sions, and the demand of the public for greater access to wireless services.” 110 Moreover, as evidenced by the expansive record compiled in this docket and our deci- sion to defer the adoption of further rules, if any, until after we had provided additional opportunity for parties to comment, we adopted only those rules that we con- cluded were clearly warranted to deter abuse of the Commission’s designated entity program. 111 Conse- quently, we believe that our analysis fully complied with the requirements of the RFA. 112 IV. CONCLUSION 45. For all of the reasons set forth above, we clarify certain aspects of the Second Report and Order as well as our rules for determining the eligibility of applicants for size-based benefits in the context of competitive bid- ding. 139a 113 5 U.S.C. §553(d). V. PROCEDURAL MATTERS A. Paperwork Reduction Act Analysis 46. This document does not contain proposed infor- mation collection(s) subject to the Paperwork Reduction Act of 1995 (PRA), Public Law 104-13. In addition, therefore, it does not contain any new or modified “in- formation collection burden for small business concerns with fewer than 25 employees,” pursuant to the Small Business Paperwork Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4). B. Congressional Review Act 47. The Commission will include a copy of this Order on Reconsideration of the Second Report and Order in a report it will send to Congress and the Government Accountability Office pursuant to the Congressional Re- view Act, see 5 U.S.C. 801(a)(1)(A). C. Effective Date 48. This Order on Reconsideration of the Second Report and Order and the accompanying rule changes are effective upon publication in the Federal Register. We find there is good cause under section 553(d)(3) of the Administrative Procedure Act 113 to make the chang- es we implement with this Order effective upon Federal Register publication, without the usual 30-day period, because these changes (with the possible exception of those concerning the unjust enrichment rules) constitute minor points of clarification of the rules adopted in the Designated Entity Second Report and Order, which 140a 114 71 Fed. Reg. 26,245, May 4, 2006. 115 47 C.F.R. § 1.2111 as revised herein. 116 5 U.S.C. § 553(d)(1). were published in the Federal Register on May 4, 2006. 114 As to the clarifying changes in our unjust en- richment rules, 115 these changes, at most, serve to “grant[ ] or recognize[ ] an exemption or relieve[ ] a re- striction” and would therefore fall within the exception contained in section 553(d)(1). 116 VI. ORDERING CLAUSE 49. IT IS ORDERED that pursuant to the authority granted in Sections 4(i), 5(b), 5(c)(1), 303(r), and 309(j) of the Communications Act of 1934, as amended, 47 U.S.C. §§ 154(i), 155(b), 155(c)(1), 303(r), and 309(j), this Order on Reconsideration of the Second Report and Or- der, is hereby ADOPTED and Part 1, Subpart Q of the Commission’s rules are amended as set forth in the Ap- pendix, effective upon the publication of this Order on Reconsideration in the Federal Register. FEDERAL COMMUNICATIONS COMMISSION Marlene H. Dortch Secretary 141a APPENDIX Final Rules For the reasons discussed in the preamble, the Federal Communications Commission amends 47 CFR part 1 as follows: PART 1 – PRACTICE AND PROCEDURE For the reasons discussed in the preamble, the FCC amends part 1 of the Code of Federal Regulations to read as follows: 1. The authority citation for part 1 continues to read as follows: Authority: 15 U.S.C. 79 et seq.; 47 U.S.C. 151, 154(i), 154(j), 155, 157, 225, 303(r), and 309. 2. Revise paragraphs (a), (b) introductory text, and (d)(2) of § 1.2111 to read as follows: § 1.2111 Assignment or transfer of control: unjust enrich- ment. (a) Reporting requirement. An applicant seeking ap- proval for a transfer of control or assignment (otherwise permitted under the Commission’s rules) of a license within three years of receiving a new license through a competitive bidding procedure must, together with its application for transfer of control or assignment, file with the Commission a statement indicating that its li- cense was obtained through competitive bidding. Such applicant must also file with the Commission the associ- ated contracts for sale, option agreements, management agreements, or other documents disclosing the local con- sideration that the applicant would receive in return for 142a the transfer or assignment of its license (see § 1.948). This information should include not only a monetary purchase price, but also any future, contingent, in-kind, or other consideration (e.g., management or consulting contracts either with or without an option to purchase; below market financing). (b) Unjust enrichment payment: set-aside. As speci- fied in this paragraph an applicant seeking approval for a transfer of control or assignment (otherwise permitted under the Commission's rules) of, or for entry into a ma- terial relationship (see §§ 1.2110, 1.2114) (otherwise per- mitted under the Commission’s rules) involving, a li- cense acquired by the applicant pursuant to a set-aside for eligible designated entities under § 1.2110(c), or which proposes to take any other action relating to own- ership or control that will result in loss of eligibility as a designated entity, must seek Commission approval and may be required to make an unjust enrichment payment (Payment) to the Commission by cashier’s check or wire transfer before consent will be granted. The Payment will be based upon a schedule that will take account of the term of the license, any applicable construction benchmarks, and the estimated value of the set-aside benefit, which will be calculated as the difference be- tween the amount paid by the designated entity for the license and the value of comparable non-set-aside license in the free market at the time of the auction. The Com- mission will establish the amount of the Payment and the burden will be on the applicants to disprove this amount. No Payment will be required if: * * * * * 143a (d) * * * (2) Payment schedule. (i) For licenses initially granted after April 25, 2006, the amount of payments made pursuant to paragraph (d)(1) of this section will be 100 percent of the value of the bidding credit prior to the filing of the notification informing the Commission that the construction require- ments applicable at the end of the initial license term have been met. If the notification informing the Com- mission that the construction requirements applicable at the end of the initial license term have been met, the amount of the payments will be reduced over time as follows: (A) A loss of eligibility in the first five years of the li- cense term will result in a forfeiture of 100 percent of the value of the bidding credit (or in the case of eligibil- ity changing to qualify for a lower bidding credit, 100 percent of the difference between the bidding credit received and the bidding credit for which it is eligible); (B) A loss of eligibility in years 6 and 7 of the license term will result in a forfeiture of 75 percent of the value of the bidding credit (or in the case of eligibility chang- ing to qualify for a lower bidding credit, 75 percent of the difference between the bidding credit received and the bidding credit for which it is eligible); (C) A loss of eligibility in years 8 and 9 of the license term will result in a forfeiture of 50 percent of the value of the bidding credit (or in the case of eligibility chang- ing to qualify for a lower bidding credit, 50 percent of the difference between the bidding credit received and the bidding credit for which it is eligible); and 144a (D) A loss of eligibility in year 10 of the license term will result in a forfeiture of 25 percent of the value of the bidding credit (or in the case of eligibility changing to qualify for a lower bidding credit, 25 percent of the dif- ference between the bidding credit received and the bid- ding credit for which it is eligible). (ii) For licenses initially granted before April 25, 2006, the amount of payments made pursuant to paragraph (d)(1) of this section will be reduced over time as follows: (A) A transfer in the first two years of the license term will result in a forfeiture of 100 percent of the value of the bidding credit (or in the case of very small busi- nesses transferring to small businesses, 100 percent of the difference between the bidding credit received by the former and the bidding credit for which the latter is eligible); (B) A transfer in year 3 of the license term will result in a forfeiture of 75 percent of the value of the bidding credit; (C) A transfer in year 4 of the license term will result in a forfeiture of 50 percent of the value of the bidding credit; (D) transfer in year 5 of the license term will result in a forfeiture of 25 percent of the value of the bidding credit; and (E) For a transfer in year 6 or thereafter, there will be no payment. (iii) These payments will have to be paid to the United States Treasury as a condition of approval of the assign- 145a ment, transfer, ownership change, or reportable eligibil- ity event (see §1.2114). * * * * * 3. Revise paragraph (a) of §1.2114 to read as follows: § 1.2114 Reporting of Eligibility Event. (a) A designated entity must seek Commission approval for all reportable eligibility events. A reportable eligi- bility event is: (1) Any spectrum lease (as defined in § 1.9003) or resale arrangement (including wholesale agreements) with one entity or on a cumulative basis that might cause a li- censee to lose eligibility for installment payments, a set- aside license, or a bidding credit (or for a particular level of bidding credit) under § 1.2110 and applicable service-specific rules. (2) Any other event that might lead to a change in the eligibility of a licensee for designated entity benefits. * * * * * 146a STATEMENT OF CHAIRMAN KEVIN J. MARTIN Re: Implementation of the Commercial Spectrum En- hancement Act and Modernization of the Commis- sion’s Competitive Bidding Rules and Procedures, Order on Reconsideration of the Second Report and Order (WT Docket No. 05-211), FCC 06-78 These changes to our designated entity rules arose out of a last-minute proposal in the proceeding to adopt rules for the Advanced Wireless Services spectrum. While I supported examining potential changes to our designated entity rules for future auctions, I did not bel- ieve the rules needed to be changed, especially in ad- vance of the auction this summer. Nevertheless, I agreed to the changes in order to obtain the support needed to establish the rules for wireless services that were essential to making the spectrum available for wireless broadband services this summer. 147a STATEMENT OF COMMISSIONER MICHAEL J. COPPS Re: Implementation of the Commercial Spectrum En- hancement Act and Modernization of the Commis- sion’s Competitive Bidding Rules and Procedures (Order on Reconsideration of the Second R&O, WT Docket No. 05-211). Today’s reconsideration order reaffirms that this Commission will not tolerate unjust enrichment or fraud in the Designated Entity (DE) program. In light of alle- gations that some of our prior auctions were tainted by such practices, I believe we have a clear duty to take af- firmative action to eliminate loopholes in our existing rules. I repeat here what I have stated previously—we should have begun our consideration of these rules last summer. That would have given us an opportunity to reach consensus on the important question of which companies should be allowed to acquire a partnership interest in a DE. Unfortunately, revisiting that question at this point would mean further postponing the long- scheduled AWS auction. That we cannot do. Study after study demonstrates that our nation’s broadband infrastructure lags dramatically behind other industrialized nations. In order to reverse this trend, we must encourage “third pipe” technologies to provide some at least some challenge to the cable/telco broad- band duopoly in our cities. In rural areas, the situation is even graver. The GAO recently announced that the Commission has not even properly measured the rural- urban broadband gap—a gap that no one disputes is both significant and deeply troubling. In underserved 148a rural regions of our country, AWS spectrum can provide a desperately needed “first pipe.” The upcoming auction can be an important step in making this happen. 149a STATEMENT OF COMMISSIONER JONATHAN S. ADELSTEIN APPROVING IN PART, CONCURRING IN PART Re: Implementation of the Commercial Spectrum En- hancement Act and Modernization of the Commis- sion’s Competitive Bidding Rules and Procedures; Order on Reconsideration of the Second Report and Order; WT Docket No. 05-211 I support the specific clarifications in this Order on Reconsideration because they in part respond to legiti- mate concerns from designated entities regarding the possibly retroactive application of new rules. I have this lingering concern, though, that the Commission’s course of action in this troubled proceeding, notwithstanding the legal maneuvering in this decision, may still leave other issues unresolved. As I have noted before, much of this uncertainty could have been avoided had we started this proceeding earlier and kept it more nar- rowly focused. I hope that the Commission’s decisions over the past several months do not prove to be the un- doing of our most significant auction in 10 years. 150a STATEMENT OF COMMISSIONER DEBORAH TAYLOR TATE APPROVING IN PART, CONCURRING IN PART Re: Implementation of the Commercial Spectrum En- hancement Act and Modernization of the Commis- sion’s Competitive Bidding Rules and Procedures, Order on Reconsideration of the Second Report and Order (WT Docket No. 05-211) Just last week, I was able to observe first-hand some of the most extraordinary applications of digital commu- nications services in our country, from life-saving tele- medicine in very remote villages, to the participation of a parent via satellite in a child’s graduation hundreds of miles away. These experiences that we in the lower 48 states take for granted are major feats of coordination in Alaska. I also heard from many of those whose par- ticipation in the designated entity (“DE”) program is critical to those same remote citizens. I am sympathetic to the concerns of DEs, who argue that requiring repay- ment of license discounts prior to the end of a ten year “hold period” will discourage investment and potentially limit a significant portion of designated entity participa- tion in future spectrum auctions. However, as always, our decision involves a balanc- ing of interests. I therefore concur in this decision knowing that our efforts were to strengthen, not weak- en, the purposes of the DE program to ensure against the potential for fraud, waste, and abuse, as well as to provide adequate notice in order that the AWS auction can occur in a timely and fair manner. 151a 1 Petition for Expedited Reconsideration, filed by Council Tree Com- munications, Inc., Bethel Native Corporation, and the Minority Media and Telecommunications Council, dated May 5, 2006 (the “Petition”). APPENDIX C FEDERAL COMMUNICATIONS COMMISSION WASHINGTON, D.C. 20554 WT Docket No. 05-211 IN THE MATTER OF IMPLEMENTATION OF THE COMMERCIAL SPECTRUM ENHANCEMENT ACT AND MODERNIZATION OF THE COMMISSION’S COMPETITIVE BIDDING RULES AND PROCEDURES Adopted: Mar. 24, 2008 Released: Mar. 26, 2008 SECOND ORDER ON RECONSIDERATION OF THE SECOND REPORT AND ORDER By the Commission: 1. In this Second Order on Reconsideration, we for- mally deny a Petition for Expedited Reconsideration (“Petition”) filed in this proceeding by Council Tree Communications, Inc., Bethel Native Corporation, and the Minority Media and Telecommunications Council (collectively, the “Joint Petitioners”). 1 152a 2 Implementation of the Commercial Spectrum Enhancement Act and Modernization of the Commission’s Competitive Bidding Rules and Procedures, Second Report and Order and Second Further Notice of Proposed Rule Making, 21 FCC Rcd 4753 (2006) (“Second Report and Order”). “Designated entities” are small businesses, businesses owned by members of minority groups and/or women, and rural telephone companies. See 47 C.F.R. § 1.2110(a). Unless otherwise noted, when referring to “designated entities,” we include as a subgroup “entrepre- neurs” eligible to bid for “set-aside” broadband Personal Communica- tions Service licenses offered in closed bidding. See id. §§ 1.2110(a), 24.709. 3 71 Fed. Reg. 26,245 (May 4, 2006). 4 See 47 C.F.R. §§ 1.4, 1.429. 5 Implementation of the Commercial Spectrum Enhancement Act and Modernization of the Commission’s Competitive Bidding Rules and Procedures, Order on Reconsideration of the Second Report and Order, 21 FCC Rcd 6703 (2006) (“Order on Reconsideration”). Subsequent to adoption of the Order on Reconsideration, we received two additional timely petitions for reconsideration of the Second Report and Order. See Petition for Partial Reconsideration and/or Clarification, filed by the Blooston Rural Carriers, dated June 2, 2006; Petition for Reconsid- eration and Clarification, filed by Cook Inlet Region, Inc., dated June 5, 2006. 2. The Petition sought reconsideration of various de- cisions we made in the Second Report and Order re- leased on April 25, 2006, which modified our Part 1 com- petitive bidding rules governing designated entities, including rules on eligibility for benefits and unjust en- richment. 2 The Second Report and Order was published in the Federal Register on May 4, 2006. 3 Joint Petition- ers filed their Petition on May 5, 2006. On June 2, 2006, prior to the deadline for filing petitions for reconsidera- tion of the Second Report and Order, 4 we released, sua sponte, an Order on Reconsideration, which considered and rejected the arguments included in the Petition without formally denying the Petition. 5 The Order on 153a 6 71 Fed. Reg. 34,272 (June 14, 2006). 7 Letter, filed by Dennis P. Corbett and S. Jennell Trigg, Counsel for the Joint Petitioners, to Marlene H. Dortch, Secretary, Federal Communications Commission, dated July 24, 2006. 8 Id. at 2. 9 Petition for Writ of Mandamus, In re Council Tree Communica- tions, et al., 07-4124, at 20 (3d Cir. filed Oct. 23, 2007). Reconsideration was published in the Federal Register on June 14, 2006. 6 3. In a July 2006 letter to the Commission, Joint Petitioners stated that the Commission had already de- cided the merits of the Petition and that the Joint Peti- tioners were no longer seeking reconsideration. 7 Ac- cordingly, they ask that we formally dispose of their Petition in order to take “the de jure action” we had al- ready “taken de facto.” 8 We agree with Joint Petition- ers that we already decided the merits of the Petition in the Order on Reconsideration. As Joint Petitioners have stated, the Order on Reconsideration “was . . . a conclusive rejection of Petitioners’ legal arguments,” 9 and, as such, we need go no further here. 4. Accordingly, IT IS ORDERED that pursuant to Sections 4(i), 5(b), 5(c)(1), 303(r), and 309(j) of the Com- munications Act, as amended, 47 U.S.C. §§ 154(i), 155(b), 155(c)(1), 303(r), and 309(j), the Petition is hereby DE- NIED. FEDERAL COMMUNICATIONS COMMISSION Marlene H. Dortch Secretary