Council Tree Communications, Inc. v. Federal Communications Commission

PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 08-2036

COUNCIL TREE COMMUNICATIONS, INC.;
BETHEL NATIVE CORPORATION;
THE MINORITY MEDIA AND
TELECOMMUNICATIONS COUNCIL,

Petitioners

v.

FEDERAL COMMUNICATIONS COMMISSION;
UNITED STATES OF AMERICA,

Respondents

CTIA-WIRELESS Association and T-Mobile USA, Inc.,

Intervenor Respondents (Per Clerk Order of 4/28/08)

CELLCO PARTNERSHIP d/b/a Verizon Wireless,

Intervenor Respondent (Per Court Order of 6/30/08)
 On Petition for Review of Orders of the
Federal Communications Commission
(FCC Nos. 06-52, 06-78 and 08-92)

Argued December 1, 2009
Before: FISHER, HARDIMAN and STAPLETON, Circuit
Judges.

(Filed: August 24, 2010)

Dennis P. Corbett (Argued)
S. Jenell Trigg
Lerner Senter
2000 K Street, N.W.
Washington, DC 20006
Attorneys for Petitioners

Robert B. Nicholson
Robert J. Wiggers
United States Department of Justice
Appellate Section
Room 3228
950 Pennsylvania Avenue, N.W.
Washington, DC 20530-0000
Attorneys for Respondents USA

Joseph R. Palmore (Argued)
Laurence N. Bourne
Federal Communications Commission

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Office of General Counsel
445 12 th Street, S.W.
Washington, DC 20554
Attorneys for Respondents FCC

Ian H. Gershengorn
Elaine J. Goldenberg
Jenner & Block
1099 New York Avenue
Suite 900
Washington, DC 20001-0000
Attorneys for Intervenor CTIA Wireless Assn

Andrew G. McBride
Wiley Rein
1776 K Street, N.W.
Washington, DC 20006-0000
Attorneys for Intervenor Cellco Partnership

Jonathan E. Nuechterlein (Argued)
Wilmer Cutler Pickering Hale & Dorr
1875 Pennsylvania Avenue, N.W.
Washington, DC 20006
Attorneys for Intervenor T Mobile USA

Thomas Gutierrez
Lukas, Nace, Gutierrez & Sachs
1650 Tysons Boulevard
Suite 1500
McLean, VA 22102-0000

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Carl N. Northrop
Carson H. Sullivan
Paul, Hastings, Janofsky & Walker
875 15th Street, N.W.
Suite 1000
Washington, DC 20005-0000
Attorneys for Proposed Amicus Respondents

Eric L. Bernthal
Latham & Watkins
555 11th Street, N.W.
Suite 1000
Washington, DC 20004-0000

Carl N. Northrop
Paul, Hastings, Janofsky & Walker
875 15th Street, N.W.
Suite 1000
Washington, DC 20005-0000
Attorneys for Proposed Intervenor Respondent

Jeneba J. Ghatt
Suite 700
2 Wisconsin Circle
Chevy Chase, MD 20815
Attorney for Amicus Petitioners

OPINION OF THE COURT

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HARDIMAN, Circuit Judge.

This dispute comes to us for the fourth time. At issue is
a challenge to some of the rules that governed the participation
of small wireless telephone service providers in auctions of
electromagnetic spectrum conducted by the Federal
Communications Commission (FCC or the Commission).

The FCC is authorized to grant licenses for the use of
bands of the electromagnetic spectrum and has done so chiefly
through auctions for defined geographic markets. Because the
law requires the FCC to promote the participation of small
businesses in the use of the spectrum, it has defined a class of
designated entities (DEs) which are eligible for bidding credits.
These credits are added to the dollar amount of the DEs’ bids,
to make it easier for them to win spectrum licenses at auction.

The petitioners here are (1) Council Tree
Communications, an investor in DEs; (2) Bethel Native
Corporation, a small wireless carrier based in Alaska whose
stock is owned by Alaskan natives; and (3) the Minority Media
and Telecommunications Council (MMTC), a trade group
representing minority-owned telecom companies. Petitioners
seek review of multiple orders in an FCC rulemaking entitled In
re Implementation of the Commercial Spectrum Enhancement
Act and Modernization of the Commission’s Competitive
Bidding Rules and Procedures, WT Docket No. 05-211, in
which the FCC changed the qualifications for DE status as well
as the restitution that must be made by a licensee that loses DE
status after taking advantage of bidding credits. Petitioners
claim that these rules (1) were enacted without the notice and

5
opportunity for comment required by the Administrative
Procedure Act (APA), and (2) are arbitrary and capricious, in
violation of the APA. Petitioners ask us to rescind the results of
approximately $33 billion worth of auctions held under the
challenged rules, and to order the FCC to conduct new auctions
under new rules.

I.

A. Legal Background

Although the FCC possesses broad authority to auction
licenses to use portions of the electromagnetic spectrum, it must
promote “economic opportunity and competition . . . by avoiding
excessive concentration of licenses and by disseminating
licenses among a wide variety of applicants, including small
businesses [and] rural telephone companies.” 47 U.S.C.
§ 309(j)(3)(B). The FCC must also “ensure that small
businesses [and] rural telephone companies . . . are given the
opportunity to participate in the provision of spectrum-based
services, and, for such purposes, consider the use of tax
certificates, bidding preferences, and other procedures.” Id.
§ 309(j)(4)(D).

Consistent with these statutory mandates, in conducting
spectrum auctions the FCC offers bidding credits that increase
the bids of small entities, in an amount measured as a percentage
of the entities’ initial bids. After a DE submits its bid, this
credit is added to the bid for purposes of determining the winner
of the auction. If the DE wins the auction, however, it will be
required to pay only the amount of its initial bid, not the amount

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that includes the credit. The credits are available as follows: (1)
a 15% credit for entities averaging annual gross revenues of $40
million or less over the last three years; (2) a 25% credit for
entities averaging annual gross revenues of $15 million or less
over the last three years; and (3) a 35% credit for entities
averaging $3 million or less in average revenues over the last
three years. 47 C.F.R. § 1.2110(f)(2)(i) to (iii). Although the
FCC defines the term “designated entities” to mean “small
businesses” generally, see id. § 1.2110(a), the term is relevant
here only insofar as it refers to bidders who qualify for these
credits.

The bidding-credit system could be abused by small
companies willing to immediately monetize their bidding
credits by selling their spectrum licenses at market prices, or by
large companies taking advantage of credits through affiliates or
puppet corporations that technically qualify as DEs. To prevent
this, the FCC is required to seek the “avoidance of unjust
enrichment through the methods employed to award” spectrum
licenses, 47 U.S.C. § 309(j)(3)(c), and to establish “such . . .
antitrafficking restrictions and payment schedules as may be
necessary to prevent unjust enrichment as a result of the
methods employed to issue licenses and permits.”
Id. § 309(j)(4)(E). In the rulemaking at issue here, the FCC
adopted three regulations of this type.

First, to prevent subsidiaries or affiliates of large
businesses from qualifying for DE credits, 47 C.F.R.
§ 1.2110(b)(1)(i) provides that:

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 [t]he 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 cumulative basis and
aggregated for purposes of determining whether
the applicant (or licensee) is eligible for status as
a small business[.]

Insofar as it applies to an applicant’s affiliates and controlling
interests, and the affiliates of an applicant’s controlling interests,
this revenue attribution rule is long-standing and is not contested
here. Instead, in the challenged rulemaking the FCC imposed
revenue attribution for “entities with which [the applicant or
licensee] has an attributable material relationship,” and defined
the phrase “attributable material relationship.” That definition
appears in 47 C.F.R. § 1.2110(b)(3)(iv)(B) and states:

[a]n applicant or licensee has an attributable
material relationship 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.

T he second challenged regulation is 47 C .F.R .
§ 1.2110(b)(3)(iv)(A), which was promulgated for the first time
in the rulemaking at issue here and provides:

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 [a]n applicant or licensee that would otherwise be
eligible for designated entity benefits under this
section and applicable service-specific rules shall
be ineligible for such benefits if the applicant or
licensee has an impermissible material
relationship. An applicant or licensee has an
impermissible material relationship when it has
arrangements with one or more entities for the
lease or resale (including 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.

Thus, unlike an “attributable material relationship,” a business
that has an impermissible material relationship is ipso facto
disqualified from receiving bidding credits.

Third, the FCC has recognized that unjust enrichment
will occur if recipients of bidding credits are permitted to
promptly sell their spectrum rights to non-DEs at a premium, or
to ally themselves with large entities in such a way as to lose
their DE status. To prevent this, 47 C.F.R. § 1.2111(d)(1) states:

[a] licensee that utilizes a bidding credit, and that
during the initial term seeks to assign or transfer
control of a license to an entity that does not meet
the eligibility criteria for a bidding credit, will be
required to reimburse the U.S. Government for
the amount of the bidding credit, plus interest . .
. as a condition of Commission approval of the
assignment or transfer. . . . If, within the initial

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 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 bidding credit . . . the amount of
the bidding credit . . . plus interest . . . must be
paid to the U.S. Government as a condition of
Commission approval of the assignment or
transfer . . . .

If a DE licensee takes action that does not render it wholly
ineligible for a bidding credit, but leaves it eligible only for a
smaller credit than the one it used to acquire a license, the
difference in value between the two credits must be repaid. Id.

This repayment obligation existed before the rulemaking
challenged by Petitioners here. At issue in this petition is the
length of time after a DE wins a license using a bidding credit
that it is subject to the repayment requirement. Although the
most effective method to prevent misuse of bidding credits
would be to require that a DE winning a license with such
credits both maintain its DE status and hold the license until it
expired, it appears that the FCC has long applied a more lenient
rule in order to permit DEs to participate in the secondary
market for spectrum rights, and to allow DEs to attract
investment capital that might be hard to obtain if there were no
way for DEs to liquidate such a valuable asset. Accordingly,
FCC regulations provide for a reduction in the repayment
amount if the DE’s offending action does not occur until an
appreciable time after it won the license. In the rulemaking at
issue here, the FCC extended the time period over which the

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repayment obligation applies. Before the rulemaking, 47 C.F.R.
§ 1.2111(d)(2)(i) provided that the required repayment dropped
to 75% of the bidding credit value for license transfers or losses
of DE status occurring up to two years after the auction, 50% of
the credit for those occurring during the third year after the
auction, 25% of the credit during the fourth year, and zero after
five years. Id. (effective through June 6, 2006). The instant
rulemaking amended § 1.2111(d)(2)(i) to require full repayment
of the credit if eligibility is lost in the first five years after the
auction, 75% repayment if eligibility is lost in the sixth or
seventh year, 50% if eligibility is lost in the eighth or ninth year,
25% in the tenth year, and eliminated the penalty only after ten
years.

B. The Rulemaking Proceeding

1. The Further Notice of Proposed Rulemaking

On February 3, 2006, the FCC issued a Further Notice of
Proposed Rulemaking In re Implementation of the Commercial
Spectrum Enhancement Act and Modernization of the
Commission’s Competitive Bidding Rules and Procedures, 21
F.C.C.R. 1753 (2006) (hereinafter FNPR). The FNPR was a
response to an ex parte letter from Council Tree
Communications (Council Tree), the lead petitioner here. In the
FNPR, the FCC agreed with Council Tree’s view “that the
Commission’s current rules do not adequately prevent large
corporations from structuring relationships in a manner that
allows them to gain access to benefits reserved for small
businesses.” Id. at 1759-60. Therefore, the FNPR sought
“comment on the elements of a proposal raised by Council Tree

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. . . that seeks to prohibit the award of bidding credits or other
small business benefits to entities that have what Council Tree
refers to as a ‘material relationship’ with a ‘large in-region
incumbent wireless service provider.’” Id. at 1754 (footnotes
omitted). The FCC “tentatively conclude[d]” that such
regulations were appropriate, id. at 1757, and “s[ought]
comment on how [it] should define the elements of such a
restriction,” id. at 1755, as well as “on whether [it] should [also]
restrict the award of designated entity benefits where an
otherwise qualified designated entity has a ‘material
relationship’ with a large entity that has a significant interest in
communications services,” id.

Throughout the FNPR, the FCC reiterated these requests
for comments in similar or identical terms. See id., passim. It
also solicited comments in more specific terms on possible
variations on each of the elements proposed by Council Tree.
With respect to the definition of “material relationship,” the
FCC inquired whether its then-current rules requiring attribution
of the revenues of an applicant’s controlling interests and
affiliates were sufficient to prevent improper influence by large
businesses over small bidders. Id. at 1760-61. The FCC asked
whether those attribution rules, or any new definition of
“material relationship,” should vary according to whether they
were applied to “large, in-region, incumbent wireless service
providers” or “entit[ies] with significant interests in
communications services.” Id. at 1760. Of particular note here,
the FCC

s[ought] comment on what, if any, standard
should be used to determine whether a spectrum

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 leasing arrangement is a ‘material relationship’
for the purpose of any additional restriction on the
availability of designated entity benefits that we
might adopt. We also seek comment on whether
other arrangements should be taken into account.
If so, what arrangements should we consider?

Id. at 1761.

With respect to the definition of “large, in-region,
incumbent wireless service provider,” the FCC sought comment
on how much geographic overlap between the incumbent’s and
DE’s service areas should be required for the “in-region”
criterion to be met, id. at 1759, 1762, and whether gross
revenues were the appropriate metric for determining whether
the incumbent was “large,” and, if so, what the proper cutoff
would be. Id. at 1759, 1761-62. With respect to the phrase
“entity with significant interests in communications services,”
the FCC inquired how “large” status should be determined, id. at
1761-62, whether an “in-region” geographical element should
also apply, id. at 1762, and how broadly the phrase “significant
interests in communications services” should be defined, and
what kinds of entities it should encompass, id. at 1762-63.

The FNPR also sought comment

on whether, if we adopt a new restriction on the
award of bidding credits to designated entities, we
should adopt revisions to our unjust enrichment
rules such as those proposed by Council Tree, or
in some other manner. . . . If we require

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 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, over
what portion of the license term should such
unjust enrichment provisions apply?

Id. at 1763. The FCC also explicitly requested comment on
whether the proposed restrictions risked unduly limiting DEs’
ability to raise capital. Id. at 1761.

Finally, the FCC confirmed in the FNPR that it expected
“to complete this proceeding in time so that any modifications
to our rules resulting from this proceeding will apply to the
upcoming auction of licenses for Advanced Wireless Services
(‘AWS’), which currently is scheduled to begin June 29, 2006,”
which was less than four months after the release of the FNPR.
Id. at 1755, 1763. This auction—known as “Auction 66”—was
the largest spectrum auction in several years. To achieve this
goal, the comment period on the FNPR ran for only 14 days
after its publication in the Federal Register, and the reply
comment period lasted only one week thereafter. Id. at 1753.

2. Comments on the FNPR

Despite the brief time frame, a number of comments on
the FNPR were submitted. Most commenters supported some
changes along the lines suggested by the FNPR. A
representative comment in this regard came from the
Department of Justice, which reported that it had

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 found contractual or other arrangements between
DEs and large wireless carriers that created such
close ties between the two that the DEs could not
be considered to be truly independent competitive
actors; in some of these instances, the DE
affiliated with a large wireless carrier had not
launched commercial services to end-user
customers or other wireless carriers but only
provided roaming services to its large affiliate.

J.A. 1052-53. In light of this finding, the DOJ recommended
that such a relationship disqualify the DE, but suggested that
lower-level relationships, such as “arm’s-length negotiated
agreements for roaming or brand licensing and support,” id. at
1054, would not necessarily be problematic. In sum, the DOJ
maintained that “[a] relationship where the large enterprise
dominates the DE is troubling as it suggests that the DE is not
within the class of entities (i.e., small businesses) that the FCC’s
rules are designed to benefit.” Id.

Several comments addressed the application of the
proposed rules to spectrum leases by DEs to non-DEs. Council
Tree agreed that the suspect class of arrangements should
include leasing arrangements, J.A. 439, arguing that such
“agreements . . . convey a level of influence over the operations
of the designated entity that is inappropriate in the hands of a
dominant national wireless service provider,” id. at 439-40. The
NTCH, Inc. proposed that DEs should be able to lease spectrum
freely, so long as substantial portions of spectrum in the same
geographic area remained in use by DEs. J.A. 663-64. Wirefree

15
Partners argued against any further restrictions on leasing by
DEs, J.A. 759-60, but Council Tree disagreed, J.A. 873-74.

Several commenters also argued that the proposed
categories of “large, in-region, incumbent wireless service
providers” or “large entities with significant interests in
communications services” were too narrow. These commenters
argued repeatedly that the statutory objective of assisting small
businesses would be frustrated by a bidder’s material
relationship with a large business of any kind, regardless of
whether the large business was involved in the communications
industry. See Comments of CTIA—The Wireless Association,
J.A. 510, 518 (“the Notice makes no attempt to justify a
distinction between large incumbent carriers and any other class
of non-attributable investor,” such as AOL, Google, or
Microsoft, but the problems arising from large investors’
dominance of DEs “would presumably run to all potential
investors, not just large carrier partners”); Comments of Dobson
Comm’ns Corp., J.A. 526 (urging the FCC to apply any changes
to “any large, well-funded investor with a strategic interest in
the use of the spectrum”); Comments of T-Mobile USA, Inc.,
J.A. 697 (“[t]here does not appear to be a justification for
permitting Microsoft or Wal-Mart to participate in a DE joint
venture while precluding T-Mobile from doing so.”); see also
Comments of Verizon Wireless, J.A. 745; Comments of
Wirefree Partners III, LLC, J.A. 760; Reply Comments of T-
Mobile USA, Inc., J.A. 812; Reply Comments of Cingular
Wireless LLC, J.A. 833-34.

3. The Second Report and Order and Second Further Notice
of Proposed Rulemaking

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 After receipt of the aforementioned comments, on April
25, 2006, the FCC adopted and released its Second Report and
Order and Second Further Notice of Proposed Rulemaking
(Second R&O), 21 F.C.C.R. 4753 (2006).1 Therein, the FCC
stated its “particular intention . . . to ensure that entities
ineligible for designated entity incentives cannot circumvent our
rules by obtaining those benefits indirectly, through their
relationships with eligible entities.” Id. at 4754. The FCC
acknowledged that

[t]he 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, second,
ensuring that the rules effectively prevent entities
ineligible for designated entity benefits from
circumventing the intent of the rules by obtaining
those benefits indirectly, through their
investments in qualified businesses.

Id. at 4756 (footnote omitted). To this end, the FCC “agree[d]
with commenters that certain agreements have the potential to
significantly influence a designated entity licensee’s decisions
regarding its provision of service and, therefore, also have the
potential to be abused, absent the appropriate safeguards.” Id.
at 4762. In an attempt to create such safeguards, and as we

1
The first Report and Order is not directly relevant here.

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described herein, the Second R&O established revenue
attribution for “attributable material relationships,” defined as
the lease of more than 25% of the DE’s spectrum capacity by
any single lessee, and mandated the loss of DE status by any
licensee that acquires an “impermissible material relationship,”
by leasing an aggregate of more than 50% of its spectrum
capacity. Id. at 4763-64.

Notably, neither the 25% rule nor the 50% rule applied
only to relationships with large entities. This, said the Second
R&O, was because the FCC had

conclude[d] that certain agreements, by their very
nature, are generally inconsistent with an
applicant’s or licensee’s ability to achieve or
maintain designated 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 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.

Id. at 4762.

The legislative intent referenced is that behind 47 U.S.C.
§ 309(j)(4)(c), the authorization for the FCC’s promulgation of
antitrafficking and anti-unjust enrichment provisions. The

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House of Representatives Budget Committee’s report on this
provision explicitly contemplated its use in connection with the
promotion of small-business licenses, and stated that “[t]he
Committee anticipates that the Commission will use this
authority to deter speculation and 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, reprinted in 1993
U.S.C.C.A.N. 378, 584-85. The Second R&O reiterated its
reliance on this congressional intent several times. 21 F.C.C.R.
at 4755, 4760, 4762-64, 4766.

The Second R&O also extended the bidding-credit-
repayment schedule to 10 years. The extended obligation
applies “if a designated entity loses its eligibility for a bidding
credit for any reason, including but not limited to[] entering into
an ‘impermissible material relationship’ or an ‘attributable
material relationship.’” Id. at 4766. The FCC again stated that
“[b]y extending the unjust enrichment period to ten years, we
increase the probability that the designated entity will develop
to be a competitive facilities-based service provider.” Id.

The Second R&O also included a Second Further Notice
of Proposed Rulemaking, which sought additional comment on
the elements of Council Tree’s initial proposal, namely, whether
the FCC should impose further restrictions on grants of DE
status to applicants having other sorts of “material relationships”
with large in-region incumbent wireless providers. Id. at 4773-
74 (seeking comment on the definition of “large” and whether
relationships with non-wireless businesses should also be
regulated); 4776-78 (seeking comment on propriety and
definition of “in-region” criterion); 4779-84 (same, on definition

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of “material relationship”). The FCC noted its “concern[] that
additional types of relationships could . . . allow[] an ineligible
entity the ability to gain undue advantages in the
communications marketplace through the benefits offered to a
designated entity applicant,” and asked, “[a]re the new rules we
adopt today sufficient to safeguard against many of these
concerns?” Id. at 4780.

The Commission further stated, however, that

[w]e generally do not have the same concerns
regarding relationships between designated entity
applicants and those who do not have interests in
spectrum capacity or the provision of service,
such as financial institutions or venture capital
firms, provided that such entities do not have a
controlling interest relationship with the
applicant.

Id. This, said the FCC, was because cross-industry investments
did not present the investor an “opportunity for it to bundle
existing communications services with a strategic wireless
partner, and there is less potential for those entities to exert
undue influence over a designated entity licensee’s decision
making regarding its service provision or the use of its licensed
spectrum.” Id.

4. Response to the Second R&O

The new rules promulgated in the Second R&O provoked
criticism from some DEs and their investors. Several petitions

20
for reconsideration were filed with the FCC, including one by
the Petitioners here. Two of Petitioners’ arguments for
reconsideration before the FCC are relevant here. First,
Petitioners maintained that “[n]one of the new rules is limited to
arrangements involving large, in-region incumbent wireless
service providers as contemplated in the Further Notice of
Proposed Rule Making.” Pet. for Exp. Reconsid’n, J.A. 1281.
Second, Petitioners argued that the 10-year credit-repayment
schedule “eviscerat[es] a designated entity’s access to capital
because lenders and investors who are being asked to back
untested new entrants want to see that the designated entity has
a clear path to exit if the business is not succeeding,” id. at
1281-82, and that the FCC had failed to take this into account in
setting the new rules.

Both of Petitioners’ objections were supported by the
views of a number of other commenters, most of whom
contacted the FCC for the first time in response to the Second
R&O. Catalyst Investors, LLC, which had provided capital for
several DEs in the past and was planning to do so in connection
with Auction 66, stated:

both the equity and the debt markets will not be
comfortable with the ‘10 Year Hold Rule,’ as it is
outside the normal hold periods for most sources
of capital. Due to a lack of reasonable notice in
the proceeding, the rule came as a surprise and
was not the subject of any meaningful public
input. Had such input been received, we strongly
believe the Commission would have realized that
the 10 year period is just too long.

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Id. at 1243; cf. Ex Parte Presentation of The Eezinet Corp., et
al., S.J.A. 91 (same arguments, by a group of DE financiers and
DEs); Notice of Ex Parte Presentation of Cook Inlet Region,
Inc., J.A.1487 (small carrier allied with T-Mobile commenting
that “[n]o significant investor will be willing to risk its return on
investment over a ten year horizon”); Letter from the Nat’l
Telecomm’ns Coop. Ass’n, J.A. 1508-09 (industry group
representing rural telecoms, complaining of a lack of public
notice and the short time between the promulgation of the rules
and Auction 66); Ex Parte Letter from Coral Wireless Licenses,
LLC, et al., J.A. 1547-48 (another group of small businesses and
their investors, commenting that “[a] business transaction where
there is no clear path to liquidity for 10 years is a very
unattractive investment for the financial institutions and venture
capital firms that traditionally have supported wireless start-up
ventures,” and that they “did not understand from the Further
Notice that changes of this nature were under consideration by
the Commission or they would have commented on this issue”);
Notice of Oral Ex Parte Presentation of Doyon, Ltd., J.A. 1550
(investor in small telecoms commenting that “the new ten year
unjust enrichment schedule . . . makes it more difficult for
designated entities to secure financing and find strategic partners
because it is less likely that they can easily exit the business in
the event of significant changes in the industry”); Letter from
Royal Street Comm’ns, LLC, J.A. 1557 (“[A] transaction where
there is no clear path to liquidity, without penalty, for 10 years
is a very unattractive investment for the types of financial
institutions and venture capital firms that traditionally have
supported wireless start-up ventures.”).

22
 Royal Street Communications LLC, a DE engaged in
wireless wholesaling, objected that the new rules impacted
arrangements by DEs with other small entities, as well as large
ones. Letter from Royal Street Comm’ns, LLC, J.A. 1557.
Royal Street claimed the new rules placed restrictions on
wireless wholesaling

without affording . . . DEs notice and the
opportunity to comment. . . . [T]hese restrictions
will also contribute to investor and financier
reluctance to back wireless licenses that are
effectively limited to a retail business model, a
m odel decidedly m ore e xpen sive and
administratively burdensome. The Order’s
restrictions ignore the fact that wholesale services
are a wireless product increasingly in demand . .
. which can add to the competitive options in the
wireless marketplace.

Id. at 1558. The Rural Telecommunications Group., Inc., also
contended that “[t]he new material relationship rules are
overbroad and unduly restrictive,” because, “current DE
licensees will be unable to . . . lease existing spectrum . . . to
another DE without becoming ineligible for DE benefits in the
AWS auction.” Ex Parte Letter from the Rural Telecomm’ns
Group, Inc., J.A. 1542.

5. The Order on Reconsideration of the Second R&O

On June 2, 2006, the FCC released an Order on
Reconsideration of the Second Report and Order, 21 F.C.C.R.

23
6703 (hereinafter the Order on Reconsideration).2 Although it
addressed the issues raised in Petitioners’ petition for
reconsideration, the Order on Reconsideration did not formally
grant or deny the petition, but instead was raised by the FCC “on
[its] own motion.” Id. at 6703.

Defending the regulations against the charge that they
would unduly restrict DEs to a retail-only business model, the
FCC restated and clarified its position that active use of a
spectrum license was required to maintain DE status:

[s]ection 309(j)(4)(D) directs the Commission to
issue regulations to ‘ensure’ that designated
entities ‘are given the opportunity to participate in
the provision of spectrum-based services.’ 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.

Id. at 6705 n.8 (internal citation omitted). In response to
Petitioners’ arguments that the material-relationship rules had
not been properly noticed, the FCC noted that the FNPR had
asked whether DE relationships with entities other than large in-
region incumbents or entities with interests in communications
services should be restricted as well. Id. at 6711. The FCC also

2
Many of the comments just described were submitted
after the Order on Reconsideration was released.

24
noted that the FNPR had included an open-ended inquiry into
what types of relationships should be regulated, and had
specifically contemplated the inclusion of lease arrangements
among those relationships. Id. The FCC concluded that the
changes embodied in the final rulemaking were all contained in,
or logical outgrowths of, the proposal in the FNPR. Id. at 6712.

With respect to the 10-year credit-repayment period, the
FCC stated that its decision to apply the new schedule to the
preexisting DE qualifications as well as the new ones was also
within the scope of its original proposal. The Commission
stated that “had we only revised the five-year unjust enrichment
schedule 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.” Id. at 6716. Turning to the
contentions that the 10-year rule would cause DEs’ funding to
dry up, the FCC was

not convinced that three to seven years is a
reasonable timeframe for investors to expect to
recover their capital investments in facilities to
provide spectrum-based services. In a recently
concluded proceeding addressing the leasing of
Educational Broadcast Service spectrum, a broad
cross-section of commenters, including a private
equity investment firm, submitted evidence that
insufficient capital would flow to businesses that
want to develop that spectrum if the length of
spectrum lease terms was limited to fifteen years.
These parties argued that lessees needed access to

25
 the spectrum for thirty years or more in order to
provide the necessary certainty to justify capital
investment in the band. The Commission was
‘persuaded by [this argument].’

Id. at 6717 (footnotes omitted). Finally, the FCC concluded that
even if the new rules did hamper DE capitalization somewhat,
this was an acceptable balancing of the statutory goals of
encouraging DE participation on the one hand while ensuring
that DEs provide “facilities-based service to the public.” Id. at
6718.

C. The First Petition for Review and the Mandamus
Petition

On June 7, 2006—two days before the Order on
R e c o n sid e ra ti o n w a s p u b lis h e d in th e F e d e ra l
Register—Petitioners filed their first petition in this Court for
review of the Second R&O, the Order on Reconsideration, and
the public notice that had announced the start dates for Auction
66, Auction of Advanced Wireless Services Licenses
Rescheduled for August 9, 2006, 21 F.C.C.R. 5598 (2006)
(hereinafter the Public Notice). Petitioners moved for an
emergency stay of Auction 66, which was denied by a motions
panel of this Court on June 29, 2006. After briefing and
argument on the merits, in September 2007 we held that we
lacked jurisdiction to entertain the petition because it was
incurably premature. Council Tree Comm’ns v. FCC, 503 F.3d
284, 293 (3d Cir. 2007). We noted that by statute, petitions for
judicial review of FCC actions can be filed only in the 60 days
following “the entry of a final order.” Id. at 287 (quoting 28

26
U.S.C. § 2344, citing 47 U.S.C. § 402(a)). We also noted that
because the FCC had not formally disposed of Petitioners’
motion for reconsideration of the Second R&O, that order was
non-final and therefore the petition for its review was premature.
Id. We further concluded that the Order on Reconsideration was
“entered,” within the meaning of the statute, only when it was
published in the Federal Register, and that we had no
jurisdiction to entertain a petition filed before this publication.
Id. at 291-93.

After we issued our opinion, Petitioners sought a writ of
mandamus ordering the FCC to act on the petition for
reconsideration, to facilitate jurisdiction in this Court. Although
we declined to issue a writ of mandamus, on February 15, 2008
we directed the FCC to inform us when it would grant or deny
the petition. On March 26, 2008 the FCC formally denied the
petition in a brief Second Order on Reconsideration, noting that
“we already decided the merits of the Petition in the Order on
Reconsideration.” 23 F.C.C.R. 5425, 5426. Within 60 days of
that denial, on April 8, 2008, Petitioners filed this petition for
review of the Second R&O, Order on Reconsideration, Second
Order on Reconsideration, and the Public Notice.3

3
It does not appear that the FCC has formally acted on
the petitions for reconsideration of the Second R&O that were
filed by parties other than Petitioners. This is no barrier to our
jurisdiction, however. In Council Tree we held only that “[a]n
agency order is non-final as to an aggrieved party whose petition
for reconsideration remains pending before the agency.” 503
F.3d at 287. And indeed, “[i]t is well established . . . that when

27
 D. The Results of Auctions 66 and 73

While Petitioners’ first petition for review was pending
in 2006, the FCC conducted Auction 66 subject to the rules
challenged here. The deadline for applications to bid fell on
June 19, 2006; DEs accounted for 166 of 252 applications and
100 out of 168 qualified bidders permitted to participate.
Bidding commenced on August 9, 2006, and the auction
generated nearly $14 billion in winning bids. DEs were 57 of
the 104 winning bidders, winning 20% of the individual licenses
auctioned. Measured in terms of dollar value, however, DEs
won only 4% of the spectrum licenses, although two DEs were
among the top ten winners in terms of dollar amounts. By
comparison, in auctions held prior to the new rules, DEs had
won, on average, 70% of the licenses by dollar value.4

two parties are adversely affected by an agency’s action, one can
petition for reconsideration before the agency at the same time
that the other seeks judicial redetermination.” W. Penn Power
Co. v. EPA, 860 F.2d 581, 586 (3d Cir. 1988) (citing Am. Farm
Lines v. Black Ball Freight Serv., 397 U.S. 532, 541 (1970)).
4
These data must be considered in light of the absence
from Auctions 66 and 73 of the set-asides by which, in prior
auctions, only DEs had been permitted to purchase certain
spectrum blocks. Also, the purpose of the instant rulemaking
from its inception was to disqualify sham DEs, which would be
expected to reduce the number of qualifying DEs.

28
 In late 2007 and early 2008, during and just after the
pendency before the FCC of Petitioners’ petition for
reconsideration, the FCC held another, even larger spectrum
auction, known as “Auction 73.” Auction 73 generated about
$19 billion in winning bids, and was also conducted under the
rules challenged here. In Auction 73, DEs comprised 119 of
214 qualified bidders and 56 of 101 winners, and won 35% of
the individual licenses. They won only 2.6% of the total dollar
value of the licenses, however.

II.

Petitioners now petition for review of the Second R&O,
the two reconsideration orders, and the Public Notice. Several
interested parties, many of them winners at Auctions 66 and 73,
have intervened or filed amicus curiae briefs in support of the
FCC. We have jurisdiction to review the FCC’s final orders
pursuant to 28 U.S.C. § 2342(1) and 47 U.S.C. § 402(a).5

Petitioners claim the new regulations are invalid for
several reasons. First, they claim that because the new rules
were not sufficiently foreshadowed by the FNPR, they were
adopted without the public notice and opportunity for comment

5
The FCC, along with its intervenors and amici, attacks
our jurisdiction to review the Public Notice. Because this
dispute bears on the remedy for any defects in the rules under
review, rather than on the validity of the rules themselves, we
consider it after our analysis of the latter issue. See infra, Part
III.

29
required by the Administrative Procedure Act.6 Petitioners also
argue that the new rules are arbitrary and capricious, because the
FCC made no findings as to their impact on the ability of small
businesses to procure financing, and because they ignore the
viability of wholesaling as a facilities-based business model for
DEs.7 These challenges differ slightly with respect to the three

6
Petitioners also argue that the rulemaking violated the
Regulatory Flexibility Act (RFA), as codified at 5 U.S.C.
§§ 603-04. We need not address this theory of recovery further
because, on the facts of this case, we regard it as duplicative of
the APA notice-and-comment claim: to the extent that the FCC
failed to give notice of the new rules for RFA purposes, it also
gave inadequate notice for APA purposes, necessitating a
remand on the latter basis alone. On remand, of course, the FCC
must comply with all RFA requirements.
7
Petitioners make another subsidiary argument: they
claim that the new rules present such obstacles to small
businesses’ participation in FCC auctions that they violate 47
U.S.C. §309(j)(3)(B)’s requirement that the Commission “seek
to promote” the objective of “economic opportunity and
competition . . . by avoiding excessive concentration of licenses
and by disseminating licenses among a wide variety of
applicants, including small businesses [and] rural telephone
companies.” But the statute also requires the FCC to promote
the development and deployment of new technologies and
services, id. § 309(j)(3)(A), recover a portion of the value of the
spectrum and prevent unjust enrichment, id. § 309(j)(3)(c), and
ensure “efficient and intensive use” of the spectrum, id.

30
provisions challenged here: (1) the 25% attribution rule, (2) the
50% impermissible-relationship rule, and (3) the 10-year credit-
repayment schedule.

A. Legal Standard: The Administrative Procedure Act

1. The Notice-and-Comment Requirement

Under the APA, federal agencies must publish “either the
terms or substance of the proposed rule or a description of the
subjects and issues involved.” 5 U.S.C. § 553(b)(3). The APA
further requires that “[a]fter notice required by this section, the
agency shall give interested persons an opportunity to participate
in the rule making through submission of written data, views, or
arguments with or without opportunity for oral presentation.”
Id. § 553(c). In interpreting these provisions, courts have held
that if the substance of an agency’s final rule strays too far from
the description contained in the initial notice, the agency may
have deprived interested persons of their statutory right to an
opportunity to participate in the rulemaking. E.g., Long Island
Care at Home, Ltd. v. Coke, 551 U.S. 158, 174 (2007) (“The
Courts of Appeals have generally interpreted this to mean that
the final rule the agency adopts must be ‘a logical outgrowth’ of
the rule proposed. The object, in short, is one of fair notice.”)

§309(j)(3)(D). Given 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-business
participation at all.

31
(quoting Nat’l Black Media Coal. v. FCC, 791 F.2d 1016, 1022
(2d Cir. 1986); citing United Steelworkers, AFL-CIO-CLC v.
Marshall, 647 F.2d 1189, 1221 (D.C. Cir. 1980) and S. Terminal
Corp. v. EPA, 504 F.2d 646, 659 (1st Cir. 1974)). The
principles governing judicial review of notice-and-comment
rulemaking are well established. As the Court of Appeals for
the District of Columbia Circuit has put it:

[n]otice requirements are designed (1) to ensure
that agency regulations are tested via exposure to
diverse public comment, (2) to ensure fairness to
affected parties, and (3) to give affected parties an
opportunity to develop evidence in the record to
support their objections to the rule and thereby
enhance the quality of judicial review. While an
agency may promulgate final rules that differ
from the proposed rule, a final rule is a logical
outgrowth of a proposed rule only if interested
parties should have anticipated that the change
was possible, and thus reasonably should have
filed their comments on the subject during the
notice-and-comment period[.] The ‘logical
outgrowth’ doctrine does not extend to a final rule
that is a brand new rule, since something is not a
logical outgrowth of nothing, nor does it apply
where interested parties would have had to divine
the Agency’s unspoken thoughts, because the
final rule was surprisingly distant from the
proposed rule[.]

32
Int’l Union, United Mine Workers v. Mine Safety & Health
Admin., 407 F.3d 1250, 1259-60 (D.C. Cir. 2005) (internal
quotation marks, brackets, and citations omitted).

2. The Arbitrary-and-Capricious Standard

Another portion of the APA, codified at 5 U.S.C.
§ 706(2), provides that on a petition for review of an agency
action,

the reviewing court shall decide all relevant
questions of law, interpret constitutional and
statutory provisions, and determine the meaning
or applicability of the terms of an agency action.
The reviewing court shall—

...

(2) hold unlawful and set aside agency action,
findings, and conclusions found to be—

(A) arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance
with law . . . .

The Supreme Court has stated that

[t]he scope of review under the ‘arbitrary and
capricious’ standard is narrow and a court is not
to substitute its judgment for that of the agency.
Nevertheless, the agency must examine the

33
 relevant data and articulate a satisfactory
explanation for its action including a rational
connection between the facts found and the
choice made. In reviewing that explanation, we
must consider whether the decision was based on
a consideration of the relevant factors and
whether there has been a clear error of judgment.
Normally, an agency rule would be arbitrary and
capricious if the agency has relied on factors
which Congress has not intended it to consider,
entirely failed to consider an important aspect of
the problem, offered an explanation for its
decision that runs counter to the evidence before
the agency, or is so implausible that it could not
be ascribed to a difference in view or the product
of agency expertise. The reviewing court should
not attempt itself to make up for such
deficiencies: [w]e may not supply a reasoned
basis for the agency’s action that the agency itself
has not given. We will, however, uphold a
decision of less than ideal clarity if the agency’s
path may reasonably be discerned.

Motor Vehicle Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins.
Co., 463 U.S. 29, 43 (1983) (internal quotation marks and
citations omitted). In situations where “an agency has engaged
in line-drawing determinations[,] . . . our review is necessarily
deferential to agency expertise,” but the agency’s actions must
still “not be ‘patently unreasonable’ or run counter to the
evidence before the agency.” Prometheus Radio Project v.
FCC, 373 F.3d. 372, 390 (3d Cir. 2004) (citations omitted).

34
 B. Validity of the 25% Attribution Rule

1. Notice and Comment Compliance

With the foregoing legal principles in mind, we now
consider the rulemaking at issue, beginning with the 25%
attributable relationship rule. As noted previously, 47 C.F.R.
§ 1.2110(b)(1)(i) and (b)(3)(iv)(B) provide that, if a DE leases
or resells (including at wholesale) more than 25% of its
spectrum capacity to any single lessee or purchaser, it must add
that lessee’s or purchaser’s revenues to its own to determine its
continued eligibility for DE credits. Petitioners claim this rule
was not adequately noticed in the FNPR, because the FNPR was
focused on avoiding domination of DEs by large
communications companies, and made no mention of placing
limits on all leases to any lessee. We disagree.

As we described previously, the FNPR explicitly sought
comment on whether the FCC’s definition of restricted “material
relationships” should include spectrum leasing arrangements,
and also asked whether other relationships should be considered.
Moreover, the FNPR solicited comment on how large an entity
must be before its relationships with DEs become problematic.
In our view, by limiting the permissible combined size of a DE
and entities to which it leases one-quarter or more of its
spectrum, the final rule squarely addresses these concerns. It is
true that, by adopting the attribution approach, the rule focuses
not on the size of the related entity, but rather on the combined
size of the DE itself and the related entity. But we regard this as
a logical outgrowth of the original rule’s focus on ensuring that
the Commission’s “small business provisions . . . be available

35
only to bona fide small businesses.” FNPR, 21 F.C.C.R. at
1757, 1767. Therefore, we find no defect of notice in the FCC’s
enactment of the 25% attribution rule.

2. Arbitrary and Capricious Review

Petitioners also argue that the 25% rule is arbitrary and
capricious, because the FCC made no findings on the impact it
would have on the ability of DEs to procure financing.
According to Petitioners, the FCC could not have articulated a
rational connection between the conclusion reached and the
facts found, because it found no facts at all.

This question is a close one. Petitioners are correct that
the FCC made few factual findings on the impact of the new
rules on DE financing. The Commission did observe that “a
growing number” of relationships required regulation in order
to prevent unjust enrichment. Second R&O, 21 F.C.C.R. at
4762. It also relied on its “experience in administering the
designated entity program” in determining that further rules
were required. Id. at 4762, 4763. The Second R&O
acknowledged the concerns of several commenters about the
impact any new rules would have on their capitalization
arrangements, see id. at 4761 & n.65, but the only statement in
the Second R&O even approaching a finding in this regard was
a recital that the new rules would protect the ability of DEs to
raise funds, id. at 4764 (“we . . . ensure that [DEs will retain]
flexibility to engage in agreements that are intended to provide
[them] with access to valuable capital”).

36
 On the other hand, the record reflects the FCC’s
cognizance of the capitalization issue, and that it engaged in a
line-drawing exercise in an attempt to prevent unjust enrichment
without unduly impairing DEs’ capital access. In the FNPR, the
FCC explicitly “recognize[d] that we must strike a delicate
balance between encouraging the participation of [genuinely]
small businesses . . . and ensuring that those small businesses
who do participate . . . have sufficient capital and flexibility,”
FNPR, 21 F.C.C.R. 1757, and solicited comment on this issue,
id. at 1767.

Moreover, although the FCC solicited comments from
the DE and investment communities with respect to the effects
of a rule change on DEs’ capitalization, this sort of prediction is
inherently speculative. In this regard, we find this case similar
to FCC v. National Citizens Committee for Broadcasting, 436
U.S. 775 (1978) (hereinafter NCCB). In NCCB, the Supreme
Court reviewed an FCC rule prohibiting common ownership of
newspapers and TV stations where only one of each existed in
the relevant geographic market. Id. at 796-97. Although the
Court found it “inconclusive” whether the rule would actually
achieve its stated goal of increasing the diversity of broadcast
programming, id., it declared that “[i]n these circumstances, the
Commission was entitled to rely on its judgment, based on
experience, that it is unrealistic to expect true diversity from a
commonly owned station-newspaper combination. The
divergency of their viewpoints cannot be expected to be the
same as if they were antagonistically run.” Id. at 797 (internal
quotation marks and citation omitted).

37
 Also at issue in NCCB was the FCC’s decision not to
give the new rules retroactive application with respect to some
markets. This was based on the FCC’s concern that retroactive
application might result in a loss of local ownership of some
broadcast stations, require the replacement of incumbent station
owners who had performed exceptionally well, or force existing
owners to sell their stations at a loss and thus discourage future
investment in quality programming. Id. at 813. The Court of
Appeals found this decision arbitrary, because the record did not
indicate the extent to which these problems would actually arise
if the divestiture requirement were applied across the board.
The Supreme Court reversed, explaining that

to the extent that factual determinations were
involved in the Commission’s decision to
“grandfather” most existing combinations, they
were primarily of a judgmental or predictive
nature—e.g., whether a divestiture requirement
would result in trading of stations with
out-of-town owners; whether new owners would
perform as well as existing crossowners, either in
the short run or in the long run; whether losses to
existing owners would result from forced sales;
whether such losses would discourage future
investment in quality programming; and whether
new owners would have sufficient working
capital to finance local programming. In such
circumstances complete factual support in the
record for the Commission’s judgment or
prediction is not possible or required; a forecast of
the direction in which future public interest lies

38
 necessarily involves deductions based on the
expert knowledge of the agency.

Id. (internal quotation marks and citation omitted).

Like in NCCB, here the FCC’s attempts at factfinding
relevant to the impact of its proposed rules on DE financing
were thin, perhaps because of its haste in promulgating rules
before Auction 66. As a result, the Commission’s consideration
of the matter is neither as clear nor as thorough as would be
ideal. Nonetheless, in light of the great deference to agency
experience that we owe “where the issues involve ‘elusive’ and
‘not easily defined’ areas” such as this, Prometheus Radio
Project, 373 F.3d. at 390 (quoting Sinclair Broad. Group v.
FCC, 284 F.3d 148, 159 (D.C. Cir. 2002)), we conclude that the
FCC offered enough consideration of DE capitalization to pass
the arbitrary and capricious threshold with respect to the 25%
attribution rule.

For these reasons, we will deny the petition insofar as it
challenges the 25% attribution rule, and uphold the validity of
47 C.F.R. § 1.2110(b)(1)(I) and (b)(3)(iv)(B).

C. The 50% Impermissible-Relationship Rule

1. Notice and Comment Compliance

We next consider 47 C.F.R. § 1.2110(b)(3)(iv)(A), which
makes license applicants or holders ineligible for DE benefits if
they lease or resell (including at wholesale) more than 50% of
their spectrum capacity. Aside from the difference in

39
percentages, this rule diverges from the 25% attribution rule in
two crucial ways. First, the 50% impermissible-relationship rule
considers the aggregate portion of spectrum capacity that a
licensee has leased or resold, rather than the portion of capacity
leased to an individual lessee as does the 25% rule. Second, the
50% rule is a per se disqualification from DE status, rather than
a mere attribution requirement. These two characteristics are
the essential elements of the rule.

The aggregation element of the 50% rule was not
mentioned in the FNPR, nor, in our view, can it be regarded as
a logical outgrowth of the concerns addressed therein. The
FNPR was focused on ensuring that a DE remains a genuinely
small business, rather than a front entity controlled or heavily
influenced by a large entity that is not eligible for bidding
credits. As we noted, the 25% attribution rule addresses this
concern directly by limiting the allowable combined size of
groups of related license holders or users which include DEs.
By contrast, because the 50% rule involves aggregation of all of
a DE’s lease or resale agreements, it would deny DE status to a
small company that leases or resells 5.1% of its spectrum
capacity to each of ten other companies, regardless of how small
those lessees or buyers, or all of them combined, might be. It is
true, of course, that this aggregation rule also strips DE status
from small businesses that lease or resell almost all of their
spectrum to several large carriers, in chunks of just under 25%.
But we find no basis in the record to conclude that either type
of arrangement would threaten to give any single large buyer or
lessee—or DE-buyer-lessee grouping—undue influence over a
DE in the manner the FNPR sought to address. Instead, DEs
that run afoul of the 50% rule may often employ a business

40
model relying on a large number of relatively small-scale
transactions with a group of third parties who compete against
each other in the wireless services market. We regard this as
exactly of the kind of DE independence that the FNPR was
concerned with preserving, and the record contains no indication
to the contrary.

Indeed, as we described above, the Second Report and
Order makes clear that the FCC’s real concern in promulgating
the 50% impermissible-relationship rule was not to prevent DEs
from being unduly influenced by large entities or groups of
entities, but rather was to ensure that DEs are primarily engaged
in offering wireless services to the public. But the FNPR had
not so much as hinted that this was the objective of the
rulemaking: it mentioned “service to the public” only twice,
both times in the course of describing the FCC’s obligation to
ensure that DEs have access to capital to help them provide such
service. See FNPR, 21 F.C.C.R. 1753 at 1757, 1767. Instead,
as we have explained, the FNPR was focused on maintaining the
independence of DEs from larger entities.

We also find it instructive that the FCC had previously
solicited broader comment on the permissibility of leasing
arrangements involving DEs, and in much more specific terms
than it did here. In 2003 the FCC issued a Report and Order and
Further Notice of Proposed Rulemaking in In re Promoting
Efficient Use of Spectrum Through Elimination of Barriers to
the Development of Secondary Markets, 18 F.C.C.R. 20,604
(October 6, 2003), in which it significantly relaxed previous
restrictions—which had applied to DEs and non-DEs alike— on
the leasing or reselling of spectrum licenses. In promulgating

41
this change, the FCC stated it had “sought to ensure that its
approach would not invite circumvention of the underlying
purposes of these designated entity-related policies and rules,”
id. at 20,627, and summarized the extensive comments it had
received directly addressing both sides of the issue, id. at
20,629, before concluding that

[a] designated entity and/or entrepreneur licensee
may lease to any spectrum lessee and avoid the
application of our unjust enrichment rules and/or
transfer restrictions so long as the lease does not
result in the lessee becoming a ‘controlling
interest’ or affiliate that would cause the licensee
to lose its designated entity or entrepreneur status.

Id. at 20,654-55. The Commission also sought comment on
possible further rulemaking, asking:

[s]hould we require a lessee to be eligible for the
same level of competitive bidding benefits, such
as bidding credits, as the licensee from which it is
leasing? Should we require only that the lessee be
qualified to hold the license? If so, do we impose
unjust enrichment obligations on a lessee that is
qualified for a lesser level of competitive bidding
benefits?

Id. at 20,698. In the final rule that emerged from this additional
process, the FCC reiterated that DEs were free to lease their
spectrum so long as they met the requirements applicable to all
licensees. Second Report and Order In re Promoting Efficient

42
Use of Spectrum through Elimination of Barriers to the
Development of Secondary Markets, 19 F.C.C.R. 17,503,
17,543-44 (2004) (“[W]e will . . . amend the language of our
rules to clarify that, subject to the other eligibility restrictions .
. . a designated entity or entrepreneur licensee may enter into a
spectrum manager leasing arrangement with any spectrum
lessee, regardless of the lessee’s eligibility for designated entity
or entrepreneur benefits.”).

The contrast could not be more stark between the
transparent discussion of DE leasing rights from 2003-04 on the
one hand, and the run up to the rules promulgated in 2006 by the
Second R&O on the other. The FNPR here gave no indication
that the FCC intended to revisit an issue it had thoroughly
addressed only three years before. Commenters could not
reasonably have anticipated that, in inquiring in the FNPR
whether leasing arrangements between DEs and large wireless
carriers impaired the DEs’ bona fide small business status, the
FCC was proposing to revise the general limits on DEs’ ability
to lease their spectrum to anyone at all. Even if this was the
FCC’s intent, “an unexpressed intention cannot convert a final
rule into a ‘logical outgrowth’ that the public should have
anticipated.” Shell Oil Co. v. EPA, 950 F.2d 741, 751 (D.C. Cir.
1991). Accordingly, we hold that the 50% impermissible-
relationship rule, as codified at 47 C.F.R. § 1.2110(b)(3)(iv)(A),
was promulgated without the notice and comment required by
the APA.8

8
Because we find the notice invalid under the APA, we
do not reach the question of whether the rule was arbitrary or

43
 D. The Ten Year Repayment Schedule

1. Notice and Comment Compliance

capricious. Nevertheless, we note the Commission’s inattention
to the nature of the wireless wholesaling business. Both the
25% and 50% rules apply to wholesaling of wireless services by
DEs. The record discloses that to engage in wireless
wholesaling, a licensee must do considerably more than obtain
and then lease or resell the spectrum license itself. Instead, the
wholesaler must build and operate the physical facilities
required to transmit and receive wireless signals, and to transfer
those signals to or from other networks or end users. It is this
service that is sold at wholesale. This raises a separate set of
questions and concerns from those raised when a DE merely
monetizes its credits or partners with a large carrier, thus
rendering the DE’s separate existence a mere formality.

Given the extensive provision of services entailed in
wireless wholesaling, it is not at all obvious that the FCC’s
rationale for the 50% impermissible-relationship rule—ensuring
that DEs offer service to the public, rather than simply handing
their spectrum over to larger carriers—should necessarily
require prohibiting DEs from engaging primarily in the
wholesale business, so long as they do not sell or lease overly
large quantities of their capacity to any single lessee or buyer.
The FCC appears to have failed to even acknowledge this issue.
We commend it to the Commission’s attention on remand.

44
 We last turn to Petitioners’ challenges to the changes to
47 C.F.R. § 1.2111(d)(2)(i) that extended from five to ten years
the period during which a licensee must repay its bidding
credits, in whole or in part, if it loses its DE status. The FNPR
plainly offered notice that the FCC was trying to determine the
proper length of the repayment period attached to any new DE
qualifications that it might adopt. Petitioners argue, however,
that the FNPR did not indicate that the FCC was considering
changing the repayment terms attached to then-existing DE
qualifications. As we noted previously, much of the protest that
greeted the new rules was directed toward this extension of the
repayment term, and the alleged lack of notice of this change.

The FCC responds by noting that it has never attached
differing bidding-credit repayment schedules to different
qualifications for DE status, because this would permit DEs
looking to enter into suspect relationships to structure their
arrangements to minimize the penalty involved. Thus, the
Commission maintains that by soliciting comment on the
repayment period attached to new regulations in the FNPR, it
implicitly proposed changing the corresponding period for
existing rules. We disagree.

Noting our decision in Wagner Electric Corp. v. Volpe,
466 F.2d 1013 (3d Cir. 1972), Petitioners argue persuasively
that this sort of implied notice is insufficient unless all interested
persons would reasonably be expected to perceive the
implication. In Wagner, the National Highway Traffic Safety
Administration (NHTSA) had published a notice of proposed
rulemaking in which it proposed to eliminate the permissible
failure rate for automobile turn signals and warning flashers.

45
The effect of this change would have been to require that 100%
of those products meet the NHTSA’s standards for regularity of
flashing, durability, and other features. After comments,
however, the NHTSA concluded that 100% compliance with its
current regulations was technologically infeasible. In the final
rule, it nevertheless enacted the 100% compliance requirement,
but dealt with the infeasibility problem by significantly relaxing
the substance of the standards. On review, faced with the
argument that its notice of proposed rulemaking had not
presaged this change, the NHTSA argued that relaxing the
substantive standards was a logical means of increasing the
compliance rate, and noted that some of the commenters had
actually suggested as much. Id. at 1018-19. We rejected this
argument, holding that even if some sophisticated observers
would have seen the connection between the stricter compliance
that had been noticed and the lower standards eventually
announced, the proper question under the APA was whether the
agency had provided notice to all “interested parties.” Id. at
1019. We held that the inferential notice purportedly provided
by the NHTSA did not satisfy that standard. Id. at 1020-21.

Here, the FNPR solicited comment on the length of the
bidding-credit repayment schedule attached to any new DE
qualifications. From this—and from the fact that the repayment
schedule had previously always been uniform across all DE
qualifications—the FCC argues that interested parties should
have inferred that the repayment schedule for all qualifications
was under review. As in Wagner, this purported inferential
notice was insufficient to satisfy the APA.

46
 Even if the kind of inferential notice the FCC advances
were sufficient under the APA, we do not find the FNPR to
provide such notice. Nothing in the record forecloses the
commonsense conclusion that because some violations of DE
status are more serious than others, it would make sense to
attach more stringent penalties to them, including more severe
bidding-credit repayment requirements. Thus, far from
communicating the need for an across-the-board repayment
period, to many interested parties, the FNPR’s solicitation of
comments only on the repayment schedule for the proposed
qualifications could well have appeared to be an attempt to
calibrate the penalties for violations of the new rules with those
for violations of existing rules. Indeed, no commenter
manifested an understanding that the FCC was considering
changing the existing repayment schedule. The only commenter
to suggest adopting a 10-year repayment period—MMTC, a
petitioner here—specifically suggested that the FCC “consider
initiating an inquiry” into doing so, apparently in an entirely
separate rulemaking. Comments of the Minority Media and
Telecomm’ns Council, J.A. at 586 (emphasis added).9
Accordingly, we hold that the 10-year repayment schedule, to
the extent it applies to qualifications for DE status that were in

9
The FCC also points to Council Tree’s own request that
the preexisting repayment schedule be applied to any new DE
qualifications that might be adopted. See Comments of Council
Tree Comm’ns, Inc., J.A. 497-99. But this does not even begin
to manifest an understanding by Council Tree that the
preexisting schedule might be changed.

47
effect before its enactment, was adopted without the notice and
comment required by the APA.10

10
As we stated above, there was more than adequate
notice that the new repayment schedule would apply to any new
rules adopted by the FCC. Because we leave intact the 25%
rule, there is therefore no notice-or-comment barrier to the 10-
year schedule’s application to that rule. Nonetheless, we find it
necessary to vacate the 10-year schedule in whole, because we
see no way to sever the FCC’s legitimate adoption of the 10-year
schedule with respect to the 25% rule from its unlawful
application of the rule to other situations. The Second R&O set
forth a single repayment schedule to govern all DE
qualifications, both those created in the Second R&O and those
that preexisted it. See 21 F.C.C.R. at 4794; 47 C.F.R.
§ 1.2111(d)(1). Thus, we can strike down the regulation as it
applies to the preexisting qualifications only by invalidating it
across the board.

Although we do not reach Petitioners’ contention that the
extended repayment schedule is arbitrary and capricious, we also
note that the FCC does not appear to have thoroughly considered
the impact of the extended repayment schedule on DEs’ ability
to retain financing. In the Reconsideration Order, the FCC
concluded that a shorter time to liquidity of a DE’s spectrum
licenses was not necessary, because

[i]n a recently concluded proceeding addressing
the leasing of Education Broadcast Service
spectrum, a broad cross-section of commenters,

48
 III.

The proper remedy remains to be considered. The FCC
suggests that, to the extent we find the rules defective, we
remand the matter without vacatur to permit it to correct the
defects. Petitioners, by contrast, urge not only that we vacate

including a private equity investment firm,
submitted evidence that insufficient capital would
flow to businesses that want to develop that
spectrum if the length of spectrum lease terms
was limited to fifteen years. 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. The Commission was ‘persuaded by
[this argument]. [Therefore,] we are not
convinced that the appropriate investment horizon
for designated entity status should be only three to
seven years.

21 F.C.C.R. at 6717-18. From this comment, it seems that the
FCC has confused the maximum period for which investors are
willing to lock up their capital (before being able to liquidate the
spectrum license, in the event the DE proves unprofitable) with
the minimum period necessary for financiers to turn a profit on
a successful investment in educational broadcast services. We
commend this issue as well to the FCC’s attention on remand.

49
the rules before remand, but also that we exercise our equitable
authority to rescind Auctions 66 and 73.11

Petitioners’ proposal is vigorously opposed by the FCC
and by several intervenors and amici, including some winners of
Auctions 66 and 73.12 The record gives no indication that these
intervenors and amici, or other winners of Auctions 66 and 73,
were anything but innocent third parties in relation to the FCC’s
improper rulemaking. We are thus loath to rescind the results of
the auctions, since it would involve unwinding transactions
worth more than $30 billion, upsetting what are likely billions
of dollars of additional investments made in reliance on the
results, and seriously disrupting existing or planned wireless
service for untold numbers of customers. Moreover, the
possibility of such large-scale disruption in wireless
communications would have broad negative implications for the
public interest in general.

11
Petitioners acknowledge that several other much
smaller auctions have been conducted under the new rules, and
that the logic of their position would also support rescission of
those results as well. Nevertheless, they request nullification
only of Auctions 66 and 73.
12
The FCC, intervenors and amici also contest our
jurisdiction to overturn the auction results. As we will explain,
we would decline to exercise any jurisdiction we may have to
rescind the auction results. Accordingly, we will not address
this matter further.

50
 In an attempt to address these concerns, Petitioners
suggest that we nullify the auction results, but permit the
winning bidders to keep their licenses unless and until they are
won by another bidder at re-auction. This 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 rescission until the re-auction which, as the
FCC might wish to adopt additional rules before the re-auction
to replace the ones at issue here, could be a significant period of
time. Additionally, some of the intervenors, who were winners
in Auction 66 in 2006, note that the state of the economy and the
credit markets has changed dramatically since the auction;
consequently, their participation in any re-auction might be
impractical or impossible. A re-auction thus would unfairly
require these intervenors 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.
Under these circumstances, we conclude that it would be
imprudent and unfair to order rescission of the auction results.

But we are also unreceptive to the FCC’s suggestion that
we remand the matter without vacating the challenged rules.
The FCC argues we are authorized to do so based on a balancing
of “the seriousness of the . . . deficiencies (and thus the extent
of doubt whether the agency chose correctly) and the disruptive
consequences of an interim change that may itself be changed,”
Chamber of Commerce of U.S. v. SEC, 443 F.3d 890, 908 (D.C.
Cir. 2006) (quoting Allied-Signal, Inc. v. Nuclear Regulatory

51
Comm’n, 988 F.2d 146, 150-51 (D.C.Cir.1993)).13 We find the
deficiencies in the challenged rulemaking to be serious. On the
other hand, vacating the 50% impermissible relationship rule
will mean that DEs will be free to lease or wholesale as much of
their spectrum as they wish, subject to revenue attribution
should they lease or wholesale more than 25% of their spectrum
to a single entity. Vacating the 10-year-hold rule will simply
mean that DEs’ repayment obligations will once again be
governed by the previous 5-year schedule.14 See Abington Mem.
Hosp. v. Heckler, 750 F.2d 242, 244 (3d Cir. 1984) (citing
Action on Smoking and Health v. CAB, 713 F.2d 795, 797 (D.C.
Cir. 1983), for the proposition that “vacating or rescinding

13
Petitioners argue that we are required to vacate any
rules we find in violation of the APA, pointing out that the APA
requires us to “hold unlawful and set aside” any such agency
action. 5 U.S.C. § 706(2) (emphasis added). The FCC,
however, cites to a case in which we remanded without vacatur,
albeit without commenting on the issue. See Am. Iron & Steel
Inst. v. EPA, 568 F.2d 284, 310 (3d Cir. 1977). Because we find
remand without vacatur to be inappropriate on the facts of this
case, we express no view as to whether we are authorized to
order this remedy.
14
Because we will leave in place 21 C.F.R.
§ 1.2111(d)(1), which makes the repayment schedule of
§ 1.2111(d)(2)(i) applicable to violations of the new 25%
attribution rule which we also leave in place, violations of the
25% rule will also be governed by the preexisting five-year
schedule.

52
invalidly promulgated regulations has the effect of reinstating
prior regulations”); Paulsen v. Daniels, 413 F.3d 999, 1008 (9th
Cir. 2005) (“The effect of invalidating an agency rule is to
reinstate the rule previously in force.”). We do not regard either
of these situations as likely to create any serious disruption.
Accordingly, even assuming we have the authority to remand
the matter without vacatur, we would decline to do so here.
Instead, we will vacate the 50% and 10-year rules and remand
the matter to the FCC.

IV.

In sum, the FCC’s 25% attribution rule was promulgated
after the public notice and opportunity to comment required by
the APA, and is not arbitrary and capricious. The 50%
impermissible-relationship rule, however, was promulgated
without the requisite notice and opportunity to comment. The
10-year bidding-credit repayment schedule likewise was
promulgated in substantial and inseverable part without notice
or comment. Accordingly, we will deny the petition with
respect to the attributable-material-relationship rule articulated
in 47 C.F.R. § 1.2110(b)(1) and (b)(3)(iv)(B). We will grant
the petition with respect to the impermissible material
relationship rule contained in 47 C.F.R. § 1.2110(b)(3)(iv)(A)
and the 10-year-hold rule contained in 47
C.F.R.§ 1.2111(d)(2)(i). We will vacate the impermissible
material relationship rule and the 10-year-hold rule, order the
reinstatement of the previous version of 47 C.F.R.
§ 1.2111(d)(2), and remand the matter to the FCC for further
proceedings.

53