Fresno Mobile Radio, Inc. v. Federal Communications Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 16, 1998 Decided February 5, 1999

No. 97-1459

Fresno Mobile Radio, Inc., et al.,

Petitioners

v.

Federal Communications Commission and

United States of America,

Respondents

Nextel Communications, Inc.,

Intervenor

Consolidated with

Nos. 97-1460, 97-1536, 97-1611

On Petitions for Review of Orders of the

Federal Communications Commission

Frederick M. Joyce argued the cause for petitioners Fresno
Mobile Radio, et al., and SMR WON. With him on the briefs

were Christine McLaughlin and Robert H. Schwaniger, Jr.
Dennis C. Brown entered an appearance.

Thomas P. Steindler argued the cause for petitioner South-
ern Company. With him on the briefs were Carole C. Harris
and Christine M. Gill.

Roberta L. Cook, Counsel, Federal Communications Com-
mission, argued the cause for respondents. With her on the
brief were Joel I. Klein, Assistant Attorney General, U.S.
Department of Justice, Catherine G. O'Sullivan and Marion
L. Jetton, Attorneys, Christopher J. Wright, General Counsel,
Federal Communications Commission, and John E. Ingle,
Deputy Associate General Counsel. Mark S. Popofsky, At-
torney, U.S. Department of Justice, and Daniel M. Arm-
strong, Associate General Counsel, Federal Communications
Commission, entered appearances.

Robert S. Foosaner, Michael D. Hays and Michael Kovaka
were on the brief for intervenor Nextel Communications, Inc.
David E. Mills entered an appearance.

Before: Edwards, Chief Judge, Williams and Ginsburg,
Circuit Judges.

Opinion for the Court filed by Circuit Judge Ginsburg.

Ginsburg, Circuit Judge: Before us are petitions for review
of two Federal Communications Commission rules creating a
new class of radio spectrum licenses for bandwidth in the 800
MHz range. Petitioner Southern Company, which holds nu-
merous licenses in that range, asserts that the rules violate a
recently-enacted statute that requires the agency to treat all
similarly situated commercial licensees comparably. Petition-
ers Fresno Mobile Radio, et al., and SMR WON, a trade
association of incumbent licensees in the 800 MHz range
contend that the Commission, among other things, exceeded
its statutory authority when it decided to distribute the new
licenses by auction, failed adequately to protect the interests
of small businesses in setting the rules for the auction, and
unlawfully modified existing licenses without holding eviden-

tiary hearings. Nextel Communications, Inc., which pur-
chased the great majority of the licenses awarded thus far
under the new rules, has intervened in support of the Com-
mission.

We hold that the Commission failed adequately to explain
its disparate treatment of incumbent and new licensees, and
therefore grant Southern's petition for review. We reject
each of the other petitioners' arguments, however, and con-
clude that the agency acted within its discretion in deciding to
allocate the new licenses by auction and otherwise proceeding
as it did.

I. Background

In 1974 the Commission created the Specialized Mobile
Radio service. SMR licensees use bandwidth in the 800 MHz
and 900 MHz ranges to provide "land mobile communications
services" on a commercial basis. 47 C.F.R. s 90.7. Until
recently the vast majority of SMR licensees provided local
dispatch services for taxis, ambulances, and the like. In the
last few years, however, an increasing number of SMR licen-
sees have begun to use their spectrum for more ambitious
purposes--in particular, the provision of cellular telephone
and data transmission services over a wide area.

At first these licensees faced a difficult regulatory environ-
ment. For example, the Commission separately licensed each
individual transmitter and small group of channels; that
made it expensive and time-consuming for a licensee that
wanted to provide cellular telephone, data transmission, or
other services to get authorization for the large number of
transmitters and channels required for those services. They
were also hampered because most of the SMR bandwidth had
already been licensed. Furthermore, the Commission's
"build out" rule, which obligated the SMR licensee to com-
plete its facility within one year of receiving its license,
weighed particularly upon any licensee trying to build a wide
area system.

The agency began to respond to these problems in 1993.
First, it extended the time for an SMR licensee to build a

wide-area broadcasting system to as much as five years.
Next, it proposed to offer large blocks of bandwidth and
coverage of a large geographic area in a single license. See 8
F.C.C.R. 3950 p 7 (1993).

Meanwhile, in August, 1993 the Congress amended s 332 of
the Communications Act of 1934 to require the Commission to
classify all mobile radio services as either "commercial" or
"private." 47 U.S.C. s 332(c). As to certain services that
had been considered private under the prior definition but
now would be classified as commercial, the Commission was
required to promulgate "technical requirements that are com-
parable to the technical requirements that apply to licensees
that are providers of substantially similar [commercial] ser-
vices." Pub. L. No. 103-66, s 6002(d)(3)(B), 107 Stat. 312
(1993). To fulfill this mandate, the Commission began a new
proceeding in which it concluded that SMR licensees offering
for-profit interconnected services--i.e. those involving both
radio and landline telephone communications--are "substan-
tially similar" to cellular telephone and Personal Communica-
tion Service (PCS) providers, and should therefore be subject
to comparable regulatory regimes.

In order to put SMR on a footing more nearly equal to
those of other licensees, the Commission then adopted a
system for the upper 200 channels of the SMR bandwidth
pursuant to which it would auction off licenses for each of 175
newly-designated "Economic Areas." Each EA license would
include a large block of spectrum for the entire geographic
area, thereby making transmitter-by-transmitter and
channel-by-channel licensing unnecessary. To help EA licen-
sees obtain the contiguous spectrum needed to provide com-
petitive wide-area services, the Commission also determined
that any EA licensee shall be able to force any incumbent
SMR licensee to relocate to the lower 230 channels of SMR
spectrum, provided the EA licensee gives the displaced licen-
see comparable facilities and spectrum, pays the expenses
associated with its relocation, and ensures it a "seamless"
transition between the old and new frequencies. The Com-
mission also relaxed the build out rule for EA licensees:
Under its new "interim coverage requirement," an EA licen-

see must provide service to one-third of the population in its
area within three years, and to two-thirds of the population
within five years, of the award of the license. The agency
declined, however, to extend this rule to incumbent SMR
licensees. Instead, it gave them a maximum of two years to
complete construction of their systems. See Amendment of
Part 90 of the Commission's Rules, First Report and Order,
11 F.C.C.R. 1463, pp 105-114 (1995) [First Report and Order].

On reconsideration, the Commission adhered to this new
regulatory scheme for the upper 200 channels of SMR band-
width but changed its pre-existing method for giving small
businesses an advantage in the auction process. Specifically,
the Commission rescinded its policy of allowing small busi-
nesses to pay for licenses in installments, and instead created
a system of bidding credits for which only small businesses
could qualify. See Amendment of Part 90 of the Commis-
sion's Rules, Memorandum Opinion and Order on Reconsid-
eration, 12 F.C.C.R. 9972, pp 125-32 (1997) [Reconsideration
Order].

In June, 1997 the Commission adopted a similar set of rules
for the lower 230 channels. Again, the agency decided to
auction off new EA licenses, each of which would cover a wide
geographic area and a large block of spectrum. It did not,
however, grant EA licensees in the lower 230 channels the
right involuntarily to displace incumbents. As before, the
Commission chose to aid small businesses at the auction with
bidding credits, but this time deferred deciding whether to
stop accepting installment payments. See Amendment of
Part 90 of the Commission's Rules, Second Report and
Order, 12 F.C.C.R. 19079, pp 276-80 (1997) [Second Report
and Order].

In October, 1997, after this Court denied SMR WON's
motion for a stay, the Commission conducted an auction for
EA licenses in the upper 200 channels. Nextel purchased 475
of the 525 licenses and 33,640 of the 35,000 channels offered.
See Public Notice, 12 F.C.C.R. 20417 (1997). The Commis-
sion has not yet scheduled an auction for EA licenses in the
lower 230 channels.

II. Analysis

Insofar as the petitioners challenge the Commission's view
of the authority delegated to it by statute, this court's review
is governed by Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837
(1984). We must first determine whether the Congress, in
the Communications Act as amended, unambiguously ad-
dressed the "precise question[s] at issue" here. 467 U.S. at
842. If it did not, then the agency's interpretation, assuming
it is reasonable, must prevail. See id. at 844. Insofar as the
petitioners attack the Commission's exercise of its statutory
authority, this court's review is limited to determining wheth-
er the agency's decisions were arbitrary and capricious within
the meaning of the Administrative Procedure Act, 5 U.S.C.
s 706(2)(A). See Arent v. Shalala, 70 F.3d 610, 616 (D.C. Cir.
1995). The agency has met this standard if it "examined the
relevant data and articulated a satisfactory explanation for its
action." Atlantic Tele-Network, Inc. v. FCC, 59 F.3d 1384,
1389 (D.C. Cir. 1995).

A."Interim Coverage Requirement" Limited to EA Licen-
sees

The Commission allows cellular, PCS, and EA licensees to
provide service after three years to as little as one-third, and
after five years to as little as two-thirds, of the population in
the areas covered by their licenses. Southern contends that
the Commission construed the Act unreasonably and acted
arbitrarily when it refused to extend this rule to incumbent
wide-area SMR licensees such as itself, that is, those that
have "obtained extended implementation authorizations ...
and who offer real-time, two-way voice service that is inter-
connected with the public switched network." According to
Southern, which is "seeking authorization to construct hun-
dreds of [additional] sites throughout its licensed geographi-
cal area," it occupies a position in the market indistinguish-
able from that of any wide-area licensee--offering services
over a large geographic area, competing directly with EA
licensee Nextel as well as with cellular and PCS licensees,
and using the same technology as do they. Because Southern
was licensed under the ancien regime for SMR licensees,

however, it is required to provide service to everyone in its
license area within two years of licensing. Southern chal-
lenges the Commission to reconcile this disparate treatment
with its statutory mandate to impose "comparable" require-
ments upon "providers of substantially similar ... services."
Pub. L. No. 103-66, s 6002(d)(3)(B), 107 Stat. 312 (1993).

Faced with this argument on reconsideration, the Commis-
sion defended its decision upon two grounds:

[1] We impose a two year build out period on [incumbent]
site licensees because, by definition, they are seeking
authority to build out and operate a particular site. EA
licensees, in contrast, will be building multiple sites
throughout their licenses' entire geographical area and
thus require a longer build out period. [2] Moreover, the
competitive bidding process provides incentives for EA
licenses to build out quickly, and thus reduces the likeli-
hood that a longer construction period would lead to
spectrum warehousing.

Reconsideration Order at p 81.

Neither explanation bears scrutiny. The Commission ele-
vates form over function when it applies the first reason to an
incumbent site licensee providing radio telephone service over
a wide area; because it is licensed for a multitude of "particu-
lar site[s]," it too "will be building sites throughout ... [an]
entire geographic area and thus require a longer build out
period." Moreover, the Commission ignores a key difference
in the regulatory regimes it has imposed upon two "substan-
tially similar ... services": An EA licensee will never have to
provide service to more than two-thirds of its market, while a
wide-area incumbent offering the same service will be re-
quired to cover its entire service area within two years.
Even if the obstacles an EA licensee faces in constructing its
system warrant giving it more time than is allowed to a
comparable SMR licensee, the Commission has not explained
why the EA licensee should have a permanent advantage over
incumbent SMR licensees--namely, not having ever to serve
the unprofitable precincts within its licensed service area.

The Commission's second rationale proceeds from the
premise that because an incumbent SMR licensee, unlike an
EA licensee, did not have to expend a substantial sum to get
its license, the incumbent has less incentive, in order to
recoup its investment, to put its spectrum into service quick-
ly. In the Commission's terms, the incumbent is more likely
to "warehouse" its spectrum because it received its license
free. This is a foolish notion that should not be entertained
by anyone who has had even a single undergraduate course in
economics. See Armen A. Alchian & William R. Allen, Ex-
change & Production 222 (3rd ed. 1983) ("[O]nce [an item] is
acquired, [its cost is] irrelevant to any future decision.");
James D. Gwartney & Richard L. Stroup, Economics 417-19
(4th ed. 1982) ("If they are to minimize costs, business
decision-makers must recognize the irrelevance of sunk
costs."); N. Gregory Mankiw, Principles of Economics 291
(1997) ("The irrelevance of sunk costs explains how real
businesses make decisions."); Paul A. Samuelson & William
D. Nordhaus, Economics 167 (16th ed. 1998) ("One of the most
important lessons of economics is that you should look at the
marginal costs and marginal benefits of decisions and ignore
past or sunk costs"). Failing that advantage, a moment's
reflection would bring one to the realization that the use to
which an asset is put is based not upon the historical price
paid for it, but upon what it will return to its owner in the
future. Would anyone be less interested in earning a return
on money he had inherited than on money he had worked for?
Of course not! Are radio licensees not as alert as inheritors?
Whether a license costs millions of dollars or nothing, that is,
absent some institutional constraint imposed upon EA licen-
sees by the Commission, or lenders, for example--and the
agency alludes to none--a rational licensee will voluntarily
put its spectrum into service only when the additional reve-
nue it expects to earn from doing so exceeds the additional
cost it must incur to do so. Therefore, the Commission
cannot reasonably assert that EA licensees will be any less
prone than their incumbent SMR competitors to warehouse
spectrum.

Because the Commission has failed to articulate a satisfac-
tory explanation for its refusal to extend the Interim Cover-

age Requirement to wide-area SMR licensees, we hold that
its decision was arbitrary and capricious in that respect. See
Atlantic Tele-Network, Inc., 59 F.3d at 1389. We shall not
go on, however, to address the question whether the agency's
interpretation of the statute to allow such a distinction is
permissible under Chevron: The Commission did not think
seriously about the question whether wide-area incumbent
SMR licensees are in fact sufficiently different from EA,
cellular, and PCS licensees that disparate regulatory treat-
ment is warranted under s 6002(d)(3)(B). We are therefore
reluctant to render what may be an uninformed application of
the statute to the facts about these various services. Accord-
ingly, we shall remand this matter for the agency to reconsid-
er in the first instance. In the interim, the Commission shall
not deny Southern the benefit of the Interim Coverage
Requirement.

B.Authority to Auction EA Licenses

Fresno and SMR WON (hereinafter collectively referred to
as "Fresno") question the Commission's authority under
s 309(j)(1) to auction EA licenses in the upper 200 channels.
That section provides that if "mutually exclusive applications
are accepted for any initial license ... then ... the Commis-
sion shall grant the license ... through a system of competi-
tive bidding." 47 U.S.C. s 309(j)(1). Fresno maintains that
the "common sense" meaning of an "initial license" is a
license for a new radio service, for an existing service in a
newly served area, or for previously unused spectrum. It
points out that many of the auctioned channels were already
licensed to SMR providers, and that at least some of those
incumbent licensees offer the same interconnected services as
will the EA licensee that prevailed in the auction. At least to
that extent, according to Fresno, no new service is being
licensed, hence, no "initial" license is involved. In response,
the Commission contends the EA licenses it auctioned off are
indeed "initial" because they are "first-time licenses for [EA]
systems and not renewals or modifications of existing licens-
es."

The statute does not unambiguously resolve "the precise
question at issue" here, Chevron, 467 U.S. at 842--whether

the Commission's creation of a new "licensing scheme" gives
it the authority to grant by auction a license for spectrum
currently being used by a licensee to provide substantially the
same (in this case, interconnected) service. To be "initial" in
any meaningful sense, a newly issued license must differ in
some significant way from the license it displaces; upon that
the parties agree. According to Fresno, the difference must
be that the new license covers a new service or territory or is
for previously unused spectrum. Although a plausible inter-
pretation of the term, this is not the only plausible one: As
the Commission suggests, nothing in the text of the statute
forecloses it from considering a license "initial" if it is the first
awarded for a particular frequency under a new licensing
scheme, that is, one involving a different set of rights and
obligations for the licensee. Even if such a license authorizes
no new service and covers spectrum already in use, it is the
first license for that spectrum issued under the new regulato-
ry regime. Because the critical term of the statute is there-
fore ambiguous, we turn to Chevron step two and the ques-
tion whether the Commission's resolution of that ambiguity is
reasonable.

Fresno contends that the Commission's interpretation of
"initial license" is unreasonable, because it removes all limita-
tions upon the agency's authority to allocate licenses by
auction. That, however, is simply not true: The Commission
acknowledges that it must have instituted a new regulatory
regime for a new license to be deemed "initial" and thus
subject to competitive bidding. Here the Commission has, as
it says, "revis[ed] its frequency allocations and its licensing
scheme." Fresno insists that the Commission has not created
a genuinely new regulatory scheme, but that is incorrect, too.
As noted above, EA licenses cover blocks of spectrum and
substantial geographic areas, while the previously issued
SMR licenses are for small groups of channels and individual
transmitters. Unlike incumbents, moreover, EA licensees
enjoy both the liberalized build out rule and the power
involuntarily to relocate other licensees. True it is, as Fresno
points out, that the Commission experimented with some of

these changes in the early 1990s by waiving its prior rules in
particular SMR license proceedings. See, e.g., FleetCall, 6
F.C.C.R. 1533, p 21 (1991) (waiving build-out rule). That may
show that the development of the Commission's thinking was
evolutionary rather than revolutionary; it does not, however,
mean that the EA licensing regime is merely old wine in a
new vessel. In sum, because an EA license is substantially
different from an SMR license, the agency did not act unrea-
sonably in treating EA licenses as "initial license[s]" within
the meaning of s 309(j)(1).

C.Elimination of Installment Payment Plans

Fresno next challenges the Commission's decision to stop
letting small businesses pay by installment for licenses in the
upper 200 channels purchased at auction. Fresno contends
that the prior practice is required by s 309(j)(3)(B), which
says that, in designing an auction, the agency should seek to
disseminate licenses "among a wide variety of applicants,
including small businesses." Fresno characterizes the agen-
cy's substitute policy of providing bidding credits for small
businesses as a "token gesture," the insignificance of which it
says is demonstrated by Nextel having bought the great
majority of the licenses offered.

There are two problems with Fresno's position. First,
s 309(j)(3)(B) requires the agency to consider a variety of
objectives--not only the promotion of small businesses but
also, among others, "the development and rapid deployment
of new technologies, products, and services," "the avoidance
of unjust enrichment," and the "efficient and intensive use of
the electromagnetic spectrum." 47 U.S.C. s 309(j)(3). When
an agency must balance a number of potentially conflicting
objectives, which these are, judicial review is limited to
determining whether the agency's decision reasonably ad-
vances at least one of those objectives and its decisionmaking
process was regular. See Melcher v. FCC, 134 F.3d 1143,
1154 (D.C. Cir. 1998). Here, the record demonstrates, the
Commission decided to eliminate the installment payment
plan after thoroughly considering the competing statutory
objectives. Having recently encountered severe problems
created by licensees defaulting on their installment payments,

the Commission reasonably decided to reevaluate its payment
policy. Because that would take some time, and because
several years had already passed since the agency had accept-
ed any new applications for 800 MHz SMR licenses, it con-
cluded that a system of bidding credits would strike the best
balance between solicitude for small businesses and prompt
and effective use of the spectrum. See Reconsideration Or-
der at pp 130-32. Its decision, therefore, clearly meets the
Melcher standard.

Second, the Commission did not simply sacrifice the goal of
promoting small businesses in favor of other statutory objec-
tives; rather, it chose one method of achieving that goal over
another. While it is true, as Fresno emphasizes, that the
method chosen did not turn out to be successful at allocating
licenses "among a wide variety of applicants," an agency's
predictive judgment regarding a matter within its sphere of
expertise is entitled to "particularly deferential" review.
Milk Indus. Found. v. Glickman, 132 F.3d 1467, 1478 (D.C.
Cir. 1998). Fresno makes no showing that the Commission's
decision was unreasonable ex ante; rather, its argument is
that the Commission's belief in the efficacy of bidding credits
appears ex post to have been mistaken. Because this argu-
ment is not a challenge to the reasonableness of the agency's
decision on the basis of the record then before it, Fresno's
claim must fail.*

D."Modification" of Incumbent Licensee Rights

Finally, Fresno contends that the licenses of incumbent
SMR providers in the upper 200 channels will be "modified"
to the extent they are forced to relocate to the lower 230
channels, and that s 316 of the Act therefore required the

__________
* Fresno also contends that the agency failed to consider the
interests of businesses owned by women and members of minority
groups, as is also required by s 309(j)(3)(B). Because Fresno
makes no showing, however, that any of its members is owned by a
woman or a member of a minority group, it lacks standing to raise
this argument. See Lujan v. Defenders of Wildlife, 504 U.S. 555,
560-61 and n.1 (1992) (to have standing, plaintiff must have suffered
a "particularized" injury, meaning that "the injury must affect the
plaintiff in a personal and individual way").

agency to grant each incumbent an evidentiary hearing before
awarding a mutually exclusive EA license. See 47 U.S.C.
s 316(a)(1) (no "order of modification shall become final until
the holder of the license ... [has been] given reasonable
opportunity ... to protest"). We do not address the merits
of this argument, however, because Fresno failed to raise it
before the Commission. See 47 U.S.C. s 405(a) ("filing of a
petition for reconsideration [is] ... a condition precedent to
judicial review ... where the party seeking such review ...
relies on questions of fact or law upon which the Commission
... has been afforded no opportunity to pass"). A number of
parties did complain to the Commission that the agency's
proposed EA licensing rules were, for a variety of reasons,
unfair to incumbents, but none of their objections mentioned
s 316 even in passing, nor did any party request an evidentia-
ry hearing. Hence, we cannot say that the Commission was
given a reasonable "opportunity to pass" upon the argument
Fresno now makes. See Bartholdi Cable Co. v. FCC, 114
F.3d 274, 279 (D.C. Cir. 1997).

III. Summary and Conclusion

First, the Commission failed reasonably to explain its deci-
sion to apply different build out requirements to EA licensees
and to incumbent wide-area SMR licensees, such as Southern,
which provide substantially similar services. Accordingly, the
Interim Coverage Requirement for EA licensees must be
remanded to the agency for further consideration in conformi-
ty with Public Law 103-66.

Second, the Commission reasonably concluded that it had
the statutory authority to grant EA licenses by competitive
bidding and that the auction rules it chose would advance the
interests of small business bidders. We do not consider
Fresno's claim to an evidentiary hearing under s 316 because
it was not raised before the agency. We have considered and
rejected the petitioners' other arguments, which do not merit
treatment in a published opinion.

Judgment Accordingly.