STATEMENT OF DONALD VERRILLI
Before the Subcommittee on Commercial and Administrative Law And the Subcommittee
On Courts, The Internet And Intellectual Property Committee On The Judiciary
United States House of Representatives
December 6, 2001
INTRODUCTION
Thank you, Mr. Chairman; Members of the Committee. My name is Donald Verrilli and I
am a partner in the law firm of Jenner & Block. For the part two years my firm has played a
significant role in representing NextWave Telecom Inc. (“NextWave”) before the courts and the
FCC regarding the company’s efforts to retain, pay for, and build out spectrum licenses that were
initially awarded to NextWave by that agency in 1997. For example, we represented NextWave in
connection with all aspects of the D.C. Circuit litigation. We handled the effort to convince the D.C.
Circuit to stay the reauction of NextWave’s licenses pending appeal, and then handled the briefing
on the merits that resulted in the D.C. Circuit’s June 22 decision undoing the Commission’s
purported cancellation of NextWave’s licenses. And we successfully opposed the Commission’s
efforts in the D.C. Circuit to stay the issuance of the court’s mandate pending the filing of a petition
for certiorari. I also served as NextWave’s principal outside legal counsel during the negotiation of
the settlement agreement that is the subject of this morning’s hearing, and participated directly in
nearly all of the negotiation sessions.
I would like to begin by extending NextWave’s sincere appreciation and thanks to this
Committee for the oversight it has devoted to constitutional due process and general Bankruptcy
Code issues that have arisen in proceedings initiated by NextWave and other FCC licensees in recent
years to reorganize their business affairs under provisions of the Code. The Committee as a whole,
and many of its Members individually, have expended considerable effort in recent years to ensure
that those congressional protections were applied faithfully and fairly in NextWave’s reorganization
proceeding and in judicial review thereof. For example, on April 11, 2000, the Commercial and
Administrative Law Subcommittee held a hearing on the contention of the Federal Communications
Commission that it was exempt from certain provisions of the Bankruptcy Code. As Members of
the Subcommittee noted in a subsequent letter to the Speaker, “[e]very member of the subcommittee
present at the hearing expressed his concern or disagreement with the FCC’s position.” Similarly,
several Members of the Subcommittee filed an amicus brief in the D.C. Circuit proceedings on
behalf of NextWave. For these and other efforts, the company is profoundly grateful.
I am here before you today to report that after years of conflict, there is a proposed consensual
resolution of the primary legal controversy that has clouded NextWave’s bankruptcy reorganization.
The proposed settlement will end long-running litigation, generate $10 billion in payments to
taxpayers, allow consumers to access radio spectrum that has been tied up in the litigation, and
provide the foundation from which the NextWave can complete its bankruptcy proceedings and
emerge reorganized and able to proceed with its remaining business.
BACKGROUND
NextWave was formed in 1995 by a group of experienced telecommunications executives,
including the former President of the wireless business at QUALCOMM, Inc., to participate as a
designated entity in the auctions and implement an innovative business plan as a nationwide
“carrier’s carrier,” providing wireless services and airtime on a wholesale basis. At the conclusion
of the C Block auctions in May and July 1996, NextWave was designated the high bidder for 63
licenses and timely made its $474 million down payment on such C Block licenses. NextWave then
executed promissory notes for the remaining amounts due to purchase its C Block licenses.
NextWave moved quickly to implement its business plan and raised more than $600 million
to finance its down payments to the FCC and the initial build-out of its network. By early 1997,
NextWave had hired over 600 employees and contractors, and had opened 22 offices across the
country. NextWave also secured more than $2 billion in financing commitments from major vendors
for deployment of network equipment. Within months, NextWave had ninety percent of the
microwave links needed to launch service, had acquired seven switch sites, designed more than 1300
cell sites, signed more than 300 site leases, and negotiated an additional 900 leases. NextWave
expected to begin commercial service in four markets by late 1997, and had completed network
engineering designs for 22 of its major markets, including New York, Los Angeles, Chicago, and
Boston. NextWave had also obtained airtime purchase commitments for in excess of 35 billion
minutes of use.
Unfortunately, spectrum markets declined dramatically during 1997, primarily due to the
availability of additional spectrum that was made available through auction, at the very time
NextWave was attempting to raise capital and launch service.
Despite its efforts to remain solvent, NextWave was forced to curtail its operations, laying
off more than 500 employees and contractors. By this time, NextWave owed (in addition to its FCC
obligations) more than $400 million to creditors, and faced attachment proceedings and other
litigation across the country. To preserve assets for the benefit of creditors, and to sustain the
company as an ongoing venture, NextWave was forced to seek bankruptcy protection.
On June 8, 1998, NextWave filed for relief under Chapter 11 of the Bankruptcy Code.
Pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code, the NextWave have operated their
businesses and managed their properties as debtors-in-possession.
LITIGATION BETWEEN NEXTWAVE AND THE FCC
Following extended litigation in the Bankruptcy Court and the Second Circuit, NextWave
prepared to emerge from bankruptcy. Aided by improved market conditions, NextWave submitted
a plan of reorganization in December 1999. That plan would have cured all alleged defaults in
installment payments to the FCC, permitted NextWave to meet all FCC obligations going forward,
and paid all creditors in full, including interest and late fees. Indeed, NextWave went further and
offered to make an immediate cash payment to the FCC of $4.3 billion – thereby paying for the
licenses seven years earlier than required. 244 B.R. at 262. The plan was set for confirmation on
January 21, 2000.
On January 12, 2000, the FCC issued a Public Notice declaring that the NextWave’ C and
F Block licenses were cancelled retroactively to January 1999 due to a failure to make postpetition
installment payments. In response to the Public Notice, the NextWave pursued two parallel courses
with respect to the Public Notice: (i) in the Bankruptcy Court and, on appeal, in the Second Circuit;
and (ii) in the Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”).
In response to an Order to Show Cause filed by the NextWave seeking to void the Public
Notice, the Bankruptcy Court found that the attempted cancellation of the C and F Block licenses
was ineffective due to, inter alia, certain provisions of the Bankruptcy Code. Subsequently,
however, in response to a petition for writ of mandamus filed by the FCC, the Second Circuit found
that bankruptcy courts lack jurisdiction to review regulatory actions such as the Public Notice.
Specifically, the Second Circuit opined that “[e]ven if the bankruptcy court is right on the merits of
its arguments against revocation,” that court simply “lacked jurisdiction to declare the Public Notice
null and void on any ground: that the Public Notice violated the automatic stay, that the right to cure
obviates any default, or that the government was estopped.” In re FCC, 217 F.3d 125, 139 (2nd Cir.
2000). The Second Circuit emphasized that “NextWave remains free to pursue its challenge to the
FCC’s regulatory acts” in the D.C. Circuit, id. at 140, and refrained from commenting “on the
prospects” of any such appeal. Id. at 129.
On February 11, 2000, NextWave filed a petition for reconsideration of the Public Notice
with the FCC. NextWave also filed a precautionary appeal with the D.C. Circuit. On June 22, 2000,
that appeal was dismissed pending resolution of the reconsideration petition. On September 6, 2000,
the Commission denied the reconsideration petition, and, shortly thereafter, scheduled NextWave’s
licenses for reauction on December 12, 2000 (such reauction referred to hereinafter as “Auction 35”).
Following the FCC’s denial of NextWave’s petition for reconsideration, NextWave appealed
to the D.C. Circuit. In such appeal, the NextWave asserted, as they had before the Bankruptcy Court,
that cancellation of the C and F Block licenses violated several provisions of the Bankruptcy Code,
including §§ 362, 525, 1123 and 1124, as well as established principles of due process and fair
notice.
On June 22, 2001, the D.C. Circuit issued a ruling on the NextWave’ appeal, reversing the
FCC’s purported cancellation and holding that cancellation of the NextWave C and F Block licenses
violated Section 525(a) of the Bankruptcy Code (the “D.C. Circuit Opinion”). Section 525(a)
provides, in relevant part, that a “governmental unit may not . . . revoke . . . a license ... to . . . a
bankrupt . . . solely because such bankrupt . . . has not paid a debt that is dischargeable . . . under this
title.” The D.C. Circuit concluded that the NextWave’ licenses had been revoked solely because the
NextWave had not paid a dischargeable debt, which revocation thus violated the Bankruptcy Code
and reversed the Commission’s purported cancellation. The Court stated: “Applying the fundamental
principle that federal agencies must obey all federal laws, not just those they administer, we conclude
that the Commission violated the provision of the Bankruptcy Code that prohibits governmental
entities from revoking debtors’ licenses solely for failure to pay debts dischargeable in bankruptcy.”
The D.C. Circuit made clear that the FCC had asked for the judicial creation of a “regulatory
purpose” exception to that prohibition, but that Congress had not created such an exception. 254
F.3d at 151.
On August 6, 2001, the FCC filed a Motion to Stay the Mandate Pending the Filing of a
Petition for a Writ of Certiorari with the D.C. Circuit. Therein, the FCC indicated that the Acting
Solicitor General had authorized the filing of a petition for certiorari with respect to the D.C. Circuit
Opinion with the United States Supreme Court and requested that the D.C. Circuit stay issuance of
the mandate pending resolution of same. On August 23, 2001, the D.C. Circuit denied the Stay
Motion, noting that “the FCC has not demonstrated that the petition would present a substantial
question” warranting Supreme Court review.
On August 30, 2001, the D.C. Circuit issued its mandate, thereby formally concluding the
proceedings before it. On August 31, 2001, the FCC issued a Public Notice announcing that it had
returned the NextWave’ licenses to active status.
On October 19, 2001, the FCC filed a petition for writ of certiorari with the United States
Supreme Court requesting review of the D.C. Circuit Opinion. Certain of the high bidders in
Auction 35 also filed certiorari petitions with the Supreme Court. Given the proposed settlement
agreement, NextWave requested and received a sixty day extension of the time within which to
respond to such petitions. It is contemplated under the settlement agreement that the petitions for
certiorari will be withdrawn at the time the FCC receives the C Block and F Block licenses.
AUCTION 35 AND INTERVENTION BY WIRELESS CARRIERS
As indicated above, following the issuance of the Public Notice, the FCC scheduled and held
Auction 35 which, while it included certain other licenses, was primarily a reauction of NextWave’s
C and F Block licenses. The 30 MgHz C Block licenses held by NextWave were divided into three
10 MgHz licenses and bidders for certain of those 10 MgHz licenses were not limited to designated
entities. Further, Auction 35 was specifically held subject to resolution of the litigation with
NextWave over the C Block and F Block licenses. Even taking into account these factors, however,
the results of Auction 35 indicated that the market value of spectrum had significantly increased
during 1999-2001. The aggregate bids for NextWave’s licenses were $15.85 billion. Alaska Native
Wireless (“ANW”), Verizon Wireless (“Verizon”), Salmon PCS (“Salmon”), and VoiceStream
Wireless (“VoiceStream”) were responsible for over $13.72 billion of such bids.
THE REORGANIZATION PROCESS
NextWave’s goal has always been to be a nationwide provider of wholesale wireless
telecommunication services. Throughout the bankruptcy cases, NextWave has worked toward this
goal and on several occasions has sought to confirm a plan of reorganization providing significant
present and/or future value to its creditors and equity interest holders – many of whom invested
money or services in NextWave in 1996 or 1997. NextWave first filed a plan on June 25, 1999 (the
“Original Plan”) which proposed payment to creditors in connection with the proposed commercial
launch and operation of a nationwide wireless network. Due to various developments in the
litigation with the FCC, the Original Plan was modified in December 1999 to fully cure and reinstate
the FCC’s claims and pay other creditors amounts owed as of the bankruptcy filing. The Original
Plan, as modified, was scheduled for confirmation in January 2000 and contemplated the build-out
of a nationwide wireless network within 12 to 18 months. The Original Plan was, however,
subsequently abandoned when it became clear as a result of a variety of events within and outside
the litigation with the FCC that it had become unconfirmable.
Notwithstanding the disruptions to the reorganization process throughout the course of the
bankruptcy proceedings, NextWave has proceeded to the extent possible with the build-out of the
network. For example, network architecture and preliminary radio frequency designs were
completed for the top 40 markets. In June 2001, NextWave obtained court approval for debtor-in-possession financing sufficient to achieve initial build-out of all of its markets with a full commercial
build in the D and E markets. This build-out has continued with the signing of vendor contracts and
the purchase and installation of base stations and switches in certain markets. The NextWave remain
on schedule to launch commercial service in the markets covered by its D Block and E Block
licenses – which were paid for in full and are not the subject of this litigation -- during 2002.
Following the DC Circuit Opinion, NextWave filed a Second Plan of Reorganization. The
Second Plan provided for payment in full of all creditors, including the FCC, and proposed financing
commitments of approximately $5 billion to fund the build-out and commercial launch of a
nationwide wireless 3G network. The Second Plan will, however, be superseded by the settlement
agreement, should Congress conclude that it is in the public interest and enact the legislation
necessary to implement it.
SUMMARY OF THE SETTLEMENT AGREEMENT
The Settlement Agreement contemplates, in sum, that the litigation and the regulatory
disputes between the FCC and NextWave will be fully and finally resolved. As a result, NextWave’s
C Block and F Block licenses, which have been subject to the cloud of litigation, and NextWave’s
D Block and E Block licenses, which have been caught up in the delays caused by the dispute with
the FCC would be put immediately to productive use. The following is a brief overview of the
transactions and procedures encompassed in the Settlement Agreement.
(a)The Parties will seek legislation authorizing the FCC and Department of Justice (the
“DOJ”) to settle with NextWave as set forth in the Settlement Agreement.
The
proposed legislation further appropriates the funds required to implement the
settlement between the FCC and NextWave and provides for an expedited appellate
review process for challenges to the Settlement Agreement or transactions
contemplated thereunder.
(b)Pursuant to § 363(b) and (f) of the Bankruptcy Code, NextWave’s C Block and F
Block licenses will be returned to the FCC.
(c)Upon fulfillment of the conditions set forth in the Settlement Agreement including
(i) enactment of the Legislation; (ii) occurrence of the Final Bankruptcy Settlement
Approval Date; and (iii) transfer of NextWave’s C Block and F block licenses to the
FCC, NextWave will become entitled to receive $9.55 billion (the “NextWave
Payment”). The NextWave Payment will be provided for in the legislation and owed
once the applicable conditions are satisfied. The NextWave Payment is comprised
of $3.052 billion as a nonrefundable advance tax payment (the “Advance Tax
Payment”) and $6.498 billion in cash (the “Cash Payment”).
(d)The FCC will retain $499 million of the deposits NextWave made on its C and F
Block licenses. In addition, NextWave is required to make certain other payments
to the FCC such that, when added to the Advance Tax Payment and the retention of
its deposits, NextWave will have paid the United States $3.731 billion.
(e)It is contemplated under the Settlement Agreement that counting the Advance Tax
Payment and certain other payments by NextWave and the payments by Auction 35
Participants for the C Block and F Block licenses, the United States and the
Commission will receive at least $10 billion.
(f)Verizon and ANW are required to post letters of credit to secure the payments they
owe for their Auction 35 licenses. Conditioned upon the posting of such letters of
credit, once NextWave receives the Cash Payment, it is required to pay Verizon and
ANW $118.1 million and $25 million respectively.
(g)If Verizon does not post a letter of credit in the amount of $7,692,113,700 in January
2002, the FCC has the right to terminate the Settlement Agreement. The NextWave
Payment is also conditioned on the issuance of an FCC Order approving the
Settlement prior to January 10, 2002 and final resolution of any litigation relating to
bankruptcy approval of the Settlement.
(h)In accordance with its normal regulatory proceedings and authority, the FCC will act
upon the applications to issue the Auction 35 licenses to Participating Auction 35
Winning Bidders.
NextWave and the FCC have both had successes and setbacks in the course of this litigation.
While the current posture is that NextWave holds the C Block and F Block licenses, as the
Committee is aware, the FCC filed its Petition for Writ of Certiorari in the Supreme Court seeking
review and reversal of the D.C. Circuit Opinion rendered in favor of NextWave.
Although
NextWave believes that certiorari is likely to be denied and that in any event the D.C. Circuit
decision is correct and would likely be affirmed by the Supreme Court if review is granted,
NextWave would suffer from further litigation expense and delay if the Supreme Court should
choose to review the case on the merits, and would also run the risk that NextWave might not
ultimately prevail in such a proceeding.
Although NextWave is confident the Supreme Court would affirm the D.C. Circuit’s
Opinion, the Company has concluded that the cost of continued litigation is outweighed in light of
the benefits to creditors and other stakeholders afforded under the Settlement Agreement.
Neither side can predict with certainty what the Supreme Court’s ruling would be should this
case be heard, but at this point, both sides are willing to eliminate that risk by fairly settling this case
in a way that benefits all parties. Even in the unlikely event of the grant of certiorari by the Supreme
Court and a subsequent ruling against NextWave, the litigation would not be ended. The
proceedings would then return to the D.C. Circuit for consideration and review of NextWave’s
remaining claims, including due process and fair notice claims. This case has been ongoing for over
three years and without settlement could proceed well into 2003 or later before resolution. The
parties and their counsel involved in these cases have spent extensive time and substantial amounts
of money attempting to resolve this case.
The parties are now at a point where all sides are willing to enter into an agreement that
benefits all parties and further avoids costly litigation and delay. NextWave and the FCC will put
years of litigation behind them with a positive recovery for the government; the Auction 35
Participants will put the spectrum covered by the C Block and F Block licenses into immediate use;
NextWave’s creditors will finally get paid, and NextWave’s equity holders will benefit as well.
NextWave will be able to complete its reorganization, distributing substantial value to stake holders
and then proceed to complete the commercial launch of service in the markets covered by the D
Block and E Block licenses (primarily Detroit, Michigan and Madison, Wisconsin).
This is a rare case in which the resolution, while not the absolute outcome any party would
unilaterally select, is one that benefits all parties. The FCC and the government will receive at least
$10 billion, more than twice the amount NextWave bid on the licenses at the original auction. In
contrast, as matters now stand, NextWave’s obligation to the FCC in the upcoming year will be to
pay approximately $850 million, and its total obligation to the FCC for the licenses will amount to
only approximately $5 billion. The settlement thus provides the United States with $10 billion in
2002 – ten times what it would otherwise receive in that year from NextWave. The Auction 35
Participants will receive the C Block and F Block licenses. This will enable these carriers, some of
whom are currently or might in the future suffer from spectrum capacity constraints, to provide
critical wireless services to consumers and may expedite the provision of third generation wireless
technology.
The settlement also benefits NextWave. While NextWave will be foregoing the opportunity
to fulfill the vision for which it has struggled so long – that of becoming the first nationwide carriers’
carrier providing third generation services on a wholesale basis – its creditors will receive payment
in full and its shareholders will realize a return on their equity investments. When combined with
the fact that the D Block and E Block licenses provide an opportunity for an ongoing business, albeit
on a significantly reduced scale, the compromise is in the best interests of all concerned.
Each party in this complex dispute benefits substantially, but each party gives up something
substantial as well. Although the Company will be able to move forward and build out a network
in the five markets where it will continue to hold licenses (including Detroit, Michigan and Madison,
Wisconsin), the scale of its immediate future operations will be much smaller than would have been
possible had NextWave retained all the licenses it currently holds. To understand why this
compromise is fair, it is important to understand what NextWave has given up. NextWave made the
decision that it was the right thing to do for its shareholders to accept this settlement, but that
decision meant real and substantial lost opportunities for the Company.
Loss of past opportunity. In January 2000, NextWave proposed a plan of reorganization
that would have allowed it to emerge from bankruptcy and would have paid the FCC in full for
NextWave’s license obligations. The FCC, however, rejected NextWave’s proposal and tried to
cancel NextWave’s licenses. The D.C. Circuit ruled in June 2001 that the FCC’s actions were
unlawful. Had the FCC’s unlawful action not been prevented from executing its plan in January
2000, NextWave would be a fully operational wireless carrier by now, providing service across the
country. By way of comparison, another wireless carrier, VoiceStream, which has a national
footprint comparable to that of NextWave, was sold for $29 billion after a little over two years of
operation. That is an opportunity that has already been taken from NextWave.
Loss of the present value of the spectrum. As a result of the D.C. Circuit’s ruling in June
2001, and its subsequent decision denying the FCC a stay, the spectrum licenses that are the subject
of this settlement have been returned to NextWave, and NextWave is in full possession of them and
able to use them. The FCC’s reauction of those licenses established their market value at $15.85
billion. NextWave’s present obligation to the FCC for those licenses is approximately $5 billion
payable over the next several years.
Loss of future opportunity. After the D.C. Circuit ruled in June 2001 that NextWave
rightfully holds the licenses, the Company again assembled a new plan of reorganization, and
arranged for financing, that would allow it to emerge from bankruptcy, build out its nationwide
wireless network, and become operational. Based on the value the market has placed on the
spectrum alone, it is likely that NextWave would become a company of significant value in the very
near future.
This Settlement Agreement is the clear result of arm’s length bargaining. The parties have
been involved in an ongoing legal battle for years with which the Committee is familiar. Over the
past several years, the parties have attempted on various occasions to discuss settlement alternatives.
The Settlement Agreement itself has taken months to negotiate given the complexity of the issues
involved. The negotiations were clearly arms length and have resulted in an Agreement where each
party benefits, but also has had to abandon achieving its particular view of the appropriate outcome
of litigation – the true description of a compromise.
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