IN THE UNITED STATES DISTRICT COURT
The United States of America, pursuant to Section 2(b) of the Antitrust Procedures and Penalties Act ("APPA"), 15 U.S.C. § 16(b)-(h), files this Competitive Impact Statement relating to the proposed Final Judgment submitted for entry in this civil antitrust proceeding.
On November 10, 1998, the United States filed a civil antitrust complaint alleging that the defendant, 21st Century Bidding Corp. ("21st Century"), had violated Section 1 of the Sherman Act, 15 U.S.C. § 1. 21st Century participated in an auction (the "DEF auction") of broadband radio spectrum licenses for personal communication services ("PCS") that was conducted by the Federal Communications Commission ("FCC") between August 1996 and January 1997. The Complaint alleges that during the DEF auction 21st Century submitted bids that ended with three-digit numerical codes to communicate with rival bidders and that, through the use of these coded bids, 21st Century and one of its rivals reached an agreement to refrain from bidding against one another. As a consequence of this agreement, the complaint alleges 21st Century and its competitor paid less for certain PCS licenses, resulting in a loss of revenue to the Treasury of the United States.
On November 10, 1998, the United States and 21st Century filed a Stipulation and Order in which they consented to the entry of a proposed Final Judgment that provides the relief that the United States seeks in the Complaint. Under the proposed Final Judgment, 21st Century would be enjoined from submitting coded bids in future FCC auctions and entering into any agreement related to bidding for FCC licenses that violates Section 1 of the Sherman Act, 15 U.S.C. § 1.
The United States and 21st Century have stipulated that the proposed Final Judgment may be entered after compliance with the APPA. Entry of the Final Judgment would terminate the action, except that the Court would retain jurisdiction to construe, modify, or enforce its provisions and to punish violations thereof.
II. DESCRIPTION OF THE EVENTS GIVING RISE TO
In 1993, Congress enacted legislation enabling the FCC to auction licenses for radio spectrum that could be used to provide PCS. Based on a wireless, digital technology, PCS offers an alternative to current traditional telephone services.
The FCC designated six bands of broadband radio spectrum for PCS: A, B, C, D, E and F. The A, B and C bands occupy 30 MHZ each, while the D, E and F licenses are 10 MHZ each. The FCC divided the country into 51 geographic areas called Market Trading Areas ("MTAs"), which were each allotted A and B licenses. The FCC subdivided the MTAs into 493 smaller geographic units called Basic Trading Areas ("BTAs"), which were each allotted C, D, E, and F licenses. Each BTA was assigned a number from 1 to 493.
The authorizing legislation required the FCC to adopt rules ensuring competitive auctions, and the FCC considered numerous auction formats for PCS, ultimately adopting a simultaneous, multiple-round, open format. Under this format, numerous licenses were offered in a single auction, staged over several rounds, with all licenses remaining open for bidding until the auction closed. Auction participants could observe all of the bidding activity in each round. The auction ended only when a round passed in which no bidder submitted a bid on any license.
To keep the auction moving forward, the FCC imposed eligibility limits and activity rules. The FCC gave each license a population value called "MHZ-pops." Each bidder made down payments to the FCC, with the size of the payment entitling it to bid for a certain amount of MHZ-pops. A participant could bid on any combination of licenses as long as the combined MHZ-pops of those licenses did not exceed the MHZ-pops to which the bidder's down payment entitled it (eligibility). Bidders also had to be "active" in each round (bid or have the high bid from the prior round) on licenses representing a set percentage of their MHZ-pops; otherwise, the FCC reduced their eligibility for the next round. As the auction proceeded, the bidders had to bid an increasing percentage of their MHZ-pops until in the final stages they had to bid nearly all of their eligibility.
Each round in the auction began with a bid submission period during which participants submitted bids electronically or by telephone for any of the licenses in which they were interested. After each bid submission period, the FCC published electronically to all bidders the results for each license, including the name of each company bidding, the amount of each bid, and the time each bid was submitted. The high bidder for a license in a round became the "standing high" bidder for that license with a tie going to the earliest bidder.
A bid withdrawal period then followed. During this period, bidders were permitted to withdraw their standing high bids from any market, subject to a withdrawal penalty specified by the FCC. The FCC then published the results. The bid submission and withdrawal periods comprised an auction round.
At the beginning of an auction, the FCC generally held one round per day. As the auction progressed, the FCC increased the number of rounds held in a single day, providing a period of time between rounds for auction participants to analyze the bidding from the prior round and to plan for the next round.
One goal of the FCC was to ensure the efficient allocation of licenses, that is, that the licenses would go to the bidders who valued them most highly. The simultaneous, multiple-round format of the PCS auctions helped achieve this goal in several ways. It allowed bidders to pursue different license aggregation strategies and change their strategies as the auction proceeded. In addition, it allowed auction participants to observe the value that other bidders placed on the licenses and use that information to refine their own assessment of license values. This was particularly useful given that the technology used for PCS was new and bidders were uncertain about both the costs of providing the services and the prospective revenues. Ultimately, because the licenses were awarded to the highest bidders, the PCS auction format allowed the marketplace to determine the most efficient allocation of licenses. Notwithstanding these benefits of the auction format, the FCC recognized the risk that "collusive conduct by bidders prior to or during the auction process could undermine the competitiveness of the bidding process." Second Report and Order, FCC 94-61, ¶ 223 (Rel. April 20, 1994). The FCC sought to mitigate the risk of collusion by adopting rules restricting the disclosure of bidding strategies during the auction. The FCC noted, however, that Federal antitrust laws applied to the auctions and it would rely primarily on those laws to deter and punish collusion in the auctions. Second Report and Order, supra at ¶ 225; Second Memorandum Opinion and Order, FCC 94-215, ¶ 50 (Rel. August 15, 1994).
The auction of the D, E and F licenses for all 493 BTAs began in August 1996. Because there were three bands being auctioned, the DEF auction involved a total of 1479 licenses. Lasting 276 rounds, the auction ended in January 1997.
Prior to the DEF auction, bidders analyzed which licenses (or groups of licenses) would best enable them to provide effective and competitive service, assessed the value they placed on those licenses, and developed strategies to obtain the desired licenses for the lowest possible prices. The bidders also speculated about their rivals' business strategies and attempted to identify the key licenses for those strategies, relying on an array of information, including knowledge of the licenses bidders had acquired in prior auctions.
As the auction proceeded, bidders carefully observed their rivals' actions and often adjusted their own market valuations and business strategies, sometimes based on their assessment of their rivals' objectives. Their rivals' bids, however, did not necessarily reveal their true objectives. An auction participant might bid for a particular license during a particular round for a number of reasons: it may have always wanted the license, but for strategic reasons refrained from bidding until then; it may have changed its business strategy and decided that it now wanted the license; it may have seen an opportunity to acquire an undervalued license; it may have bid simply to preserve its eligibility to bid on other licenses later in the auction; it may have bid to raise a rival's cost to obtain the license; or it may have bid to send a message to the standing high bidder to refrain from bidding against it for a different license. Thus, the purpose of a particular bid might be procompetitive or anticompetitive.
A bidder's purpose in making a bid might, depending on the circumstances, be ambiguous to its rivals. Where ambiguity remains, it can be difficult to use a bid or bidding pattern alone to send clear messages or invitations to collude. To eliminate or reduce any ambiguity, 21st Century sometimes placed bids during the DEF auction in which the final three digits intentionally corresponded to the number for a BTA (a "BTA end code"). Knowing that other bidders could see the bids and hence the BTA end codes, 21st Century used the codes to better explain the real purpose of certain bids it made -- to reach an agreement with a rival. In particular, 21st Century used the BTA end codes to link the bidding of licenses in two (or more) specific BTA markets, highlight the licenses 21st Century wanted, and convey to the competing bidders offers to agree with 21st Century not to bid against each other for the linked licenses. By placing bids in one market with the BTA end code of another market, 21st Century sent the message: "I'm bidding for this license because you bid for the one I want (indicated by the BTA code) and I'll stop bidding in your market if you stop bidding in mine."
21st Century's use of the BTA end codes did not serve any legitimate purpose of the auction. 21st Century's purpose for using BTA end codes was to send clear and unmistakable invitations to collude to rival bidders and to reach agreements with those rivals to refrain from bidding against each other. Such conduct was not authorized by the applicable FCC rules and was inconsistent with the FCC's goal to encourage competitive bidding.
Over the course of rounds 120 to 125, 21st Century reached an agreement with Mercury PCS II, L.L.C. ("Mercury") to allocate between them the F-band licenses for Indianapolis (BTA #204), Baton Rouge (BTA #32), and Biloxi (BTA#42). 21st Century agreed to stop bidding for the Baton Rouge and Biloxi-F licenses in exchange for Mercury's agreement not to bid for the Indianapolis-F license. (The bidding for the Baton Rouge, Biloxi and Indianapolis-F between rounds 120 and 125 is depicted in the table attached as Appendix A to this Competitive Impact Statement.)
Prior to round 120, 21st Century had been bidding for the Indianapolis-F license and had been the high bidder on that license since round 85. On the other hand, Mercury had been bidding consistently for the Baton Rouge and Biloxi-F licenses and was the standing high bidder for both licenses. 21st Century had never bid for licenses in Baton Rouge or Biloxi; Mercury had never bid in Indianapolis.
In round 120, Mercury bid for the first time for the Indianapolis-F license. After 21st Century bid back in round 121, Mercury again bid for Indianapolis-F. In round 123, 21st Century placed bids for the Baton Rouge and Biloxi-F licenses and attached the Indianapolis BTA end code ("204") to these bids. 21st Century's purpose for using the BTA end codes was to link the Baton Rouge, Biloxi and Indianapolis-F licenses, highlight the bids as retaliatory, and communicate an offer to stop bidding for Baton Rouge and Biloxi if Mercury stopped bidding for Indianapolis-F.
21st Century believed that the Baton Rouge and Biloxi licenses were important to Mercury. Mercury had been bidding persistently for these licenses since the start of the auction. In addition, Mercury held a number of licenses from the C block in the vicinity and the Baton Rouge and Biloxi-F licenses were contiguous to several other geographic markets where Mercury was the standing high bidder for the F licenses.
Mercury saw the BTA end code and understood that 21st Century proposed to stop bidding for Baton Rouge and Biloxi in exchange for Mercury ceasing to bid for the Indianapolis-F license. In round 124, Mercury bid back over 21st Century for the Baton Rouge and Biloxi-F licenses, attaching the Indianapolis BTA end code to its bids. Mercury's use of the Indianapolis BTA end code in round 124 confirmed that it understood the link between the three licenses. Mercury accepted 21st Century's offer and stopped bidding for Indianapolis-F even though it was willing to pay more for the Indianapolis-F license. Observing that Mercury had stopped bidding for Indianapolis-F, 21st Century stopped bidding for the Baton Rouge and Biloxi-F licenses.
As a consequence of 21st Century's agreement with Mercury, competition for the Indianapolis-F license was suppressed and the Treasury received less revenue for the Indianapolis-F license. It was in Mercury's economic self-interest to bid more for the Indianapolis-F license than 21st Century's winning bid and, but for the illegal agreement, it would have done so.
The provisions of the proposed Final Judgment are designed to ensure that 21st Century does not enter into anticompetitive agreements when participating in future FCC auctions. The decree supplements any prohibitions on bidding conduct set forth in the FCC's auction rules, and the defendant may violate the decree even if its conduct does not violate an agency statute or rule.
The proposed Final Judgment would enjoin 21st Century from entering into an agreement with another license applicant to fix, establish, suppress or maintain the price of a license to be awarded by the FCC or to allocate any such licenses among competitors (Section IV(A)). The proposed Final Judgment would not prevent 21st Century from entering into any joint-venture or similar agreements regarding licenses to be awarded by the FCC that are both disclosed to the FCC and authorized under the FCC's rules and regulations. (Section IV(A)). However, such bidding arrangements would still be subject to scrutiny under the antitrust laws.
The proposed Final Judgment would also prevent 21st Century from using BTA end codes or any similar signaling mechanism to solicit anticompetitive agreements in future FCC auctions. The proposed Final Judgment would enjoin 21st Century from submitting bids that contain "license-identifying information" in future FCC auctions, unless the inclusion of such information is required by the FCC (Section IV(B)). License-identifying information is defined as "any number, letter, code or description that designates or identifies a license or that links licenses." (Section II (D)).
The proposed Final Judgment would further require 21st Century to establish and maintain an antitrust compliance program (Section V). It would also provide that the United States may obtain information from 21st Century concerning possible violations of the Final Judgment (Section VII).
Section 4 of the Clayton Act, 15 U.S.C. § 15, provides that any person who has been injured as a result of conduct prohibited by the antitrust laws may bring suit in federal court to recover three times the damages the person has suffered, as well as costs and reasonable attorneys' fees. Entry of the proposed Final Judgment will neither impair nor assist the bringing of any private antitrust damage action. Under the provisions of Section 5(a) of the Clayton Act, 15 U.S.C. § 16(a), the proposed Final Judgment has no prima facie effect in any subsequent private lawsuit that may be brought against 21st Century. In this case, the injured person is the United States.
THE PROPOSED FINAL JUDGMENT
The United States and 21st Century have stipulated that the proposed Final Judgment may be entered by the Court after compliance with the provisions of the APPA, provided that the United States has not withdrawn its consent. The APPA conditions entry upon the Court's determination that the proposed Final Judgment is in the public interest.
The APPA provides a period of at least sixty days preceding the effective date of the proposed Final Judgment within which any person may submit to the United States written comments regarding the proposed Final Judgment. Any person who wishes to comment should do so within sixty days of the date of publication of this Competitive Impact Statement in the Federal Register. The United States will evaluate and respond to the comments. All comments will be given due consideration by the Department of Justice, which remains free to withdraw its consent to the proposed Final Judgment at any time prior to entry. The comments and the responses of the United States will be filed with the Court and published in the Federal Register. Written comments should be submitted to:
The proposed Final Judgment provides that the Court retains jurisdiction over this action, and the parties may apply to the Court for any order necessary or appropriate for the modification, interpretation, or enforcement of the Final Judgment. The proposed Final Judgment would expire ten (10) years from the date of its entry.
The United States considered, as an alternative to the proposed Final Judgment, seeking damages in this case pursuant to Section 4A of the Clayton Act, 15 U.S.C. § 15a. Doing so would likely have required a full trial on the merits against 21st Century. In the view of the Department of Justice, undertaking the substantial cost and the risk associated with such a trial is not warranted, considering that the proposed Final Judgment provides full injunctive relief for the violations of the Sherman Act set forth in the Complaint.
VII. STANDARD OF REVIEW UNDER THE APPA FOR
The APPA requires that proposed consent judgments in antitrust cases brought by the United States be subject to a sixty-day comment period, after which the court shall determine whether entry of the proposed Final Judgment "is in the public interest." In making that determination, the court may consider:
15 U.S.C. § 16(e). As the Court of Appeals for the District of Columbia Circuit recently held, the APPA permits a court to consider, among other things, the relationship between the remedy secured and the specific allegations set forth in the government's complaint, whether the decree is sufficiently clear, whether enforcement mechanisms are sufficient, and whether the decree may positively harm third parties. See United States v. Microsoft, 56 F.3d 1448 (D.C. Cir. 1995).
In conducting this inquiry, "the Court is nowhere compelled to go to trial or to engage in extended proceedings which might have the effect of vitiating the benefits of prompt and less costly settlement through the consent decree process."(1) Rather, absent a showing of corrupt failure of the government to discharge its duty, the Court, in making its public interest finding, should . . . carefully consider the explanations of the government in the competitive impact statement and its responses to comments in order to determine whether those explanations are reasonable under the circumstances. United States v. Mid-America Dairymen, Inc., 1977-1 Trade Case. ¶ 61,508, at 71,980 (W.D. Mo. 1977).
Accordingly, with respect to the adequacy of the relief secured by the decree, a court may not "engage in an unrestricted evaluation of what relief would best serve the public." United States v. BNS, Inc., 858 F.2d 456, 462 (9th Cir. 1988), quoting United States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir. 1981); see also, Microsoft, 56 F.3d 1448 (D.C. Cir. 1995). Precedent requires that
The proposed Final Judgment, therefore, should not be reviewed under a standard of whether it is certain to eliminate every anticompetitive effect of a particular practice or whether it mandates certainty of free competition in the future. Court approval of a final judgment requires a standard more flexible and less strict than the standard required for a finding of liability. "[A] proposed decree must be approved even if it falls short of the remedy the court would impose on its own, as long as it falls within the range of acceptability or is 'within the reaches of public interest.' (citations omitted)."(3)
There are no determinative materials or documents within the meaning of the APPA that were considered by the United States in formulating the proposed Final Judgment.
FOR PLAINTIFF UNITED STATES OF AMERICA:
Dated: November 10, 1998
1. 119 Cong. Rec. 24598 (1973); see also United States v. Gillette Co., 406 F. Supp. 713, 715 (D. Mass. 1975). A "public interest" determination can be made properly on the basis of the Competitive Impact Statement and Response to Comments filed pursuant to the APPA. Although the APPA authorizes the use of additional procedures, 15 U.S.C. § 16(f), those procedures are discretionary. A court need not invoke any of them unless it believes that the comments have raised significant issues and that further proceedings would aid the court in resolving those issues. See H.R. 93-1463, 93rd Cong. 2d Sess. 8-9, reprinted in 1974 U.S.C.C.A.N. 6535, 6538.
2. United States v. Bechtel, 648 F.2d at 666 (internal citations omitted) (emphasis added); see United States v. BNS, Inc., 858 F.2d at 463; United States v. National Broadcasting Co., 449 F. Supp. 1127, 1143 (C.D. Cal. 1978); Gillette, 406 F. Supp. at 716; see also United States v. American Cyanamid Co., 719 F.2d 558, 565 (2d Cir. 1983).
3. United States v. American Tel. & Tel. Co., 552 F. Supp. 131, 150 (D.D.C. 1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983), quoting Gillette, 406 F. Supp. at 716; United States v. Alcan Aluminum, Ltd., 605 F. Supp. 619, 622 (W.D. Ky. 1985).