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, Omnipoint Corporation ("Omnipoint"), had violated Section 1 of the Sherman Act, 15 U.S.C. § 1. Omnipoint, through its affiliate Omnipoint PCS Entrepreneurs Two, Inc., 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 Omnipoint submitted bids that ended with three-digit numerical codes to communicate with rival bidders and that, through the use of these coded bids, Omnipoint and one of its rivals reached an agreement to refrain from bidding against one another. As a consequence of this agreement, the complaint alleges Omnipoint 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 Omnipoint 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, Omnipoint 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 Omnipoint 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
A. Background of the PCS Auctions
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).
B. Illegal Agreement to Allocate Licenses in the DEF Auction
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, Omnipoint 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, Omnipoint used the codes to better explain the real purpose of certain bids it made -- to reach an agreement with a rival. In particular, Omnipoint used the BTA end codes to link the bidding of licenses in two (or more) specific BTA markets, highlight the licenses Omnipoint wanted, and convey to the competing bidders offers to agree with Omnipoint not to bid against each other for the linked licenses.
Sometimes Omnipoint placed bids in one market with the BTA end code of another market to send 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." Other times, Omnipoint used the BTA end codes to tell its rival: "If you don't stop bidding for this license, I will bid for the one you want (indicated by the BTA code)."
Omnipoint's use of the BTA end codes did not serve any legitimate purpose of the auction. Omnipoint'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 167 to 172, Omnipoint reached an agreement with NextWave Telecom, Inc. ("NextWave") to allocate between them the F-band licenses for Toledo, OH (BTA #444), Salisbury, MD (BTA #398), and Lancaster, PA (BTA #240). Omnipoint agreed to stop bidding for the Salisbury and Lancaster-F licenses in exchange for NextWave's agreement not to bid for the Toledo-F license. (The bidding for the Toledo, Salisbury, and Lancaster-F licenses between rounds 167 and 172 is depicted in the table attached as Appendix A to this Competitive Impact Statement.)
Prior to round 167, Omnipoint had the high bid in Salisbury-F and had bid intermittently in earlier rounds for the F license in Lancaster and Toledo. NextWave had the standing high bids for the Lancaster and Toledo-F licenses. In round 167, NextWave placed the high bid for Salisbury-F. Omnipoint bid for Toledo-F in round 168. NextWave won back the Toledo license in round 169.
In round 170, Omnipoint placed bids for the Toledo, Salisbury and Lancaster-F licenses. Omnipoint's bids for Salisbury and Lancaster licenses ended in "444" -- the BTA number for Toledo. Omnipoint withdrew its Salisbury and Lancaster bids that same round, only to bid again for the two licenses in round 171, this time for lower prices than it had bid in round 170. Omnipoint's use of the BTA end codes established a link between the Salisbury and Lancaster-F licenses and the Toledo-F license.
NextWave saw the BTA end codes and understood that Omnipoint proposed to stop bidding in Salisbury and Lancaster in exchange for NextWave ceasing to bid for the Toledo-F license. In round 171, NextWave bid back over Omnipoint for the Salisbury and Lancaster-F licenses. NextWave accepted Omnipoint's offer and stopped bidding for Toledo-F even though it was willing to pay more for the Toledo-F license than Omnipoint's standing high bid for that license. Observing that NextWave had stopped bidding for Toledo-F, Omnipoint then stopped bidding for Salisbury-F and Lancaster-F.
Omnipoint's purpose for using the BTA end codes was to link the Salisbury, Lancaster and Toledo-F licenses, highlight the bids as retaliatory, and communicate an offer to stop bidding for Salisbury and Lancaster if NextWave stopped bidding for Toledo-F. Omnipoint believed that the Salisbury and Lancaster licenses were important to NextWave. The Salisbury and Lancaster licenses complemented the licenses that NextWave was holding in the Philadelphia and Washington, D.C. areas.
As a consequence of Omnipoint's agreement with NextWave, competition for the Toledo-F license was suppressed and the Treasury received less revenue for the Toledo-F license. It was in NextWave's economic self-interest to bid more for the Toledo-F license than Omnipoint'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 Omnipoint 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 Omnipoint 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 Omnipoint 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 Omnipoint from using BTA end codes or any similar signaling mechanism to solicit anticompetitive agreements in future FCC auctions. The proposed Final Judgment would enjoin Omnipoint 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 a license or that links licenses." (Section II (D)).
The proposed Final Judgment would further require Omnipoint to establish and maintain an antitrust compliance program (Section V). It would also provide that the United States may obtain information from Omnipoint 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 Omnipoint. In this case, the injured person is the United States.
THE PROPOSED FINAL JUDGMENT
The United States and Omnipoint 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:
Roger W. Fones, Chief
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 Omnipoint. 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.
Dated: November 10, 1998
1. 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. 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. 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).