Department of Justice Seal

Statement of
Joseph H. ("Jody") Hunt
Counsel to the Deputy Attorney General
Before the Subcommittee on Telecommunications and the Internet
Committee on Energy and Commerce
U.S. House of Representatives
Concerning Settlement of the "NextWave" Case

December 11, 2001

Thank you Chairman Upton, as well as Members of the Subcommittee, for allowing me to provide a statement concerning the settlement agreement reached by the government, NextWave, and the Auction 35 participants. That agreement offers an opportunity for the government to end years of hard-fought litigation on terms that will benefit the American public by providing for prompt deployment of valuable telecommunications spectrum and adding billions of dollars to the United States Treasury.

The government's dispute with NextWave dates back to 1996 and 1997, when the company was the high bidder at auctions held by the Federal Communications Commission (FCC) for wireless telecommunications licenses. NextWave opted to pay its winning bids, totaling $4.86 billion, in installments, but soon sought bankruptcy protection. The United States Court of Appeals for the Second Circuit agreed with the government that NextWave could not keep the licenses while paying less than the winning bid amount, and also held that the bankruptcy court could not thwart the operation of the FCC's automatic-cancellation rule, under which the licenses dissolved upon failure to make timely payments. Following the Second Circuit's rulings, the FCC re-auctioned the disputed spectrum earlier this year in FCC Auction NO. 35. Winning bids for that spectrum in Auction 35 totaled $15.85 billion -- more than three times the amount that NextWave had agreed to pay five years earlier.

NextWave brought an action in the District of Columbia Circuit challenging the FCC's automatic cancellation of the licenses and re-auction of the spectrum. That court held that section 525 of the Bankruptcy Code precluded the FCC's automatic cancellation of NextWave's licenses. The government has petitioned the Supreme Court for further review of that decision. Even if the Supreme Court grants review and rules for the government, there remain other issues to be litigated before the D.C. Circuit and the FCC on remand. Thus, there is no assurance that continued litigation would allow the government to put the spectrum to its most productive use or to recover the $15.85 billion bid at Auction 35. If the government does not prevail before the Supreme Court or an remand, NextWave would retain the licenses, and the United States might (depending on the treatment of interest and penalties) receive only $4.86 billion for this spectrum. Moreover, even if the government were ultimately successful in its pursuit of this litigation, success would likely come after years of additional delay in deployment of the spectrum in the face of continuing increases in consumer demand for wireless telecommunications services.

Recognizing these disadvantages of continued litigation, the government entered into settlement discussions with NextWave and the Auction 35 winning bidders. The government pursued settlement as an opportunity to provide for the prompt transfer of valuable, unused spectrum to the Action 35 Winning Bidders, whose bids provided strong evidence of their ability to put it to the highest and best use, and to increase the amount of money flowing into the Treasury by several billion dollars over what the government might otherwise receive.

Extensive and complex negotiations, lasting more than two months, culminated in a settlement agreement signed by the government, NextWave and Auction 35 winning bidders representing more than $15.8 billion in bids. Under the settlement, NextWave will surrender the licenses in exchange for a guarantee of payment from the United States. The FCC will then grant licenses to the Auction 35 winning bidders, who will pay the full amount of their winning bids -- approximately $15.85 billion. In exchange for NextWave's relinquishment of its claims to the licenses, and after payment of taxes and other amounts to the government required by the settlement, NextWave will receive approximately $5.82 billion (net of corporate taxes on the transaction).

As the Attorney General explained in his letter submitting the draft bill to the Congressional leadership, the Department of Justice has concluded that "the settlement is strongly in the public interest." This is a good settlement; it offers two tangible benefits to the American people. First, it accomplishes by consensual arrangement what lengthy and contentious litigation has been unable to achieve -- the award of spectrum to telecommunications companies that are most likely to use it promptly and efficiently, thereby making possible the expansion and improvement of widely used wireless telecommunications services.

Second, it will bring substantial additional revenues to the United States Treasury. The settlement is designed to bring into the Treasury net payments in excess of $10 billion, after accounting for the payment to NextWave. The Office of Management and Budget advises that these payments will result in a net benefit to the budget (above the current baseline) of approximately $4 billion. The public is far better off with such an agreed resolution than it would be if we continued to pursue judicial relief, especially given the uncertain prospects of success and the delay associated even with a favorable outcome to the litigation. The settlement is a compromise that recognizes the enormous demand for this spectrum and recovers for the public most of the value the spectrum represents to the winning bidders at Auction 35.

The settlement requires implementing legislation before it can go forward. The Attorney General has submitted a draft bill that provides statutory authority to proceed with the settlement. The settlement specifies that Auction 35 should be implemented, with payment terms as modified under the settlement agreement. By appropriating funds to guarantee payment, the bill enables NextWave to relinquish its claims to the licenses, which is a prerequisite to the FCC's issuance of those licenses to the winning bidders at Auction 35. The bill also establishes a limited and expedited structure for judicial review of challenges to the settlement, enabling the spectrum to be put to use expeditiously and bringing an end to this protracted litigation.

The judicial review provisions of the bill are designed to ensure that any challenge to the settlement is presented to and resolved by the courts as quickly as possible. Three kinds of challenges are permitted - litigation concerning approval of the settlement under the Bankruptcy Code, constitutional challenges to the FCC's approval of the settlement, and constitutional challenges to the implementing legislation. To ensure consistency and to promote judicial efficiency, the D.C. Circuit will have exclusive jurisdiction to hear any such challenge. Although the bill requires expedited treatment, it leaves the court to set its own schedule, subject to an instruction that the court act "with a view to" deciding the case within a certain period of time "if practicable." Similar provisions seeking quick action are also provided for rehearing and certiorari review.

The bill provides ample opportunity for judicial resolution of genuine legal disputes about the settlement. As in any bankruptcy case, settlement must be approved by a bankruptcy court or district court. NextWave has filed its motion for approval with the Bankruptcy Court for the Southern District of New York, and the bankruptcy rules provide for a period of notice during which any objections may be brought before the court. If the bankruptcy court grants NextWave's motion for approval, any objecting party may appeal that decision. The D.C. Circuit, which is familiar with the case, will have exclusive jurisdiction to hear any challenge to the constitutionality of the settlement or the legislation.

The bill precludes nonconstitutional challenges to the FCC's implementation of Auction 35 pursuant to the terms of the settlement and the legislation. Congress's express approval of the settlement would eliminate potentially time-consuming litigation. Similarly, because of the importance of putting this valuable spectrum to use as quickly as possible, the bill precludes courts from entering an interlocutory order enjoining an Auction 35 licensee from using the spectrum before the expedited review process has reached finality. Legal disputes that would not affect the implementation of the settlement - such as questions about the qualifications of a winning bidder - are not subject to the provisions for expedited treatment and can proceed in the normal course. The judicial review provisions of the bill permit bankruptcy challenges that are otherwise authorized under current law.

We believe that the bill is constitutional in all its particulars, and that there are no other judicial obstacles to full implementation of the settlement. The settlement nevertheless addresses the consequences of an adverse ruling. If a final court order prevents NextWave from surrendering the licenses, the settlement will not go forward. If a final order bars the FCC from implementing Auction 35, the government will again hold valuable wireless spectrum and could offer it in a future auction as appropriate.

I want to emphasize that the Department of Justice, after careful consideration, has concluded that this settlement of the NextWave litigation offers significant benefits to the American public. Because the settlement requires enactment of legislation before it can go forward, the Department strongly urges the Committee, and the Congress as a whole, to take the steps necessary to realize these benefits. We are mindful of the difficulties Congress faces when asked to enact proposed legislation before December 31, 2001. But the December 31, 2001 date is a necessary component of this carefully negotiated settlement; the parties' decision to select that date was not entered into lightly. All parties, including the United States, need to bring an end to the wrangling over these licenses and put the spectrum to good use. Legislation is necessary by December 31, 2001, in order to conclude all related litigation and ensure the availability of the spectrum to the American consumers by December 31, 2002. The December 31, 2001 date for enactment also reflects the pendency of petitions for writs of certiorari before the Supreme Court, an important component of the time pressures that were considered.

The parties have said that they are willing to settle this case on the terms set forth in the agreement, but only if the legislation can be enacted by December 31, 2001. If the implementing legislation is not enacted, we will return to litigation in which our prospects are uncertain and the path to success a long and costly one. Only if Congress enacts the implementing legislation and keeps this settlement agreement in place are the American people certain to realize promptly both the improvements in wireless telecommunications services and the addition of several billion dollars to the Treasury. We appreciate the care and seriousness with which this subcommittee and others in Congress have undertaken to review and consider the proposed legislation. After careful analysis, we have concluded that the settlement is in the public interest. We hope that you will agree.

Chairman Upton, that concludes my prepared statement. I very much appreciate this opportunity to present the Department of Justice's views on this important issue, and I would be pleased to respond to any questions you may have.