Novel Procedures in FCC License Transfer Proceedings
Thank you for the opportunity to appear before your distinguished Subcommittee on Commercial and Administrative Law. The topic for today's hearing is "Novel Procedures in FCC License Transfer Proceedings."
At the outset, I would like to emphasize that debates about process are not trivial debates. To the contrary, regularity and fairness of process are central to a governmental system based on the rule of law. As the law recognizes in many different areas, the denial of a procedural right can result in the abridgment of a substantive right. Not the least of these areas is administrative law, the jurisdiction of this Subcommittee. The Administrative Procedure Act (APA) is grounded in the notions that fair processes result in better regulations, and that participatory processes result in regulations that people can accept, even if they disagree with them. Indeed, procedural fairness is so fundamental a principle in our legal system that the Framers expressly guaranteed it in the Constitution. See U.S. Const. Amdmt. V ("No person shall . . . be deprived of life, liberty, or property, without due process of law. . . .").
It is no secret that I have been, and remain, deeply concerned about the novel procedures currently being employed by the FCC in license transfer proceedings. My concerns arise out of the legal problems with the processes and standards -- or more precisely, the lack thereof -- that the Commission uses to evaluate applications for the transfer of licenses. The aggregate effect of these problems, described in detail below, is to create an administrative scheme that undermines the principles of fundamental fairness and procedural due process, the hallmarks of the APA.
The FCC Lacks "Merger" Review Authority Under the Communications Act
As a threshold matter, I would like to correct a common misperception about the scope of the Commission's authority when reviewing license transactions involving merging parties. Contrary to its frequent assertions, the Commission does not possess statutory authority under the Communications Act to review, writ large, the mergers or acquisitions of communications companies. Rather, that Act charges the Commission with a much narrower task: review of the proposed transfer of radio station licenses from one party to another and review of the proposed transfer of interstate operational authorizations for common carriers. Nothing in the Communications Act speaks of jurisdiction to approve or disapprove the mergers that may occasion a transferor's desire to pass licenses on to a transferee.(1)
Under that Act, the Commission is, at most, required to determine whether the transfer of licenses
serves the public interest, convenience and necessity.(2)
To be sure, the transfer of radio licenses and common carrier authorizations is an important part of any merger. But it is simply not the same thing. A merger is a much larger and more complicated set of events than the transfer of FCC permits. It includes, to name but a few things, the passage of legal title for many assets other than radio licenses, corporate restructuring, stock swaps or purchases, and the consolidation of corporate headquarters and personnel.
Clearly, then, asking whether the particularized transaction of a license transfer would serve the public interest, convenience, and necessity entails a significantly more limited focus than contemplating the industry-wide effects of a merger between the transferee and transferor. For instance, in considering the transfer of licenses, one might ask whether there is any reason to think that the proposed transferee would not put the relevant spectrum to efficient use or comply with applicable Commission regulations; one would not, by contrast, consider how the combination of the two companies might affect other competitors in the industry. One might also consider the benefits of the transfer, but not of the merger generally. And one might consider the transferee's proposed use and disposition of the actual licenses, but one would not venture into an examination of services provided by the transferee that do not even involve the use of those licenses, as the Commission often does.
By using the license transfer provisions of the Communications Act to assert jurisdiction over the entire merger of two companies that happen to be the transferee and transferor of licenses, the Commission greatly expands its organic authority. Certainly, in the context of a merger, license transfers occur as a result of the merger, but the Commission should not use this causative fact to bootstrap itself into jurisdiction over the merger. If control of licenses were to be transferred "as a result of" a licensee's bankruptcy, would the Commission assert jurisdiction to review the legal propriety of the declaration of bankruptcy? That would be preposterous, as that is a job for a bankruptcy court. Review of the merger of two communications companies which, just like the bankruptcy in my hypothetical, is an underlying cause of the transfer in question, is a job for the Department of Justice. Expanding our review of license transfers to a review of the event that precipitates the transfers -- whether that event is a merger, a bankruptcy, or any other event that might lead a licensee to cede control of a license -- is off the statutory mark.
Despite the Commission's effort to exercise power over "mergers" under sections 214 and 310 of the Communications Act, it must be remembered that, in the end, the Commission can only refuse to permit the transfer of the relevant licenses. While such action would no doubt threaten consummation of a proposed merger, the Commission cannot -- despite its threats to do so in licensing orders(3) -- directly forbid the stockholders of one company from selling their shares to the other.
Put simply, the scope of FCC review ought to accord with the scope of our remedies: that is, it ought to be limited to considering (i) whether the public would suffer harm if radio licenses are transferred from Party A to Party B, and (ii) whether the public
convenience and necessity would be served by allowing Party A to convey authorizations to operate carrier lines to Party B. The fact that most orders involving mergers do not even identify the radio licenses or section 214 authorizations at issue or discuss the consequences of their conveyance, but instead move directly to a discussion of the merger, reflects how far the Commission has strayed from the provisions of the Act.
The exercise of power not authorized in the Communications Act is not just an independent wrong: it also creates a violation of the Administrative Procedure Act. As the members of this Subcommittee well know, the APA requires a reviewing court to "hold unlawful and set aside agency action" that is "in excess of statutory jurisdiction, authority, or limitations." 5 U.S.C. section 706(2)(C). This critical provision of the APA provides enforcement of the statutory limits on agency action and recourse for their transgression. Should the Commission ever purport to prohibit a "merger" -- as opposed to the simple transfer of licenses -- I believe that action would violate this linchpin of the APA.
Moreover, if the Commission stuck closely to its statutory authority, the adverse affects of the procedural practices that you have asked me to testify about today, while still legally problematic, would be greatly mitigated as a practical matter.
Potentially Arbitrary Review: Choice of Transfers for Full-Scale Review, Procedures to be Employed, and Substantive Standards To Be Applied
Beyond the threshold question of statutory authority to regulate mergers, I have grave concerns about the process employed in FCC merger reviews, the subject of today's hearings.
The Commission annually approves tens of thousands of license transfers without any scrutiny or comment, while others receive minimal review, and a few are subjected to intense regulatory scrutiny. For example, mergers of companies like Mobil and Exxon involve the transfer of a substantial number of radio licenses, many of the same kind of licenses as those at issue in other high-profile proceedings, such as AT&T/TCI, and yet we take no Commission level action on those transfer applications. I do not advocate extensive review of all license transfer applications, but mean only to illustrate that we apply highly disparate levels of review to applications that arise under identical statutory provisions.
Unfortunately, there is no established Commission standard for distinguishing between the license transfers that trigger extensive analysis by the full Commission and those that do not. Nor do any of the Commission's orders in "merger" reviews elucidate the standard. Unfortunately, the orders tend to conclusorily assert that some mergers warrant heavy review and others do not.(4) This is not a very helpful explanation. Regulated entities and even their often sophisticated counsel are left to wonder: Is the question whether the merging firms are large, successful corporations? (That is one of the obvious differences between the mergers that receive heavy attention from the Commission and those that do not.) Does the level of review depend on the type of services offered by the merging companies, i.e. a telephone/cable merger (such as AT&T/TCI) gets one sort of review, while a telephone/telephone merger (such as SBC/Ameritech) gets another? In short, merging parties have no clear notice as to the threshold showing for determining the scale of FCC license transfer review.
If the answer is, as some have suggested, that the Commission reviews extensively only a subclass of license transfer applications -- those occasioned by mergers with the potential to affect the telecommunications industry -- that response is incomplete. Whatever the soundness of this theory for distinguishing among transfer applications, it is not written
anywhere, whether in agency rules, regulations, policy statements, or even internal agency guidelines. While the Communications Act does allow the Commission to make reasonable classifications of applications, see 47 U.S.C. section 309(g), the Commission has in no way done so, much less in a way that puts the public on notice as to what those classifications are. Agency decisions regarding which license transfers to review, even as among license transfers occasioned by mergers, are entirely ad hoc and thus run a high risk of being made arbitrarily.
Nor does the Commission have any established procedures for the handling of applications for license transfers. Any particular application on any particular day could be: adopted at a Commission meeting; voted by the Commission on circulation; processed with or without a formal hearing; processed with or without so-called "public fora"; handled with or without additional private "talks" between the companies, interested parties, Commission staff, and individual, especially interested members of the Commission; granted with or without conditions; finalized after 90 days or 90 weeks, etc. The list goes on almost indefinitely.
Section 1.1 of the Practice and Procedure subpart of the Commission's rules, entitled "Proceedings before the Commission," does nothing to remedy the open-ended nature of Commission processes. It states that "[t]he Commission may on its own motion or petition of any interested party hold such proceedings as it may deem necessary from time to time" and "[p]rocedures to be followed by the Commission shall . . . be such as in the opinion of the Commission will best serve the purposes of such proceedings." 47 C.F.R. section 1.1. This rule, written by the Commission, establishes only that the Commission can do essentially whatever it wants. There is nothing constraining or useful about this section.
Moreover, this rule -- the only general one about procedures on the Commission's books -- is routinely flouted. Section 1.1. allows "the Commission" to decide on appropriate procedures. Under the Communications Act, "the Commission" is defined as being "composed of five Commissioners appointed by the President, by and with the advice of the Senate, one of whom the President shall designate as chairman." 47 U.S.C. section 4(a). During my tenure, however, important procedural issues have not been decided upon by the full Commission, as section 1.1. requires; rather the Chairman seems to believe that he can set procedural rules on his own. This is contrary, however, to the little that section 1.1 actually does require -- namely, full Commission action.
The extraordinary process to which SBC and Ameritech are now being subjected -- which includes "discussions" between the companies and Common Carrier Bureau staff unauthorized by the full Commission, with Chairman-set "ground rules" that are wholly unenforceable and thus subject to change at his personal whim -- is illustrative of what happens when there are no limits on Commission discretion with respect to procedures.(5)
Since there are no rules governing procedures (I do not think section 1.1 can fairly be said to be a rule of anything except unfettered discretion), the Commission (or even just the Chairman?) is free to change the procedural rules of the road from transaction to transaction, and even in the midst of a single transaction. Individual companies can be dragged through long and expensive proceedings, with full-fledged Commission action, while others have their applications promptly granted by the staff, with no rationale for the grossly disparate treatment -- except for perhaps the cynical one that the Commission is favoring certain industries or companies. And individual companies can be subjected to this unprecedented processes at the direction, apparently, of the Chairman himself, without consultation or agreement by the full Commission. This is simply not the right way to run a licensing agency or to deal with the licensees who pay the regulatory fees that fund this agency.
Finally, if the Commission did establish a threshold test for determining which license transfer applications should receive strict scrutiny, and what kinds of process it should utilize, the Commission would still need to set out the substantive tests for the differing scrutiny levels. As a general matter, our decisional precedents provide little concrete guidance on the substantive standard for approval of Title II or Title III license transfers: the proposition that a merger is in the "public interest" if it is not anti-competitive (or if it is also pro-competitive) is too generalized to be of any real help. Moreover, there is clearly a different "public interest" test being applied, sub silentio, in different cases under the same statutory provisions, usually sections 310 and 214. The cases that undergo extensive inquiry exhaustively discuss all kinds of service areas and issues ancillary to the use of the actual radio licenses, and the decisions that are granted at the Bureau level are relatively perfunctory in their public interest analysis. We should, after identifying the threshold test for license transfers that warrant thorough inquiry, articulate clearer substantive criteria to guide the Commission's inquiry
The long and short of it is this: regulated entities have little basis for knowing, ex ante, how their applications will be treated, either procedurally or substantively. The license transfer process at the Commission is lacking in any transparent, fixed and meaningful standards. A person -- even a well-trained lawyer -- who wished to prepare for this process could find scant guidance in public sources of law, such as the Code of Federal Regulations or the Commission's adjudicatory orders. Rather, one would have to be trained in the unwritten ways of this Commission to know what to expect, and those expectations unfortunately would have little relation to federal administrative law.
While obviously troublesome on an intuitive level, such a license transfer process suffers from at least four particular flaws under the APA. First, the wholly ad hoc nature of this process makes it all too easy for decisionmakers to discriminate among industries and even companies - in other words, to engage in arbitrary and capricious review. Protecting against such decisionsmaking is, of course, a core function of the Administrative Procedure Act. See 5 U.S.C. section 706(2)(A) (reviewing court must '"aside agency action . . . found to be arbitrary [and] capricious").
Second, and relatedly, by failing to state clearly the principles that it uses to judge license transfers, the Commission decreases the viability of meaningful judicial review. The net result is to undermine the statutory right of aggrieved parties to judicial review. See id. section 702 ("A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof."). That right of review is an interested party's primary defense against arbitrary agency decisions.
Third, the nonascertainable nature of the license transfer process means that interested parties have no fair notice as to the regulatory constraints on their conduct. Notice of what the law requires -- i.e., which behavior is prohibited and which is permissible -- is a bedrock element of fairness in our legal system, derivative of the Due Process Clause. No person should be penalized for violating a rule that is either so vague as to give no clear indication of the prescribed conduct, or entirely unpublished and thus unavailable to the public, residing only in the minds of regulators. The notice and comment procedures of the APA are designed to safeguard against lack of fair notice. They require notification, and an opportunity to participate in the making, of the standards that govern interested parties. See id. section 553(b)-(c). Indeed, the whole rulemaking system of the APA is based on the assumption that governing standards will be published and public before they go into effect, allowing regulated parties a certain amount of time to conform their conduct to the new federal standards. See id. section 553(d) ("The required publication or service of a substantive rule shall be made not less than 30 days before its effective date. . . .").
Finally, as Senator McCain recently pointed out in a letter to Chairman Kennard to concerning the pending SBC/Ameritech applications, the unpredictability of the Commission's procedures cast a pall on the Commission's impartiality. Specifically, when the Commission subjects parties to a novel, extended, and unwieldy process to which it has not subjected similarly situated applicants, a reasonable person might think that the decisionmakers possessed a bias -- a bias manifesting itself in the especially high and numerous procedural hoops through which the decisionmakers were forcing the companies to jump. Unfortunately, the manipulation of procedural rules can be a cover for discrimination on the merits. The appearance of partiality created by the use of such highly unusual procedures contravenes the core principle of the APA (again based on the constitutional concerns of procedural due process) that decisionmakers be neutral. See 2 Davis & Pierce, Administrative Law Treatise at page 67 (3d ed. 1994) ("Due process requires a neutral, or unbiased, adjudicatory decisionmaker. Scholars and judges consistently characterize provision of a neutral decisionmaker as one of the three or four core requirements of a system of fair adjudicatory decisionmaking.").
To quote Senator McCain:
A proceeding of . . . importance and potential consequences must be attended, not only with every element of fairness, but with the very appearance of complete fairness. That is the only way its conduct will meet the basic requirement of due process. Amos Treat and Co., Inc. v. SEC, 306 F.2d 260 (D.C.Cir. 1962). The Commission's objectivity and impartiality are unavoidably opened to challenge by the adoption of procedures from which a disinterested observer may conclude that it has in some measure adjudged the facts as well as the law a case in advance of fully hearing it. See, e.g., Gilligan , Will & Co. v. SEC, 267 F.2d 461 (D.C.Cir. 1959).
Letter from Sen. John McCain to Chairman William E. Kennard, May 12, 1999.
For the above reasons, it seems to me that the Commission's lack of guidelines regarding the process and substance of license transfer proceedings is in serious tension with the principles that undergird the APA.
Potential Constitutional Problems With A Boundless "Public Interest" Test
The statutory test to be applied to license transfers is, of course, the "public interest" standard. As noted above, the Commission has failed to place any outer limits whatsoever on this concept, freely reinterpreting the standard in each new case. Not only does the Commission's lack of clear guidelines with respect to standards governing license applications present issues of arbitrary decisionmaking and of fair notice, as discussed above, it may also create constitutional issues with respect to the non-delegation doctrine.
This month, the United States Court of Appeals for the D.C. Circuit ruled in American Trucking Ass'n v. EPA, 1999 WL300618 (May 14, 1999) that the EPA's failure to adopt "intelligible principles" for implementing its statutory mandate to regulate air pollution effected an unconstitutional delegation of legislative power. The Court explained that "[w]here . . . statutory language and an existing agency interpretation involve an unconstitutional delegation of power, but an interpretation without the constitutional weakness is or may be available, our response is not to strike down the statute but to give the agency an opportunity to extract a determinate standard on its town." Id. at *6. According to this case and its precedential forebears, see International Union, UAW v. OSHA, 938 F.2d 1310 (D.C. Cir. 1991), this agency has a constitutional duty to choose interpretations of statutory language that avoid, rather than create, non-delegation doctrine problems.
I believe that the FCC has not satisfied its obligation under American Trucking to adopt "determinate, binding standards," 1999 WL 300618 at *6, in order to channel its discretion under the "public interest" provisions. Putting aside the question of the breadth of the statutory standard itself, the Commission has not articulated any clear principles about what that standard means in the context of merger review; how it applies to different entities; and what justifies a departure from standard practice, to name just a few of the major outposts on the license transfer trail. In short, there are no self-defined limits -- at either end of the spectrum -- on the Commission's consideration of whether to grant or deny a license transfer when mergers are involved, or otherwise. To my mind, this is arguably the kind of "free-wheeling authority [that] might well violate the nondelegation doctrine." International Union, UAW v. OSHA, 938 F.3d at 371.
I have always thought that it was incumbent on the Commission to fashion some guidelines to place limits on its discretion as a matter of simple fairness. Under American Trucking and International Union, it would appear that the Commission also has a constitutional duty to do so. This duty it has not even attempted to carry out.
"Conditional" Approval of License Transfer Applications
Finally, I express some general apprehension about the "conditioning" of grants for license transfer applications and section 214 authorizations. I think it is entirely appropriate, under the Commission's organic statute, for the Commission to condition license transfer and line extension applications on compliance with existing FCC rules or statutory provisions. See 47 U.S.C. section 303(r) ("Commission shall . . . prescribe such . . . conditions, not inconsistent with law, as may be necessary to carry out the provisions of this Act"); id. section 214(c) (Commission "may attach to the issuance of  certificate such terms and conditions as in its judgment the public convenience and necessity may require").
All too often, however, this Commission places conditions on license transfers that have no basis in the text of the Communications Act. That is, the Commission requires companies to do certain things -- things that it could not for lack of statutory authority require outright in a rulemaking -- as a quo for the quid of receiving a license. Again, this represents a transgression of the Commission's statutory limits and thus a violation of the APA. See 5 U.S.C. section 706(2)(C). It could also constitute an evasion of the notice and comment provisions of the APA, if the Commission (assuming it follows its own decisional precedent) uses its licensing orders to create standards that logically apply industry-wide. See id. section 553.
I am also concerned about situations in which this agency becomes an enforcer of the rules and regulations of other governmental agencies. We have no jurisdiction to enforce rules not promulgated under the Communications Act, see id. section 303(r) (referring to conditions needed to "carry out the provisions of this Act"), and we cannot and should not do the enforcement work of others. This is not to say that we should not take official notice, in the course of making licensing decisions, of findings by another agency that an applicant has violated a regulation in its bailiwick. We should certainly consider such findings in determining whether to grant or deny a license application. But we should not
condition such a decision on compliance with another agency's regulation, thus putting ourselves in the position of potential enforcer of non-FCC rules should the transferee fail to conform to that regulation. For instance, if the Department of Justice enters into an antitrust agreement with a party, we have no business attempting to enforce the obligations created thereunder in our licensing orders.
I am doubly concerned about conditional FCC approval when the rule at issue is not just that of another agency, but when that agency has made no formal, final, and material findings of a violation. That is, I do not think we should take official notice of alleged violations, including matters under investigation or in litigation, or of informal concerns that an agency is not yet ready or willing to pursue through their own established procedures. When we give formal weight to anything short of formal, final findings by other agencies, we create a situation that is rife with incentives for inter-agency gaming of the system, e.g., registering an objection with an agency about a matter that the complaining agency is not prepared to pursue itself, and requires the Commission to do extensive reviews in areas where it simply has no experience or authority.
In sum, at the intersection of two areas -- non-FCC rules and no final determination of a violation by a responsible entity -- our authority to impose conditions on a license or 214 authorization transfer is at its weakest. Where non-FCC rules are at issue but there is a final, record finding of a material infraction thereof, there is a middle ground: we should take
notice of that fact in deciding upon the application but not condition approval upon compliance. Finally, where extant FCC rules are involved, our power to condition a proposed transfer upon compliance with those rules and to enforce compliance, if necessary, is at its apex. We should never, however, impose conditions that have no basis in the text of the Communications Act, thus using our license transfer authority to impose new substantive obligations that Congress never contemplated.
For the reasons discussed above, I believe that the Commission's failure to establish, pursuant to notice and comment, public and intelligible principles to channel the exercise of authority delegated by Congress raises serious questions under the APA and the Constitution. In particular, the use of extraordinary processes in individual, high-profile cases threatens to undermine both the procedural and substantive rights of regulated entities. I further believe that the Commission's practice of attaching "conditions" to license transfers that lack a basis in the Communications Act or extant Commission rules, or that purport to enforce the judgments of other federal agencies, is also legally troublesome.
As an "independent" agency, composed of unelected officials who have no direct accountability to the American public, I believe that we should proceed with heightened reserve when exercising discretionary functions. If we so proceeded, we could better stay within the bounds of our statutory authority, mitigate the potential for arbitrary decisionmaking, safeguard the rights of judicial review, provide regulated entities with fair notice of the procedural and substantive rules governing their applications, avoid the appearance of impartiality, and steer clear of the non-delegation doctrine. In short, we could better serve the rule of law.
2. The Commission does possess authority under the Clayton Act, which prohibits combinations in restraint of trade, to review mergers per se. See 15 U.S.C. section 21 (granting FCC authority to enforce Clayton Act where applicable to common carriers engaged in wire or radio communication or radio transmission of energy). That power is rarely invoked by the Commission, however. If the Commission intends to exercise authority over mergers and acquisitions as such, it ought to do so pursuant to the Clayton Act, not the licensing provisions of the Communications Act.
3. See, e.g, In the Matter of Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from Tele-Communications, Inc., Transferor, AT&T Corp., Transferee, CS Docket No. 98-178 (released Feb. 18, 1999), at para. 112 (purporting to prohibit the applicants from "consummat[ing] the merger").
4. See, e.g., Applications for Consent to the Transfer of Control, supra n. 3, at para. 16 (stating, without elaboration, that "the face of some merger applications may reveal that the merger could not frustrate or
undermine our policies").
5. I express, of course, no view on the merits of this application. My exclusive focus here is on the process that employed to evaluate it. Accordingly, nothing in my testimony should be taken as reflective of any opinion on the question whether SBC and Ameritech are in compliance with Commission rules.