Participating in FCC Auctions
Auction at a Glance (FM Broadcast)
Auction at a Glance (VHF Public Coast/LMS)
After taking a break from last winter’s auction frenzy, the FCC is gearing up again for a new round of auctions. On the block are location and monitoring service licenses, FM broadcast construction permits (they’re cheaper than you think!), 700MHz band frequencies (unless, of course, they’re postponed again), and, yes, the long-awaited upper- and lower-band paging channels.
Participating in an auction is pretty much the only way small land mobile operators will be able to license new systems anymore. Because I’m a lawyer, I’ll give my disclaimer up front – the procedures outlined below are generalities. Before each auction, the FCC evaluates and modifies its processes and procedures and tailors them to that specific auction. So the information in this article is not intended as legal advice.
The first computer-automated auction
FCC auctions predated, and may have inspired, auctions on E-Bay and other Internet sites. Unlike Internet auctions, however, many detailed regulations and procedures are involved in participating in an FCC auction, and there are serious consequences for failing to comply. Familiarity with the ins and outs of FCC auctions can prevent costly or disastrous missteps.
Preparation for an FCC auction
The first step to participating in an FCC auction is preparing for it. The FCC usually releases a public notice announcing an auction six months before the bidding is to start. In certain circumstances, the FCC will delay or postpone an auction, which gives potential participants additional time to prepare and do their due diligence.
Due diligence
Due diligence in an auction means investigating the licenses or construction permits for sale. In certain auctions, these licenses may be encumbered, i.e., there may be existing users licensed in the area on the frequencies for sale. The amount of the encumbrance can have a great effect on the value and usefulness of the license. In addition, there might be FCC rules that could affect the use and value of the license. Due diligence also involves determining the potential “worth” of the station to you or your company. It’s a good idea to determine this worth ahead of time and use this determination as a foundation for your bidding strategy.
We are careful not to refer to successful auction participants as “winners,” because they have, indeed, won nothing. They have decided to purchase a property for a certain price. Many auction participants get involved in the competition for licenses and forget that the license is a business property. As a result, they may end up spending more money than they intended on the property.
The FCC’s auction process
*The seminar — The FCC holds a seminar in Washington before each auction to explain the rules and familiarize participants with the auction tools, rules and procedures. Instructors demonstrate the software and answer participants’ questions. It is a good idea to attend this seminar if you are thinking about participating in an auction.
*The short form — Auction participants have to file a short form application with the FCC about a month before the auction begins. In a sense, the FCC’s public notices announcing an auction beginning on a certain date are misleading because if you have not filed your short-form application in the previous month, you won’t be participating in that auction. The auction really “begins” when you file this application.
This application is called the short form because it, in and of itself, is not long. But the information that must be supplied with the form can be voluminous. The FCC wants to know, essentially, who owns your company and what your company owns. It wants to know what the people who own your company own, at least in terms of telecommunications and FCC-regulated companies. This “family tree” must be traced out until you get to less than 10% ownership. Plus, the FCC will ask for revenues for the preceding three years, to determine whether the applicant qualifies for “bidding credits.” The bidding credits, actually discounts, are given to small businesses as an incentive to participate in the auction. Bidding credits are also available, in some cases, to winning bidders who intend to use their licenses to provide service to Native Americans on recognized tribal lands.
The short-form deadline also signals the activation of the FCC’s anti-collusion rules. The FCC wants to raise as much money from auctions as it possibly can. It believes (rightly so) that if auction participants could just call each other up in the middle of an auction and talk to each other about the properties for sale, they would make “side deals” that would reduce the FCC’s take. (OK, the FCC itself doesn’t get to keep the money; it goes into the U.S. Treasury.) To prevent this dilution of auction prices, the FCC has restricted the ability of an applicant to discuss its bidding strategy for that auction with other potentially competing applicants, starting on the deadline for filing the short-form application to enter the auction. This prohibition continues until the down payment has been made, after the auction is over.
While the FCC takes most of its rules seriously, it takes its anti-collusion rule very seriously. It has changed its auction software design on the mere suggestion that participants were using the FCC’s bidding software to signal their intentions to other bidders. And it has come down hard on those who have colluded, intentionally or unintentionally, in other manners. All of a bidder’s employees, whether involved in the auction or not, should be educated about this rule.
About a week after the short form is filed, the FCC will release a public notice listing all entities whose applications have been accepted for filing, and those that are deemed to be “incomplete” and must be amended (the most common cause of an application being deemed “incomplete” is some sort of error in the information contained in the attachments). These applicants are given a little time to fix and resubmit the applications. If successful, they are listed in a subsequent public notice as “accepted for filing.”
The FCC also announces which applications are considered unacceptable, or rejected, for filing, mainly due to procedural errors. In our experience, these are generally applications filed by the applicants themselves, without the aid of experienced communications counsel. FCC auction law is cumulative. The experience in one auction leads to a new set of rules for the next auction, or to a stricter, or less strict (though that rarely happens), interpretation of a particular rule. An experienced communications attorney is usually aware of this history and understands what the FCC is looking for.
These applicants are not given a chance to fix their applications. Some have petitioned the FCC to reconsider this decision, but we are unaware of any successful challenge. In addition, the FCC’s auctions process moves much more quickly than the FCC’s petitions process (even if you request expedited treatment), and the auction could be over before you would receive a decision on your petition.
It is in the short-form application that the bidder lists the licenses it wants to bid on. In many auctions, the FCC has made it easy on applicants to fill this part out by using something called an ALL box, which permits the applicant, in theory at least, to bid on any license offered in the auction. This box will not be used in the broadcast auction, for reasons not fully explained by the FCC. In the upcoming paging auction, the FCC has modified its ALL box. Applicants will be able to customize a list of licenses on which they intend to bid and then “Select All” of that list.
The upfront payment
To ensure auction participants’ good faith and ability to pay for what they bid on, the FCC requires a deposit to be made about two weeks before the auction starts. This deposit corresponds with the minimum acceptable value that the FCC has set for the licenses upon which the applicant intends to bid. This deposit establishes the parameters for the applicant’s bidding. This does not limit the amount of money that can be bid on any license.
Bidding requirements
Ordinarily, there are three potential stages for an FCC auction; each stage requires a bidder to use a greater amount of its eligibility per round. This scheme encourages bidding, which moves the auction process along. In the first stage, applicants are generally required to use about 80% of their eligibility. In the second stage, that increases to 90%, and in the third stage, applicants are required to use 98% of their bidding units in each round.
If you fail to bid your required eligibility, you will lose eligibility for the next round when you use an activity rule waiver. This permits you to sit out a round of the auction without losing eligibility. Each bidder receives five waivers at the beginning of the auction. If you fail to bid in a round in which you have unpledged bid units, the FCC will apply an automatic waiver. This means that you do not have to affirmatively enter an activity rule waiver. The FCC does this rather than reduce a bidder’s eligibility for having missed one round. If the applicant does not wish to lose a waiver, it must override the automatic waiver before the bidding round is over.
If you have exhausted all your waivers and still do not use all of your eligibility, the FCC will reduce your eligibility for you. This is a fairly serious step that the FCC does not take lightly because it does not permit you to increase your eligibility during an auction. The FCC will reduce your eligibility only to the extent that will bring you in compliance with the FCC’s activity requirements. Please note that you do not have to be the high bidder in the round to retain eligibility. Eligibility must merely be pledged, which is accomplished by placing a bid.
Placing a bid
Generally, you can place a bid two ways, by telephone or computer. The FCC has developed proprietary bidding software, which it modifies for each auction, to allow you to place bids from your computer. You can also bid by telephone. Both bidding methods require the bidder to pass a security procedure before the FCC will accept a bid.
Mock auction
A few days prior to an auction, the FCC will conduct a mock auction for qualified bidders. Applicants should have configured their computers before this date. This is an excellent opportunity to make sure that you understand the auction, the procedures and the software before you “go live.” During the mock auction the FCC has all of its auction facilities operating, so bidders can and should practice bidding by computer as well as by phone. In most situations, bidding by phone is going to be a last resort and you might not be able to place your bid until close to the end of the round.
This does not mean that you won’t be able to “get in” to the FCC’s telephonic bidding facility. The FCC has sufficient capacity to handle telephonic bidders promptly. We have not heard of a single instance where a telephonic bid was not taken immediately. We are referring, instead, to catastrophic computer failure preventing computer bidding, or something similar. Please be advised that, because there are several levels of a security “script” that the telephonic bidder must guide you through verbally, telephonic bidding takes substantially more time than computer bidding, possibly as much at four or five minutes. All calls are recorded.
If you are familiar with the process prior to beginning of the auction, this process will go a lot more smoothly. At the very least, the number for telephonic bidding should be kept handy.
Most FCC auctions are simultaneous, multiple round auctions. This means that the FCC will allow bids on all licenses offered in every round of the auction. When the round closes, the FCC will announce the high bidder for each license in each market. The FCC usually starts an auction slowly, with one or two rounds of the auction per day and increases the number of rounds per day when bidders have become more comfortable with the process and when the number of bids per round decreases. The FCC’s bidding software has a facility to notify bidders of important announcements and this should be checked frequently. Each license is available throughout the auction.
Bid removal
It is possible to make a mistake while placing a bid in an auction, although the FCC has tried to eliminate these errors through changes in software and bidding procedures. If you do make a mistake and discover it before the end of that round of the auction, you may remove your bid. Essentially, you unsubmit your bid in the same manner as you submitted it. After bidding, you should print out a copy of the bid confirmation provided by the software and look at it carefully. If you find and fix an error before the end of the round, there will be no penalty.
Bid withdrawal
On the other hand, if you find a bidding error after the round closes, you may withdraw the bid. The FCC will let you withdraw bids twice during one auction. If you do withdraw your bid, the FCC will offer that property during the next round of the auction at the price it had been offered before you bid. If nobody bids on that license during the rest of the auction, the license stays with the FCC to be auctioned again at a later date, and you will be required to pay a penalty for having withdrawn your high bid and if the license brings in a lower price at a subsequent auction. If somebody does bid the same or more than you had bid, you’re off the hook.
The end of the auction
An auction ends when a round passes with no new bids, waivers or withdrawals on any license, or when the FCC says it does. For the purposes of the broadcast auction, the FCC is considering a new bid that would keep the auction open, as a bid by someone other than the current high bidder. During one auction, a bidder allegedly lost critical funding and kept the auction open by making small bids on lower-priced licenses while it scrambled to replace its funding. In some of the markets, it was “bidding up” its own bid. The auction dragged on with little action and little return for the U.S. Treasury. Finally, the FCC invoked its “special stopping rule” and ended the auction after 200-plus rounds. The FCC can end an auction in three rounds by invoking the stopping rule, but is reluctant to, and will only do so in rare circumstances. In that auction, as in this one, every license was available for bid until the close of the auction.
Down payment
If your high bid(s) at the end of the auction is more than you paid in your upfront payment, you will have to bring the amount of money on deposit with the FCC up to 20% of what you owe. This is considered the down payment and is due 10 business days after the FCC announces the close of the auction. Any bid withdrawal penalties must be paid at this time. The FCC will “take” a bid withdrawal amount out of the high bidder’s upfront payment, prior to applying that money to a down payment.
Long form application and final payment
After the auction closes, the high bidder has 10 days to submit a long-form application to actually be awarded the licenses. The FCC will then review these applications and announce those acceptable for filing, much like it did the short forms. This starts a 30-day window during which petitions against the applications may be filed. After reviewing the applications and any challenges to them, the FCC will announce when it is prepared to grant the licenses, and high bidders will have notice to submit the remainder, if any, of the payment for the license to the FCC.
And that’s all there is to an FCC auction.
Important dates
Auction Seminar To be determined
Short-Form Application Aug. 17, 2001, 6:00 p.m. ET
Upfront Payments To be determined
Mock Auction To be determined
Auction Begins Sept. 12, 2001
Licenses to be auctioned
Twelve 700MHz band EAG licenses
*Minimum opening bids—if you have to ask, you can’t afford it
Bidding credits available(!)
*Small business — a bidder with attributed average annual gross revenues of not more than $40 million for the preceding three years may receive a 15% discount on its winning bids.
*Very small business — a bidder with attributed average annual gross revenues of not more than $15 million for the preceding three years may receive a 25% discount on its winning bids.
Auction at a Glance — FM Broadcast
Important dates
Auction Seminar March 7, 2001+
Short-Form Application Oct. 5, 2001, 6 p.m. ET
Upfront Payments Nov. 5, 2001, 6 p.m. ET
Mock Auction Dec. 3, 2001
Auction Begins Dec. 5, 2001
Licenses to be auctioned
351 FM broadcast construction permits
*Minimum opening bids as cheap as $1,500 or as high as $200,000
Bidding credits available
New entrant bidding credit
*A winning bidder with no attributable interest in any other media of mass communications is entitled to a 35% bidding credit.
*A winning bidder with an attributable interest in no more than three mass media facilities is entitled to a 25% bidding credit.
+While this date has passed, I expect that the FCC will schedule another auction seminar.
Auction at a Glance — VHF Public Coast/LMS
Important dates
Auction Seminar April 24, 2001
Short-Form Application May 4, 2001, 6 p.m. ET
Upfront Payments May 18, 2001, 6 p.m. ET
Mock Auction June 4, 2001
Auction Begins June 6, 2001
Licenses to be auctioned
16 Inland VHF Public Coast Area (VPC) licenses
*Unsold from first VHF Public Coast/LMS auction
*All licenses are inland VPC licenses
*Each license has seven 25kHz channel pairs, or 350kHz
*Minimum opening bid from $2,500 for each license except El Paso, which is listed for $3,200
241 LMS multilateration licenses
*Unsold from first VHF Public Coast/LMS auction
*Economic-area licenses
*Three frequency blocks (not all are available in each market)
q Block A – 904.000–909.750/927.750–928.000MHz
q Block B – 919.750–921.750/927.500–927.750MHz
q Block C – 921.750–927.250/927.250–927.500MHz
*Minimum opening bid $1,000–11,000; most closer to $1,000
Bidding credits available
* Small Business — A bidder with attributed average annual gross revenues of not more than $15 million for the preceding three years may receive a 25% discount on its winning bids.
* Very Small Business — A bidder with attributed average annual gross revenues of not more than $3 million for the preceding three years may receive a 35% discount on its winning bids.
* Tribal Land Bidding Credit — After the auction, winning bidders that intend to use its license to establish service to federally recognized tribal lands, under certain conditions, may receive a bidding credit in addition to qualifying for a small or very small business credit.
Important dates
Auction Seminar May 3, 2001
Short-Form Application May 14, 2001, 6 p.m. ET
Upfront Payments June 4, 2001, 6 p.m. ET
Mock Auction June 22, 2001
Auction Begins June 26, 2001
Licenses to be auctioned
14,000 lower paging band licenses (35MHz–36MHz, 43MHz–44MHz, 152MHz–159MHz and 454MHz–460MHz)
*Economic-area licenses
*Minimum opening bid from $500-2,700, most closer to $500
1,514 upper paging band licenses (929-931 MHz)
*Unsold from the first paging auction
*Major Economic Area licenses
*Minimum opening bid $1,000-3,300, most closer to $1,000
Bidding credits available
*Small Business — A bidder with attributed average annual gross revenues of not more than $15 million for the preceding three years may receive a 25% discount on its winning bids.
*Very Small Business — A bidder with attributed average annual gross revenues of not more than $3 million for the preceding three years may receive a 35% discount on its winning bids.
*Tribal Land Bidding Credit — After the auction, winning bidders that intend to use its license to establish service to federally recognized tribal lands, under certain conditions, may receive a bidding credit in addition to qualifying for a small or very small business credit.
Kaercher is an associate attorney at Blooston, Mordkofsky, Dickens, Duffy & Prendergast in Washington. She has represented numerous companies in FCC auctions.
