PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

No. 08-2036

 

COUNCIL TREE COMMUNICATIONS, INC.; 

BETHEL NATIVE CORPORATION; 

THE MINORITY MEDIA AND

TELECOMMUNICATIONS COUNCIL,

 Petitioners

v. 

FEDERAL COMMUNICATIONS COMMISSION; 

UNITED STATES OF AMERICA,

 Respondents

CTIA-WIRELESS Association and T-Mobile USA, Inc.,

 Intervenor Respondents (Per Clerk Order of 4/28/08)

CELLCO PARTNERSHIP d/b/a Verizon Wireless,

Intervenor Respondent (Per Court Order of 6/30/08)

 
2

On Petition for Review of Orders of the

Federal Communications Commission

(FCC Nos. 06-52, 06-78 and 08-92)

 

Argued December 1, 2009

Before: FISHER, HARDIMAN and STAPLETON, Circuit

Judges.

(Filed: August 24, 2010)

Dennis P. Corbett (Argued)

S. Jenell Trigg

Lerner Senter

2000 K Street, N.W.

Washington, DC 20006

Attorneys for Petitioners

Robert B. Nicholson 

Robert J. Wiggers

United States Department of Justice 

Appellate Section 

Room 3228 

950 Pennsylvania Avenue, N.W. 

Washington, DC 20530-0000 

Attorneys for Respondents USA

Joseph R. Palmore (Argued)

Laurence N. Bourne

Federal Communications Commission
3

Office of General Counsel

445 12 Street, S.W. th

Washington, DC 20554

Attorneys for Respondents FCC

Ian H. Gershengorn

Elaine J. Goldenberg

Jenner & Block 

1099 New York Avenue 

Suite 900 

Washington, DC 20001-0000 

Attorneys for Intervenor CTIA Wireless Assn

Andrew G. McBride 

Wiley Rein 

1776 K Street, N.W. 

Washington, DC 20006-0000 

Attorneys for Intervenor Cellco Partnership

Jonathan E. Nuechterlein (Argued)

Wilmer Cutler Pickering Hale & Dorr

1875 Pennsylvania Avenue, N.W.

Washington, DC 20006

Attorneys for Intervenor T Mobile USA

Thomas Gutierrez 

Lukas, Nace, Gutierrez & Sachs 

1650 Tysons Boulevard 

Suite 1500 

McLean, VA 22102-0000 
4

Carl N. Northrop

Carson H. Sullivan

Paul, Hastings, Janofsky & Walker 

875 15th Street, N.W. 

Suite 1000 

Washington, DC 20005-0000 

Attorneys for Proposed Amicus Respondents

Eric L. Bernthal 

Latham & Watkins 

555 11th Street, N.W. 

Suite 1000 

Washington, DC 20004-0000 

Carl N. Northrop

Paul, Hastings, Janofsky & Walker 

875 15th Street, N.W. 

Suite 1000 

Washington, DC 20005-0000 

Attorneys for Proposed Intervenor Respondent

Jeneba J. Ghatt 

Suite 700 

2 Wisconsin Circle 

Chevy Chase, MD 20815

Attorney for Amicus Petitioners

 

OPINION OF THE COURT

 
5

HARDIMAN, Circuit Judge.

This dispute comes to us for the fourth time. At issue is

a challenge to some of the rules that governed the participation

of small wireless telephone service providers in auctions of

electromagnetic spectrum conducted by the Federal

Communications Commission (FCC or the Commission).

The FCC is authorized to grant licenses for the use of

bands of the electromagnetic spectrum and has done so chiefly

through auctions for defined geographic markets. Because the

law requires the FCC to promote the participation of small

businesses in the use of the spectrum, it has defined a class of

designated entities (DEs) which are eligible for bidding credits.

These credits are added to the dollar amount of the DEs’ bids,

to make it easier for them to win spectrum licenses at auction.

The petitioners here are (1) Council Tree

Communications, an investor in DEs; (2) Bethel Native

Corporation, a small wireless carrier based in Alaska whose

stock is owned by Alaskan natives; and (3) the Minority Media

and Telecommunications Council (MMTC), a trade group

representing minority-owned telecom companies. Petitioners

seek review of multiple orders in an FCC rulemaking entitled In

re Implementation of the Commercial Spectrum Enhancement

Act and Modernization of the Commission’s Competitive

Bidding Rules and Procedures, WT Docket No. 05-211, in

which the FCC changed the qualifications for DE status as well

as the restitution that must be made by a licensee that loses DE

status after taking advantage of bidding credits. Petitioners

claim that these rules (1) were enacted without the notice and
6

opportunity for comment required by the Administrative

Procedure Act (APA), and (2) are arbitrary and capricious, in

violation of the APA. Petitioners ask us to rescind the results of

approximately $33 billion worth of auctions held under the

challenged rules, and to order the FCC to conduct new auctions

under new rules.

I.

A. Legal Background

Although the FCC possesses broad authority to auction

licenses to use portions of the electromagnetic spectrum, it must

promote “economic opportunity and competition . . . by avoiding

excessive concentration of licenses and by disseminating

licenses among a wide variety of applicants, including small

businesses [and] rural telephone companies.” 47 U.S.C.

§ 309(j)(3)(B). The FCC must also “ensure that small

businesses [and] rural telephone companies . . . are given the

opportunity to participate in the provision of spectrum-based

services, and, for such purposes, consider the use of tax

certificates, bidding preferences, and other procedures.” Id.

§ 309(j)(4)(D).

Consistent with these statutory mandates, in conducting

spectrum auctions the FCC offers bidding credits that increase

the bids of small entities, in an amount measured as a percentage

of the entities’ initial bids. After a DE submits its bid, this

credit is added to the bid for purposes of determining the winner

of the auction. If the DE wins the auction, however, it will be

required to pay only the amount of its initial bid, not the amount
7

that includes the credit. The credits are available as follows: (1)

a 15% credit for entities averaging annual gross revenues of $40

million or less over the last three years; (2) a 25% credit for

entities averaging annual gross revenues of $15 million or less

over the last three years; and (3) a 35% credit for entities

averaging $3 million or less in average revenues over the last

three years. 47 C.F.R. § 1.2110(f)(2)(i) to (iii). Although the

FCC defines the term “designated entities” to mean “small

businesses” generally, see id. § 1.2110(a), the term is relevant

here only insofar as it refers to bidders who qualify for these

credits.

The bidding-credit system could be abused by small

companies willing to immediately monetize their bidding

credits by selling their spectrum licenses at market prices, or by

large companies taking advantage of credits through affiliates or

puppet corporations that technically qualify as DEs. To prevent

this, the FCC is required to seek the “avoidance of unjust

enrichment through the methods employed to award” spectrum

licenses, 47 U.S.C. § 309(j)(3)(c), and to establish “such . . .

antitrafficking restrictions and payment schedules as may be

necessary to prevent unjust enrichment as a result of the

methods employed to issue licenses and permits.”

Id. § 309(j)(4)(E). In the rulemaking at issue here, the FCC

adopted three regulations of this type.

First, to prevent subsidiaries or affiliates of large

businesses from qualifying for DE credits, 47 C.F.R.

§ 1.2110(b)(1)(i) provides that:
8

[t]he gross revenues of the applicant (or licensee),

its affiliates, its controlling interests, the affiliates

of its controlling interests, and the entities with

which it has an attributable material relationship

shall be attributed to the applicant (or licensee)

and considered on a cumulative basis and

aggregated for purposes of determining whether

the applicant (or licensee) is eligible for status as

a small business[.]

Insofar as it applies to an applicant’s affiliates and controlling

interests, and the affiliates of an applicant’s controlling interests,

this revenue attribution rule is long-standing and is not contested

here. Instead, in the challenged rulemaking the FCC imposed

revenue attribution for “entities with which [the applicant or

licensee] has an attributable material relationship,” and defined

the phrase “attributable material relationship.” That definition

appears in 47 C.F.R. § 1.2110(b)(3)(iv)(B) and states:

[a]n applicant or licensee has an attributable

material relationship when it has one or more

arrangements with any individual entity for the

lease or resale (including under a wholesale

agreement) of, on a cumulative basis, more than

25 percent of the spectrum capacity of any one of

the applicant’s or licensee’s licenses.

The second challenged regulation is 47 C.F.R.

§ 1.2110(b)(3)(iv)(A), which was promulgated for the first time

in the rulemaking at issue here and provides:
9

[a]n applicant or licensee that would otherwise be

eligible for designated entity benefits under this

section and applicable service-specific rules shall

be ineligible for such benefits if the applicant or

licensee has an impermissible material

relationship. An applicant or licensee has an

impermissible material relationship when it has

arrangements with one or more entities for the

lease or resale (including under a wholesale

agreement) of, on a cumulative basis, more than

50 percent of the spectrum capacity of any one of

the applicant’s or licensee’s licenses.

Thus, unlike an “attributable material relationship,” a business

that has an impermissible material relationship is ipso facto

disqualified from receiving bidding credits.

Third, the FCC has recognized that unjust enrichment

will occur if recipients of bidding credits are permitted to

promptly sell their spectrum rights to non-DEs at a premium, or

to ally themselves with large entities in such a way as to lose

their DE status. To prevent this, 47 C.F.R. § 1.2111(d)(1) states:

[a] licensee that utilizes a bidding credit, and that

during the initial term seeks to assign or transfer

control of a license to an entity that does not meet

the eligibility criteria for a bidding credit, will be

required to reimburse the U.S. Government for

the amount of the bidding credit, plus interest . .

. as a condition of Commission approval of the

assignment or transfer. . . . If, within the initial
10

term of the license, a licensee that utilizes a

bidding credit seeks to make any ownership

change or to enter into a material relationship (see

§ 1.2110) that would result in the licensee losing

eligibility for a bidding credit . . . the amount of

the bidding credit . . . plus interest . . . must be

paid to the U.S. Government as a condition of

Commission approval of the assignment or

transfer . . . .

If a DE licensee takes action that does not render it wholly

ineligible for a bidding credit, but leaves it eligible only for a

smaller credit than the one it used to acquire a license, the

difference in value between the two credits must be repaid. Id.

This repayment obligation existed before the rulemaking

challenged by Petitioners here. At issue in this petition is the

length of time after a DE wins a license using a bidding credit

that it is subject to the repayment requirement. Although the

most effective method to prevent misuse of bidding credits

would be to require that a DE winning a license with such

credits both maintain its DE status and hold the license until it

expired, it appears that the FCC has long applied a more lenient

rule in order to permit DEs to participate in the secondary

market for spectrum rights, and to allow DEs to attract

investment capital that might be hard to obtain if there were no

way for DEs to liquidate such a valuable asset. Accordingly,

FCC regulations provide for a reduction in the repayment

amount if the DE’s offending action does not occur until an

appreciable time after it won the license. In the rulemaking at

issue here, the FCC extended the time period over which the
11

repayment obligation applies. Before the rulemaking, 47 C.F.R.

§ 1.2111(d)(2)(i) provided that the required repayment dropped

to 75% of the bidding credit value for license transfers or losses

of DE status occurring up to two years after the auction, 50% of

the credit for those occurring during the third year after the

auction, 25% of the credit during the fourth year, and zero after

five years. Id. (effective through June 6, 2006). The instant

rulemaking amended § 1.2111(d)(2)(i) to require full repayment

of the credit if eligibility is lost in the first five years after the

auction, 75% repayment if eligibility is lost in the sixth or

seventh year, 50% if eligibility is lost in the eighth or ninth year,

25% in the tenth year, and eliminated the penalty only after ten

years.

B. The Rulemaking Proceeding

1. The Further Notice of Proposed Rulemaking

On February 3, 2006, the FCC issued a Further Notice of

Proposed Rulemaking In re Implementation of the Commercial

Spectrum Enhancement Act and Modernization of the

Commission’s Competitive Bidding Rules and Procedures, 21

F.C.C.R. 1753 (2006) (hereinafter FNPR). The FNPR was a

response to an ex parte letter from Council Tree

Communications (Council Tree), the lead petitioner here. In the

FNPR, the FCC agreed with Council Tree’s view “that the

Commission’s current rules do not adequately prevent large

corporations from structuring relationships in a manner that

allows them to gain access to benefits reserved for small

businesses.” Id. at 1759-60. Therefore, the FNPR sought

“comment on the elements of a proposal raised by Council Tree
12

. . . that seeks to prohibit the award of bidding credits or other

small business benefits to entities that have what Council Tree

refers to as a ‘material relationship’ with a ‘large in-region

incumbent wireless service provider.’” Id. at 1754 (footnotes

omitted). The FCC “tentatively conclude[d]” that such

regulations were appropriate, id. at 1757, and “s[ought]

comment on how [it] should define the elements of such a

restriction,” id. at 1755, as well as “on whether [it] should [also]

restrict the award of designated entity benefits where an

otherwise qualified designated entity has a ‘material

relationship’ with a large entity that has a significant interest in

communications services,” id.

Throughout the FNPR, the FCC reiterated these requests

for comments in similar or identical terms. See id., passim. It

also solicited comments in more specific terms on possible

variations on each of the elements proposed by Council Tree.

With respect to the definition of “material relationship,” the

FCC inquired whether its then-current rules requiring attribution

of the revenues of an applicant’s controlling interests and

affiliates were sufficient to prevent improper influence by large

businesses over small bidders. Id. at 1760-61. The FCC asked

whether those attribution rules, or any new definition of

“material relationship,” should vary according to whether they

were applied to “large, in-region, incumbent wireless service

providers” or “entit[ies] with significant interests in

communications services.” Id. at 1760. Of particular note here,

the FCC

s[ought] comment on what, if any, standard

should be used to determine whether a spectrum
13

leasing arrangement is a ‘material relationship’

for the purpose of any additional restriction on the

availability of designated entity benefits that we

might adopt. We also seek comment on whether

other arrangements should be taken into account.

If so, what arrangements should we consider?

Id. at 1761.

With respect to the definition of “large, in-region,

incumbent wireless service provider,” the FCC sought comment

on how much geographic overlap between the incumbent’s and

DE’s service areas should be required for the “in-region”

criterion to be met, id. at 1759, 1762, and whether gross

revenues were the appropriate metric for determining whether

the incumbent was “large,” and, if so, what the proper cutoff

would be. Id. at 1759, 1761-62. With respect to the phrase

“entity with significant interests in communications services,”

the FCC inquired how “large” status should be determined, id. at

1761-62, whether an “in-region” geographical element should

also apply, id. at 1762, and how broadly the phrase “significant

interests in communications services” should be defined, and

what kinds of entities it should encompass, id. at 1762-63.

The FNPR also sought comment

on whether, if we adopt a new restriction on the

award of bidding credits to designated entities, we

should adopt revisions to our unjust enrichment

rules such as those proposed by Council Tree, or

in some other manner. . . . If we require
14

reimbursement by licensees that, either through a

change of ‘material relationships’ or assignment

or transfer of control of the license, lose their

eligibility for a bidding credit pursuant to any

eligibility restriction that we might adopt, over

what portion of the license term should such

unjust enrichment provisions apply?

Id. at 1763. The FCC also explicitly requested comment on

whether the proposed restrictions risked unduly limiting DEs’

ability to raise capital. Id. at 1761.

Finally, the FCC confirmed in the FNPR that it expected

“to complete this proceeding in time so that any modifications

to our rules resulting from this proceeding will apply to the

upcoming auction of licenses for Advanced Wireless Services

(‘AWS’), which currently is scheduled to begin June 29, 2006,”

which was less than four months after the release of the FNPR.

Id. at 1755, 1763. This auction—known as “Auction 66”—was

the largest spectrum auction in several years. To achieve this

goal, the comment period on the FNPR ran for only 14 days

after its publication in the Federal Register, and the reply

comment period lasted only one week thereafter. Id. at 1753.

2. Comments on the FNPR

Despite the brief time frame, a number of comments on

the FNPR were submitted. Most commenters supported some

changes along the lines suggested by the FNPR. A

representative comment in this regard came from the

Department of Justice, which reported that it had
15

found contractual or other arrangements between

DEs and large wireless carriers that created such

close ties between the two that the DEs could not

be considered to be truly independent competitive

actors; in some of these instances, the DE

affiliated with a large wireless carrier had not

launched commercial services to end-user

customers or other wireless carriers but only

provided roaming services to its large affiliate.

J.A. 1052-53. In light of this finding, the DOJ recommended

that such a relationship disqualify the DE, but suggested that

lower-level relationships, such as “arm’s-length negotiated

agreements for roaming or brand licensing and support,” id. at

1054, would not necessarily be problematic. In sum, the DOJ

maintained that “[a] relationship where the large enterprise

dominates the DE is troubling as it suggests that the DE is not

within the class of entities (i.e., small businesses) that the FCC’s

rules are designed to benefit.” Id.

Several comments addressed the application of the

proposed rules to spectrum leases by DEs to non-DEs. Council

Tree agreed that the suspect class of arrangements should

include leasing arrangements, J.A. 439, arguing that such

“agreements . . . convey a level of influence over the operations

of the designated entity that is inappropriate in the hands of a

dominant national wireless service provider,” id. at 439-40. The

NTCH, Inc. proposed that DEs should be able to lease spectrum

freely, so long as substantial portions of spectrum in the same

geographic area remained in use by DEs. J.A. 663-64. Wirefree
16

Partners argued against any further restrictions on leasing by

DEs, J.A. 759-60, but Council Tree disagreed, J.A. 873-74.

Several commenters also argued that the proposed

categories of “large, in-region, incumbent wireless service

providers” or “large entities with significant interests in

communications services” were too narrow. These commenters

argued repeatedly that the statutory objective of assisting small

businesses would be frustrated by a bidder’s material

relationship with a large business of any kind, regardless of

whether the large business was involved in the communications

industry. See Comments of CTIA—The Wireless Association,

J.A. 510, 518 (“the Notice makes no attempt to justify a

distinction between large incumbent carriers and any other class

of non-attributable investor,” such as AOL, Google, or

Microsoft, but the problems arising from large investors’

dominance of DEs “would presumably run to all potential

investors, not just large carrier partners”); Comments of Dobson

Comm’ns Corp., J.A. 526 (urging the FCC to apply any changes

to “any large, well-funded investor with a strategic interest in

the use of the spectrum”); Comments of T-Mobile USA, Inc.,

J.A. 697 (“[t]here does not appear to be a justification for

permitting Microsoft or Wal-Mart to participate in a DE joint

venture while precluding T-Mobile from doing so.”); see also

Comments of Verizon Wireless, J.A. 745; Comments of

Wirefree Partners III, LLC, J.A. 760; Reply Comments of TMobile USA, Inc., J.A. 812; Reply Comments of Cingular

Wireless LLC, J.A. 833-34.

3. The Second Report and Order and Second Further Notice

of Proposed Rulemaking
 The first Report and Order is not directly relevant here. 1

17

After receipt of the aforementioned comments, on April

25, 2006, the FCC adopted and released its Second Report and

Order and Second Further Notice of Proposed Rulemaking

(Second R&O), 21 F.C.C.R. 4753 (2006). Therein, the FCC 1

stated its “particular intention . . . to ensure that entities

ineligible for designated entity incentives cannot circumvent our

rules by obtaining those benefits indirectly, through their

relationships with eligible entities.” Id. at 4754. The FCC

acknowledged that

[t]he challenge for the Commission in carrying

out Congress’s plan has always been to find a

reasonable balance between the competing goals

of, first, providing designated entities with

reasonable flexibility in being able to obtain

needed financing from investors and, second,

ensuring that the rules effectively prevent entities

ineligible for designated entity benefits from

circumventing the intent of the rules by obtaining

those benefits indirectly, through their

investments in qualified businesses.

Id. at 4756 (footnote omitted). To this end, the FCC “agree[d]

with commenters that certain agreements have the potential to

significantly influence a designated entity licensee’s decisions

regarding its provision of service and, therefore, also have the

potential to be abused, absent the appropriate safeguards.” Id.

at 4762. In an attempt to create such safeguards, and as we
18

described herein, the Second R&O established revenue

attribution for “attributable material relationships,” defined as

the lease of more than 25% of the DE’s spectrum capacity by

any single lessee, and mandated the loss of DE status by any

licensee that acquires an “impermissible material relationship,”

by leasing an aggregate of more than 50% of its spectrum

capacity. Id. at 4763-64.

Notably, neither the 25% rule nor the 50% rule applied

only to relationships with large entities. This, said the Second

R&O, was because the FCC had

conclude[d] that certain agreements, by their very

nature, are generally inconsistent with an

applicant’s or licensee’s ability to achieve or

maintain designated entity eligibility because they

are inconsistent with Congress’s legislative intent.

In this regard, where an agreement concerns the

actual use of the designated entity’s spectrum

capacity, it is the agreement, as opposed to the

party with whom it is entered into, that causes the

relationship to be ripe for abuse and creates the

potential for the relationship to impede a

designated entity’s ability to become a

facilities-based provider, as intended by Congress.

Id. at 4762.

The legislative intent referenced is that behind 47 U.S.C.

§ 309(j)(4)(c), the authorization for the FCC’s promulgation of

antitrafficking and anti-unjust enrichment provisions. The
19

House of Representatives Budget Committee’s report on this

provision explicitly contemplated its use in connection with the

promotion of small-business licenses, and stated that “[t]he

Committee anticipates that the Commission will use this

authority to deter speculation and participation in the licensing

process by those who have no intention of offering service to the

public.” H.R. Rep. No. 103-111, at 257-58, reprinted in 1993

U.S.C.C.A.N. 378, 584-85. The Second R&O reiterated its

reliance on this congressional intent several times. 21 F.C.C.R.

at 4755, 4760, 4762-64, 4766.

The Second R&O also extended the bidding-creditrepayment schedule to 10 years. The extended obligation

applies “if a designated entity loses its eligibility for a bidding

credit for any reason, including but not limited to[] entering into

an ‘impermissible material relationship’ or an ‘attributable

material relationship.’” Id. at 4766. The FCC again stated that

“[b]y extending the unjust enrichment period to ten years, we

increase the probability that the designated entity will develop

to be a competitive facilities-based service provider.” Id.

The Second R&O also included a Second Further Notice

of Proposed Rulemaking, which sought additional comment on

the elements of Council Tree’s initial proposal, namely, whether

the FCC should impose further restrictions on grants of DE

status to applicants having other sorts of “material relationships”

with large in-region incumbent wireless providers. Id. at 4773-

74 (seeking comment on the definition of “large” and whether

relationships with non-wireless businesses should also be

regulated); 4776-78 (seeking comment on propriety and

definition of “in-region” criterion); 4779-84 (same, on definition
20

of “material relationship”). The FCC noted its “concern[] that

additional types of relationships could . . . allow[] an ineligible

entity the ability to gain undue advantages in the

communications marketplace through the benefits offered to a

designated entity applicant,” and asked, “[a]re the new rules we

adopt today sufficient to safeguard against many of these

concerns?” Id. at 4780.

The Commission further stated, however, that

[w]e generally do not have the same concerns

regarding relationships between designated entity

applicants and those who do not have interests in

spectrum capacity or the provision of service,

such as financial institutions or venture capital

firms, provided that such entities do not have a

controlling interest relationship with the

applicant.

Id. This, said the FCC, was because cross-industry investments

did not present the investor an “opportunity for it to bundle

existing communications services with a strategic wireless

partner, and there is less potential for those entities to exert

undue influence over a designated entity licensee’s decision

making regarding its service provision or the use of its licensed

spectrum.” Id.

4. Response to the Second R&O

The new rules promulgated in the Second R&O provoked

criticism from some DEs and their investors. Several petitions
21

for reconsideration were filed with the FCC, including one by

the Petitioners here. Two of Petitioners’ arguments for

reconsideration before the FCC are relevant here. First,

Petitioners maintained that “[n]one of the new rules is limited to

arrangements involving large, in-region incumbent wireless

service providers as contemplated in the Further Notice of

Proposed Rule Making.” Pet. for Exp. Reconsid’n, J.A. 1281.

Second, Petitioners argued that the 10-year credit-repayment

schedule “eviscerat[es] a designated entity’s access to capital

because lenders and investors who are being asked to back

untested new entrants want to see that the designated entity has

a clear path to exit if the business is not succeeding,” id. at

1281-82, and that the FCC had failed to take this into account in

setting the new rules.

Both of Petitioners’ objections were supported by the

views of a number of other commenters, most of whom

contacted the FCC for the first time in response to the Second

R&O. Catalyst Investors, LLC, which had provided capital for

several DEs in the past and was planning to do so in connection

with Auction 66, stated:

both the equity and the debt markets will not be

comfortable with the ‘10 Year Hold Rule,’ as it is

outside the normal hold periods for most sources

of capital. Due to a lack of reasonable notice in

the proceeding, the rule came as a surprise and

was not the subject of any meaningful public

input. Had such input been received, we strongly

believe the Commission would have realized that

the 10 year period is just too long.
22

Id. at 1243; cf. Ex Parte Presentation of The Eezinet Corp., et

al., S.J.A. 91 (same arguments, by a group of DE financiers and

DEs); Notice of Ex Parte Presentation of Cook Inlet Region,

Inc., J.A.1487 (small carrier allied with T-Mobile commenting

that “[n]o significant investor will be willing to risk its return on

investment over a ten year horizon”); Letter from the Nat’l

Telecomm’ns Coop. Ass’n, J.A. 1508-09 (industry group

representing rural telecoms, complaining of a lack of public

notice and the short time between the promulgation of the rules

and Auction 66); Ex Parte Letter from Coral Wireless Licenses,

LLC, et al.,J.A. 1547-48 (another group of small businesses and

their investors, commenting that “[a] business transaction where

there is no clear path to liquidity for 10 years is a very

unattractive investment for the financial institutions and venture

capital firms that traditionally have supported wireless start-up

ventures,” and that they “did not understand from the Further

Notice that changes of this nature were under consideration by

the Commission or they would have commented on this issue”);

Notice of Oral Ex Parte Presentation of Doyon, Ltd., J.A. 1550

(investor in small telecoms commenting that “the new ten year

unjust enrichment schedule . . . makes it more difficult for

designated entities to secure financing and find strategic partners

because it is less likely that they can easily exit the business in

the event of significant changes in the industry”); Letter from

Royal Street Comm’ns, LLC, J.A. 1557 (“[A] transaction where

there is no clear path to liquidity, without penalty, for 10 years

is a very unattractive investment for the types of financial

institutions and venture capital firms that traditionally have

supported wireless start-up ventures.”).
23

Royal Street Communications LLC, a DE engaged in

wireless wholesaling, objected that the new rules impacted

arrangements by DEs with other small entities, as well as large

ones. Letter from Royal Street Comm’ns, LLC, J.A. 1557.

Royal Street claimed the new rules placed restrictions on

wireless wholesaling

without affording . . . DEs notice and the

opportunity to comment. . . . [T]hese restrictions

will also contribute to investor and financier

reluctance to back wireless licenses that are

effectively limited to a retail business model, a

model decidedly more expensive and

administratively burdensome. The Order’s

restrictions ignore the fact that wholesale services

are a wireless product increasingly in demand . .

. which can add to the competitive options in the

wireless marketplace.

Id. at 1558. The Rural Telecommunications Group., Inc., also

contended that “[t]he new material relationship rules are

overbroad and unduly restrictive,” because, “current DE

licensees will be unable to . . . lease existing spectrum . . . to

another DE without becoming ineligible for DE benefits in the

AWS auction.” Ex Parte Letter from the Rural Telecomm’ns

Group, Inc., J.A. 1542.

5. The Order on Reconsideration of the Second R&O

On June 2, 2006, the FCC released an Order on

Reconsideration of the Second Report and Order, 21 F.C.C.R.
 Many of the comments just described were submitted 2

after the Order on Reconsideration was released.

24

6703 (hereinafter the Order on Reconsideration). Although it 2

addressed the issues raised in Petitioners’ petition for

reconsideration, the Order on Reconsideration did not formally

grant or deny the petition, but instead was raised by the FCC “on

[its] own motion.” Id. at 6703.

Defending the regulations against the charge that they

would unduly restrict DEs to a retail-only business model, the

FCC restated and clarified its position that active use of a

spectrum license was required to maintain DE status:

[s]ection 309(j)(4)(D) directs the Commission to

issue regulations to ‘ensure’ that designated

entities ‘are given the opportunity to participate in

the provision of spectrum-based services.’ We

believe that the word ‘participate’ in this directive

contemplates significant involvement in the

provision of services to the public, not merely

passive ownership of a license to spectrum used

by others to provide service.

Id. at 6705 n.8 (internal citation omitted). In response to

Petitioners’ arguments that the material-relationship rules had

not been properly noticed, the FCC noted that the FNPR had

asked whether DE relationships with entities other than large inregion incumbents or entities with interests in communications

services should be restricted as well. Id. at 6711. The FCC also
25

noted that the FNPR had included an open-ended inquiry into

what types of relationships should be regulated, and had

specifically contemplated the inclusion of lease arrangements

among those relationships. Id. The FCC concluded that the

changes embodied in the final rulemaking were all contained in,

or logical outgrowths of, the proposal in the FNPR. Id. at 6712.

With respect to the 10-year credit-repayment period, the

FCC stated that its decision to apply the new schedule to the

preexisting DE qualifications as well as the new ones was also

within the scope of its original proposal. The Commission

stated that “had we only revised the five-year unjust enrichment

schedule for certain types of transactions but not for others, we

would have risked creating an illogical scheme that would have

created an incentive for designated entities to prioritize certain

types of transactions over others.” Id. at 6716. Turning to the

contentions that the 10-year rule would cause DEs’ funding to

dry up, the FCC was

not convinced that three to seven years is a

reasonable timeframe for investors to expect to

recover their capital investments in facilities to

provide spectrum-based services. In a recently

concluded proceeding addressing the leasing of

Educational Broadcast Service spectrum, a broad

cross-section of commenters, including a private

equity investment firm, submitted evidence that

insufficient capital would flow to businesses that

want to develop that spectrum if the length of

spectrum lease terms was limited to fifteen years.

These parties argued that lessees needed access to
26

the spectrum for thirty years or more in order to

provide the necessary certainty to justify capital

investment in the band. The Commission was

‘persuaded by [this argument].’

Id. at 6717 (footnotes omitted). Finally, the FCC concluded that

even if the new rules did hamper DE capitalization somewhat,

this was an acceptable balancing of the statutory goals of

encouraging DE participation on the one hand while ensuring

that DEs provide “facilities-based service to the public.” Id. at

6718.

C. The First Petition for Review and the Mandamus

Petition

On June 7, 2006—two days before the Order on

Reconsideration was published in the Federal

Register—Petitioners filed their first petition in this Court for

review of the Second R&O, the Order on Reconsideration, and

the public notice that had announced the start dates for Auction

66, Auction of Advanced Wireless Services Licenses

Rescheduled for August 9, 2006, 21 F.C.C.R. 5598 (2006)

(hereinafter the Public Notice). Petitioners moved for an

emergency stay of Auction 66, which was denied by a motions

panel of this Court on June 29, 2006. After briefing and

argument on the merits, in September 2007 we held that we

lacked jurisdiction to entertain the petition because it was

incurably premature. Council Tree Comm’ns v. FCC, 503 F.3d

284, 293 (3d Cir. 2007). We noted that by statute, petitions for

judicial review of FCC actions can be filed only in the 60 days

following “the entry of a final order.” Id. at 287 (quoting 28
It does not appear that the FCC has formally acted on 3

the petitions for reconsideration of the Second R&O that were

filed by parties other than Petitioners. This is no barrier to our

jurisdiction, however. In Council Tree we held only that “[a]n

agency order is non-final as to an aggrieved party whose petition

for reconsideration remains pending before the agency.” 503

F.3d at 287. And indeed, “[i]t is well established . . . that when

27

U.S.C. § 2344, citing 47 U.S.C. § 402(a)). We also noted that

because the FCC had not formally disposed of Petitioners’

motion for reconsideration of the Second R&O, that order was

non-final and therefore the petition for its review was premature.

Id. We further concluded that the Order on Reconsideration was

“entered,” within the meaning of the statute, only when it was

published in the Federal Register, and that we had no

jurisdiction to entertain a petition filed before this publication.

Id. at 291-93.

After we issued our opinion, Petitioners sought a writ of

mandamus ordering the FCC to act on the petition for

reconsideration, to facilitate jurisdiction in this Court. Although

we declined to issue a writ of mandamus, on February 15, 2008

we directed the FCC to inform us when it would grant or deny

the petition. On March 26, 2008 the FCC formally denied the

petition in a brief Second Order on Reconsideration, noting that

“we already decided the merits of the Petition in the Order on

Reconsideration.” 23 F.C.C.R. 5425, 5426. Within 60 days of

that denial, on April 8, 2008, Petitioners filed this petition for

review of the Second R&O, Order on Reconsideration, Second

Order on Reconsideration, and the Public Notice.3
two parties are adversely affected by an agency’s action, one can

petition for reconsideration before the agency at the same time

that the other seeks judicial redetermination.” W. Penn Power

Co. v. EPA, 860 F.2d 581, 586 (3d Cir. 1988) (citing Am. Farm

Lines v. Black Ball Freight Serv., 397 U.S. 532, 541 (1970)).

 These data must be considered in light of the absence 4

from Auctions 66 and 73 of the set-asides by which, in prior

auctions, only DEs had been permitted to purchase certain

spectrum blocks. Also, the purpose of the instant rulemaking

from its inception was to disqualify sham DEs, which would be

expected to reduce the number of qualifying DEs.

28

D. The Results of Auctions 66 and 73

While Petitioners’ first petition for review was pending

in 2006, the FCC conducted Auction 66 subject to the rules

challenged here. The deadline for applications to bid fell on

June 19, 2006; DEs accounted for 166 of 252 applications and

100 out of 168 qualified bidders permitted to participate. 

Bidding commenced on August 9, 2006, and the auction

generated nearly $14 billion in winning bids. DEs were 57 of

the 104 winning bidders, winning 20% of the individual licenses

auctioned. Measured in terms of dollar value, however, DEs

won only 4% of the spectrum licenses, although two DEs were

among the top ten winners in terms of dollar amounts. By

comparison, in auctions held prior to the new rules, DEs had

won, on average, 70% of the licenses by dollar value.4
 The FCC, along with its intervenors and amici, attacks 5

our jurisdiction to review the Public Notice. Because this

dispute bears on the remedy for any defects in the rules under

review, rather than on the validity of the rules themselves, we

consider it after our analysis of the latter issue. See infra, Part

III.

29

In late 2007 and early 2008, during and just after the

pendency before the FCC of Petitioners’ petition for

reconsideration, the FCC held another, even larger spectrum

auction, known as “Auction 73.” Auction 73 generated about

$19 billion in winning bids, and was also conducted under the

rules challenged here. In Auction 73, DEs comprised 119 of

214 qualified bidders and 56 of 101 winners, and won 35% of

the individual licenses. They won only 2.6% of the total dollar

value of the licenses, however.

II.

Petitioners now petition for review of the Second R&O,

the two reconsideration orders, and the Public Notice. Several

interested parties, many of them winners at Auctions 66 and 73,

have intervened or filed amicus curiae briefs in support of the

FCC. We have jurisdiction to review the FCC’s final orders

pursuant to 28 U.S.C. § 2342(1) and 47 U.S.C. § 402(a).5

Petitioners claim the new regulations are invalid for

several reasons. First, they claim that because the new rules

were not sufficiently foreshadowed by the FNPR, they were

adopted without the public notice and opportunity for comment
 Petitioners also argue that the rulemaking violated the 6

Regulatory Flexibility Act (RFA), as codified at 5 U.S.C.

§§ 603-04. We need not address this theory of recovery further

because, on the facts of this case, we regard it as duplicative of

the APA notice-and-comment claim: to the extent that the FCC

failed to give notice of the new rules for RFA purposes, it also

gave inadequate notice for APA purposes, necessitating a

remand on the latter basis alone. On remand, of course, the FCC

must comply with all RFA requirements.

 Petitioners make another subsidiary argument: they 7

claim that the new rules present such obstacles to small

businesses’ participation in FCC auctions that they violate 47

U.S.C. §309(j)(3)(B)’s requirement that the Commission “seek

to promote” the objective of “economic opportunity and

competition . . . by avoiding excessive concentration of licenses

and by disseminating licenses among a wide variety of

applicants, including small businesses [and] rural telephone

companies.” But the statute also requires the FCC to promote

the development and deployment of new technologies and

services, id. § 309(j)(3)(A), recover a portion of the value of the

spectrum and prevent unjust enrichment, id. § 309(j)(3)(c), and

ensure “efficient and intensive use” of the spectrum, id.

30

required by the Administrative Procedure Act. Petitioners also 6

argue that the new rules are arbitrary and capricious, because the

FCC made no findings as to their impact on the ability of small

businesses to procure financing, and because they ignore the

viability of wholesaling as a facilities-based business model for

DEs. These challenges differ slightly with respect to the three 7
§309(j)(3)(D). Given the general agreement that the DE

program can be abused, as well as the continuing participation

by DEs in auctions held under the new rules, we cannot

conclude that the FCC has failed to promote small-business

participation at all.

31

provisions challenged here: (1) the 25% attribution rule, (2) the

50% impermissible-relationship rule, and (3) the 10-year creditrepayment schedule.

A. Legal Standard: The Administrative Procedure Act

1. The Notice-and-Comment Requirement

Under the APA, federal agencies must publish “either the

terms or substance of the proposed rule or a description of the

subjects and issues involved.” 5 U.S.C. § 553(b)(3). The APA

further requires that “[a]fter notice required by this section, the

agency shall give interested persons an opportunity to participate

in the rule making through submission of written data, views, or

arguments with or without opportunity for oral presentation.”

Id. § 553(c). In interpreting these provisions, courts have held

that if the substance of an agency’s final rule strays too far from

the description contained in the initial notice, the agency may

have deprived interested persons of their statutory right to an

opportunity to participate in the rulemaking. E.g., Long Island

Care at Home, Ltd. v. Coke, 551 U.S. 158, 174 (2007) (“The

Courts of Appeals have generally interpreted this to mean that

the final rule the agency adopts must be ‘a logical outgrowth’ of

the rule proposed. The object, in short, is one of fair notice.”)
32

(quoting Nat’l Black Media Coal. v. FCC, 791 F.2d 1016, 1022

(2d Cir. 1986); citing United Steelworkers, AFL-CIO-CLC v.

Marshall, 647 F.2d 1189, 1221 (D.C. Cir. 1980) and S. Terminal

Corp. v. EPA, 504 F.2d 646, 659 (1st Cir. 1974)). The

principles governing judicial review of notice-and-comment

rulemaking are well established. As the Court of Appeals for

the District of Columbia Circuit has put it:

[n]otice requirements are designed (1) to ensure

that agency regulations are tested via exposure to

diverse public comment, (2) to ensure fairness to

affected parties, and (3) to give affected parties an

opportunity to develop evidence in the record to

support their objections to the rule and thereby

enhance the quality of judicial review. While an

agency may promulgate final rules that differ

from the proposed rule, a final rule is a logical

outgrowth of a proposed rule only if interested

parties should have anticipated that the change

was possible, and thus reasonably should have

filed their comments on the subject during the

notice-and-comment period[.] The ‘logical

outgrowth’ doctrine does not extend to a final rule

that is a brand new rule, since something is not a

logical outgrowth of nothing, nor does it apply

where interested parties would have had to divine

the Agency’s unspoken thoughts, because the

final rule was surprisingly distant from the

proposed rule[.]
33

Int’l Union, United Mine Workers v. Mine Safety & Health

Admin., 407 F.3d 1250, 1259-60 (D.C. Cir. 2005) (internal

quotation marks, brackets, and citations omitted).

2. The Arbitrary-and-Capricious Standard

Another portion of the APA, codified at 5 U.S.C.

§ 706(2), provides that on a petition for review of an agency

action,

the reviewing court shall decide all relevant

questions of law, interpret constitutional and

statutory provisions, and determine the meaning

or applicability of the terms of an agency action.

The reviewing court shall—

. . .

(2) hold unlawful and set aside agency action,

findings, and conclusions found to be—

(A) arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance

with law . . . .

The Supreme Court has stated that

[t]he scope of review under the ‘arbitrary and

capricious’ standard is narrow and a court is not

to substitute its judgment for that of the agency.

Nevertheless, the agency must examine the
34

relevant data and articulate a satisfactory

explanation for its action including a rational

connection between the facts found and the

choice made. In reviewing that explanation, we

must consider whether the decision was based on

a consideration of the relevant factors and

whether there has been a clear error of judgment.

Normally, an agency rule would be arbitrary and

capricious if the agency has relied on factors

which Congress has not intended it to consider,

entirely failed to consider an important aspect of

the problem, offered an explanation for its

decision that runs counter to the evidence before

the agency, or is so implausible that it could not

be ascribed to a difference in view or the product

of agency expertise. The reviewing court should

not attempt itself to make up for such

deficiencies: [w]e may not supply a reasoned

basis for the agency’s action that the agency itself

has not given. We will, however, uphold a

decision of less than ideal clarity if the agency’s

path may reasonably be discerned.

Motor Vehicle Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins.

Co., 463 U.S. 29, 43 (1983) (internal quotation marks and

citations omitted). In situations where “an agency has engaged

in line-drawing determinations[,] . . . our review is necessarily

deferential to agency expertise,” but the agency’s actions must

still “not be ‘patently unreasonable’ or run counter to the

evidence before the agency.” Prometheus Radio Project v.

FCC, 373 F.3d. 372, 390 (3d Cir. 2004) (citations omitted).
35

B. Validity of the 25% Attribution Rule

1. Notice and Comment Compliance

With the foregoing legal principles in mind, we now

consider the rulemaking at issue, beginning with the 25%

attributable relationship rule. As noted previously, 47 C.F.R.

§ 1.2110(b)(1)(i) and (b)(3)(iv)(B) provide that, if a DE leases

or resells (including at wholesale) more than 25% of its

spectrum capacity to any single lessee or purchaser, it must add

that lessee’s or purchaser’s revenues to its own to determine its

continued eligibility for DE credits. Petitioners claim this rule

was not adequately noticed in the FNPR, because the FNPR was

focused on avoiding domination of DEs by large

communications companies, and made no mention of placing

limits on all leases to any lessee. We disagree.

As we described previously, the FNPR explicitly sought

comment on whether the FCC’s definition of restricted “material

relationships” should include spectrum leasing arrangements,

and also asked whether other relationships should be considered.

Moreover, the FNPR solicited comment on how large an entity

must be before its relationships with DEs become problematic.

In our view, by limiting the permissible combined size of a DE

and entities to which it leases one-quarter or more of its

spectrum, the final rule squarely addresses these concerns. It is

true that, by adopting the attribution approach, the rule focuses

not on the size of the related entity, but rather on the combined

size of the DE itself and the related entity. But we regard this as

a logical outgrowth of the original rule’s focus on ensuring that

the Commission’s “small business provisions . . . be available
36

only to bona fide small businesses.” FNPR, 21 F.C.C.R. at

1757, 1767. Therefore, we find no defect of notice in the FCC’s

enactment of the 25% attribution rule.

2. Arbitrary and Capricious Review

Petitioners also argue that the 25% rule is arbitrary and

capricious, because the FCC made no findings on the impact it

would have on the ability of DEs to procure financing.

According to Petitioners, the FCC could not have articulated a

rational connection between the conclusion reached and the

facts found, because it found no facts at all.

This question is a close one. Petitioners are correct that

the FCC made few factual findings on the impact of the new

rules on DE financing. The Commission did observe that “a

growing number” of relationships required regulation in order

to prevent unjust enrichment. Second R&O, 21 F.C.C.R. at

4762. It also relied on its “experience in administering the

designated entity program” in determining that further rules

were required. Id. at 4762, 4763. The Second R&O

acknowledged the concerns of several commenters about the

impact any new rules would have on their capitalization

arrangements, see id. at 4761 & n.65, but the only statement in

the Second R&O even approaching a finding in this regard was

a recital that the new rules would protect the ability of DEs to

raise funds, id. at 4764 (“we . . . ensure that [DEs will retain]

flexibility to engage in agreements that are intended to provide

[them] with access to valuable capital”).
37

On the other hand, the record reflects the FCC’s

cognizance of the capitalization issue, and that it engaged in a

line-drawing exercise in an attempt to prevent unjust enrichment

without unduly impairing DEs’ capital access. In the FNPR, the

FCC explicitly “recognize[d] that we must strike a delicate

balance between encouraging the participation of [genuinely]

small businesses . . . and ensuring that those small businesses

who do participate . . . have sufficient capital and flexibility,”

FNPR, 21 F.C.C.R. 1757, and solicited comment on this issue,

id. at 1767.

Moreover, although the FCC solicited comments from

the DE and investment communities with respect to the effects

of a rule change on DEs’ capitalization, this sort of prediction is

inherently speculative. In this regard, we find this case similar

to FCC v. National Citizens Committee for Broadcasting, 436

U.S. 775 (1978) (hereinafter NCCB). In NCCB, the Supreme

Court reviewed an FCC rule prohibiting common ownership of

newspapers and TV stations where only one of each existed in

the relevant geographic market. Id. at 796-97. Although the

Court found it “inconclusive” whether the rule would actually

achieve its stated goal of increasing the diversity of broadcast

programming, id., it declared that “[i]n these circumstances, the

Commission was entitled to rely on its judgment, based on

experience, that it is unrealistic to expect true diversity from a

commonly owned station-newspaper combination. The

divergency of their viewpoints cannot be expected to be the

same as if they were antagonistically run.” Id. at 797 (internal

quotation marks and citation omitted).
38

Also at issue in NCCB was the FCC’s decision not to

give the new rules retroactive application with respect to some

markets. This was based on the FCC’s concern that retroactive

application might result in a loss of local ownership of some

broadcast stations, require the replacement of incumbent station

owners who had performed exceptionally well, or force existing

owners to sell their stations at a loss and thus discourage future

investment in quality programming. Id. at 813. The Court of

Appeals found this decision arbitrary, because the record did not

indicate the extent to which these problems would actually arise

if the divestiture requirement were applied across the board.

The Supreme Court reversed, explaining that

to the extent that factual determinations were

involved in the Commission’s decision to

“grandfather” most existing combinations, they

were primarily of a judgmental or predictive

nature—e.g., whether a divestiture requirement

would result in trading of stations with

out-of-town owners; whether new owners would

perform as well as existing crossowners, either in

the short run or in the long run; whether losses to

existing owners would result from forced sales;

whether such losses would discourage future

investment in quality programming; and whether

new owners would have sufficient working

capital to finance local programming. In such

circumstances complete factual support in the

record for the Commission’s judgment or

prediction is not possible or required; a forecast of

the direction in which future public interest lies
39

necessarily involves deductions based on the

expert knowledge of the agency.

Id. (internal quotation marks and citation omitted).

Like in NCCB, here the FCC’s attempts at factfinding

relevant to the impact of its proposed rules on DE financing

were thin, perhaps because of its haste in promulgating rules

before Auction 66. As a result, the Commission’s consideration

of the matter is neither as clear nor as thorough as would be

ideal. Nonetheless, in light of the great deference to agency

experience that we owe “where the issues involve ‘elusive’ and

‘not easily defined’ areas” such as this, Prometheus Radio

Project, 373 F.3d. at 390 (quoting Sinclair Broad. Group v.

FCC, 284 F.3d 148, 159 (D.C. Cir. 2002)), we conclude that the

FCC offered enough consideration of DE capitalization to pass

the arbitrary and capricious threshold with respect to the 25%

attribution rule.

For these reasons, we will deny the petition insofar as it

challenges the 25% attribution rule, and uphold the validity of

47 C.F.R. § 1.2110(b)(1)(I) and (b)(3)(iv)(B).

C. The 50% Impermissible-Relationship Rule

1. Notice and Comment Compliance

We next consider 47 C.F.R. § 1.2110(b)(3)(iv)(A), which

makes license applicants or holders ineligible for DE benefits if

they lease or resell (including at wholesale) more than 50% of

their spectrum capacity. Aside from the difference in
40

percentages, this rule diverges from the 25% attribution rule in

two crucial ways. First, the 50% impermissible-relationship rule

considers the aggregate portion of spectrum capacity that a

licensee has leased or resold, rather than the portion of capacity

leased to an individual lessee as does the 25% rule. Second, the

50% rule is a per se disqualification from DE status, rather than

a mere attribution requirement. These two characteristics are

the essential elements of the rule.

The aggregation element of the 50% rule was not

mentioned in the FNPR, nor, in our view, can it be regarded as

a logical outgrowth of the concerns addressed therein. The

FNPR was focused on ensuring that a DE remains a genuinely

small business, rather than a front entity controlled or heavily

influenced by a large entity that is not eligible for bidding

credits. As we noted, the 25% attribution rule addresses this

concern directly by limiting the allowable combined size of

groups of related license holders or users which include DEs.

By contrast, because the 50% rule involves aggregation of all of

a DE’s lease or resale agreements, it would deny DE status to a

small company that leases or resells 5.1% of its spectrum

capacity to each of ten other companies, regardless of how small

those lessees or buyers, or all of them combined, might be. It is

true, of course, that this aggregation rule also strips DE status

from small businesses that lease or resell almost all of their

spectrum to several large carriers, in chunks of just under 25%.

 But we find no basis in the record to conclude that either type

of arrangement would threaten to give any single large buyer or

lessee—or DE-buyer-lessee grouping—undue influence over a

DE in the manner the FNPR sought to address. Instead, DEs

that run afoul of the 50% rule may often employ a business
41

model relying on a large number of relatively small-scale

transactions with a group of third parties who compete against

each other in the wireless services market. We regard this as

exactly of the kind of DE independence that the FNPR was

concerned with preserving, and the record contains no indication

to the contrary.

Indeed, as we described above, the Second Report and

Order makes clear that the FCC’s real concern in promulgating

the 50% impermissible-relationship rule was not to prevent DEs

from being unduly influenced by large entities or groups of

entities, but rather was to ensure that DEs are primarily engaged

in offering wireless services to the public. But the FNPR had

not so much as hinted that this was the objective of the

rulemaking: it mentioned “service to the public” only twice,

both times in the course of describing the FCC’s obligation to

ensure that DEs have access to capital to help them provide such

service. See FNPR, 21 F.C.C.R. 1753 at 1757, 1767. Instead,

as we have explained, the FNPR was focused on maintaining the

independence of DEs from larger entities.

We also find it instructive that the FCC had previously

solicited broader comment on the permissibility of leasing

arrangements involving DEs, and in much more specific terms

than it did here. In 2003 the FCC issued a Report and Order and

Further Notice of Proposed Rulemaking in In re Promoting

Efficient Use of Spectrum Through Elimination of Barriers to

the Development of Secondary Markets, 18 F.C.C.R. 20,604

(October 6, 2003), in which it significantly relaxed previous

restrictions—which had applied to DEs and non-DEs alike— on

the leasing or reselling of spectrum licenses. In promulgating
42

this change, the FCC stated it had “sought to ensure that its

approach would not invite circumvention of the underlying

purposes of these designated entity-related policies and rules,”

id. at 20,627, and summarized the extensive comments it had

received directly addressing both sides of the issue, id. at

20,629, before concluding that

[a] designated entity and/or entrepreneur licensee

may lease to any spectrum lessee and avoid the

application of our unjust enrichment rules and/or

transfer restrictions so long as the lease does not

result in the lessee becoming a ‘controlling

interest’ or affiliate that would cause the licensee

to lose its designated entity or entrepreneur status.

Id. at 20,654-55. The Commission also sought comment on

possible further rulemaking, asking:

[s]hould we require a lessee to be eligible for the

same level of competitive bidding benefits, such

as bidding credits, as the licensee from which it is

leasing? Should we require only that the lessee be

qualified to hold the license? If so, do we impose

unjust enrichment obligations on a lessee that is

qualified for a lesser level of competitive bidding

benefits?

Id. at 20,698. In the final rule that emerged from this additional

process, the FCC reiterated that DEs were free to lease their

spectrum so long as they met the requirements applicable to all

licensees. Second Report and Order In re Promoting Efficient
 Because we find the notice invalid under the APA, we 8

do not reach the question of whether the rule was arbitrary or

43

Use of Spectrum through Elimination of Barriers to the

Development of Secondary Markets, 19 F.C.C.R. 17,503,

17,543-44 (2004) (“[W]e will . . . amend the language of our

rules to clarify that, subject to the other eligibility restrictions .

. . a designated entity or entrepreneur licensee may enter into a

spectrum manager leasing arrangement with any spectrum

lessee, regardless of the lessee’s eligibility for designated entity

or entrepreneur benefits.”).

The contrast could not be more stark between the

transparent discussion of DE leasing rights from 2003-04 on the

one hand, and the run up to the rules promulgated in 2006 by the

Second R&O on the other. The FNPR here gave no indication

that the FCC intended to revisit an issue it had thoroughly

addressed only three years before. Commenters could not

reasonably have anticipated that, in inquiring in the FNPR

whether leasing arrangements between DEs and large wireless

carriers impaired the DEs’ bona fide small business status, the

FCC was proposing to revise the general limits on DEs’ ability

to lease their spectrum to anyone at all. Even if this was the

FCC’s intent, “an unexpressed intention cannot convert a final

rule into a ‘logical outgrowth’ that the public should have

anticipated.” Shell Oil Co. v. EPA, 950 F.2d 741, 751 (D.C. Cir.

1991). Accordingly, we hold that the 50% impermissiblerelationship rule, as codified at 47 C.F.R. § 1.2110(b)(3)(iv)(A),

was promulgated without the notice and comment required by

the APA.8
capricious. Nevertheless, we note the Commission’s inattention

to the nature of the wireless wholesaling business. Both the

25% and 50% rules apply to wholesaling of wireless services by

DEs. The record discloses that to engage in wireless

wholesaling, a licensee must do considerably more than obtain

and then lease or resell the spectrum license itself. Instead, the

wholesaler must build and operate the physical facilities

required to transmit and receive wireless signals, and to transfer

those signals to or from other networks or end users. It is this

service that is sold at wholesale. This raises a separate set of

questions and concerns from those raised when a DE merely

monetizes its credits or partners with a large carrier, thus

rendering the DE’s separate existence a mere formality.

Given the extensive provision of services entailed in

wireless wholesaling, it is not at all obvious that the FCC’s

rationale for the 50% impermissible-relationship rule—ensuring

that DEs offer service to the public, rather than simply handing

their spectrum over to larger carriers—should necessarily

require prohibiting DEs from engaging primarily in the

wholesale business, so long as they do not sell or lease overly

large quantities of their capacity to any single lessee or buyer.

The FCC appears to have failed to even acknowledge this issue.

We commend it to the Commission’s attention on remand.

44

D. The Ten Year Repayment Schedule

1. Notice and Comment Compliance
45

We last turn to Petitioners’ challenges to the changes to

47 C.F.R. § 1.2111(d)(2)(i) that extended from five to ten years

the period during which a licensee must repay its bidding

credits, in whole or in part, if it loses its DE status. The FNPR

plainly offered notice that the FCC was trying to determine the

proper length of the repayment period attached to any new DE

qualifications that it might adopt. Petitioners argue, however,

that the FNPR did not indicate that the FCC was considering

changing the repayment terms attached to then-existing DE

qualifications. As we noted previously, much of the protest that

greeted the new rules was directed toward this extension of the

repayment term, and the alleged lack of notice of this change.

The FCC responds by noting that it has never attached

differing bidding-credit repayment schedules to different

qualifications for DE status, because this would permit DEs

looking to enter into suspect relationships to structure their

arrangements to minimize the penalty involved. Thus, the

Commission maintains that by soliciting comment on the

repayment period attached to new regulations in the FNPR, it

implicitly proposed changing the corresponding period for

existing rules. We disagree.

Noting our decision in Wagner Electric Corp. v. Volpe,

466 F.2d 1013 (3d Cir. 1972), Petitioners argue persuasively

that this sort of implied notice is insufficient unless all interested

persons would reasonably be expected to perceive the

implication. In Wagner, the National Highway Traffic Safety

Administration (NHTSA) had published a notice of proposed

rulemaking in which it proposed to eliminate the permissible

failure rate for automobile turn signals and warning flashers.
46

The effect of this change would have been to require that 100%

of those products meet the NHTSA’s standards for regularity of

flashing, durability, and other features. After comments,

however, the NHTSA concluded that 100% compliance with its

current regulations was technologically infeasible. In the final

rule, it nevertheless enacted the 100% compliance requirement,

but dealt with the infeasibility problem by significantly relaxing

the substance of the standards. On review, faced with the

argument that its notice of proposed rulemaking had not

presaged this change, the NHTSA argued that relaxing the

substantive standards was a logical means of increasing the

compliance rate, and noted that some of the commenters had

actually suggested as much. Id. at 1018-19. We rejected this

argument, holding that even if some sophisticated observers

would have seen the connection between the stricter compliance

that had been noticed and the lower standards eventually

announced, the proper question under the APA was whether the

agency had provided notice to all “interested parties.” Id. at

1019. We held that the inferential notice purportedly provided

by the NHTSA did not satisfy that standard. Id. at 1020-21.

Here, the FNPR solicited comment on the length of the

bidding-credit repayment schedule attached to any new DE

qualifications. From this—and from the fact that the repayment

schedule had previously always been uniform across all DE

qualifications—the FCC argues that interested parties should

have inferred that the repayment schedule for all qualifications

was under review. As in Wagner, this purported inferential

notice was insufficient to satisfy the APA.
 The FCC also points to Council Tree’s own request that 9

the preexisting repayment schedule be applied to any new DE

qualifications that might be adopted. See Comments of Council

Tree Comm’ns, Inc., J.A. 497-99. But this does not even begin

to manifest an understanding by Council Tree that the

preexisting schedule might be changed.

47

Even if the kind of inferential notice the FCC advances

were sufficient under the APA, we do not find the FNPR to

provide such notice. Nothing in the record forecloses the

commonsense conclusion that because some violations of DE

status are more serious than others, it would make sense to

attach more stringent penalties to them, including more severe

bidding-credit repayment requirements. Thus, far from

communicating the need for an across-the-board repayment

period, to many interested parties, the FNPR’s solicitation of

comments only on the repayment schedule for the proposed

qualifications could well have appeared to be an attempt to

calibrate the penalties for violations of the new rules with those

for violations of existing rules. Indeed, no commenter

manifested an understanding that the FCC was considering

changing the existing repaymentschedule. The only commenter

to suggest adopting a 10-year repayment period—MMTC, a

petitioner here—specifically suggested that the FCC “consider

initiating an inquiry” into doing so, apparently in an entirely

separate rulemaking. Comments of the Minority Media and

Telecomm’ns Council, J.A. at 586 (emphasis added).9

Accordingly, we hold that the 10-year repayment schedule, to

the extent it applies to qualifications for DE status that were in
 As we stated above, there was more than adequate 10

notice that the new repayment schedule would apply to any new

rules adopted by the FCC. Because we leave intact the 25%

rule, there is therefore no notice-or-comment barrier to the 10-

year schedule’s application to that rule. Nonetheless, we find it

necessary to vacate the 10-year schedule in whole, because we

see no way to sever the FCC’s legitimate adoption of the 10-year

schedule with respect to the 25% rule from its unlawful

application of the rule to other situations. The Second R&O set

forth a single repayment schedule to govern all DE

qualifications, both those created in the Second R&O and those

that preexisted it. See 21 F.C.C.R. at 4794; 47 C.F.R.

§ 1.2111(d)(1). Thus, we can strike down the regulation as it

applies to the preexisting qualifications only by invalidating it

across the board.

Although we do not reach Petitioners’ contention that the

extended repayment schedule is arbitrary and capricious, we also

note that the FCC does not appear to have thoroughly considered

the impact of the extended repayment schedule on DEs’ ability

to retain financing. In the Reconsideration Order, the FCC

concluded that a shorter time to liquidity of a DE’s spectrum

licenses was not necessary, because

[i]n a recently concluded proceeding addressing

the leasing of Education Broadcast Service

spectrum, a broad cross-section of commenters,

48

effect before its enactment, was adopted without the notice and

comment required by the APA.10
including a private equity investment firm,

submitted evidence that insufficient capital would

flow to businesses that want to develop that

spectrum if the length of spectrum lease terms

was limited to fifteen years. These parties argued

that lessees needed access to the spectrum for

thirty years or more in order to provide the

necessary certainty to justify capital investment in

the band. The Commission was ‘persuaded by

[this argument]. [Therefore,] we are not

convinced that the appropriate investment horizon

for designated entity status should be only three to

seven years.

21 F.C.C.R. at 6717-18. From this comment, it seems that the

FCC has confused the maximum period for which investors are

willing to lock up their capital (before being able to liquidate the

spectrum license, in the event the DE proves unprofitable) with

the minimum period necessary for financiers to turn a profit on

a successful investment in educational broadcast services. We

commend this issue as well to the FCC’s attention on remand.

49

III.

The proper remedy remains to be considered. The FCC

suggests that, to the extent we find the rules defective, we

remand the matter without vacatur to permit it to correct the

defects. Petitioners, by contrast, urge not only that we vacate
 Petitioners acknowledge that several other much 11

smaller auctions have been conducted under the new rules, and

that the logic of their position would also support rescission of

those results as well. Nevertheless, they request nullification

only of Auctions 66 and 73.

 The FCC, intervenors and amici also contest our 12

jurisdiction to overturn the auction results. As we will explain,

we would decline to exercise any jurisdiction we may have to

rescind the auction results. Accordingly, we will not address

this matter further.

50

the rules before remand, but also that we exercise our equitable

authority to rescind Auctions 66 and 73.11

Petitioners’ proposal is vigorously opposed by the FCC

and by several intervenors and amici, including some winners of

Auctions 66 and 73. The record gives no indication that these 12

intervenors and amici, or other winners of Auctions 66 and 73,

were anything but innocent third parties in relation to the FCC’s

improper rulemaking. We are thus loath to rescind the results of

the auctions, since it would involve unwinding transactions

worth more than $30 billion, upsetting what are likely billions

of dollars of additional investments made in reliance on the

results, and seriously disrupting existing or planned wireless

service for untold numbers of customers. Moreover, the

possibility of such large-scale disruption in wireless

communications would have broad negative implications for the

public interest in general.
51

In an attempt to address these concerns, Petitioners

suggest that we nullify the auction results, but permit the

winning bidders to keep their licenses unless and until they are

won by another bidder at re-auction. This might mitigate the

chaos of a rescission, but it could not eliminate the massive

uncertainty, waste, and frozen development that would occur

from the time of the rescission until the re-auction which, as the

FCC might wish to adopt additional rules before the re-auction

to replace the ones at issue here, could be a significant period of

time. Additionally, some of the intervenors, who were winners

in Auction 66 in 2006, note that the state of the economy and the

credit markets has changed dramatically since the auction;

consequently, their participation in any re-auction might be

impractical or impossible. A re-auction thus would unfairly

require these intervenors to pay sums that they may not have in

order to protect investments they have already made, and

perhaps cannot recoup without the relevant spectrum licenses.

Under these circumstances, we conclude that it would be

imprudent and unfair to order rescission of the auction results.

But we are also unreceptive to the FCC’s suggestion that

we remand the matter without vacating the challenged rules.

The FCC argues we are authorized to do so based on a balancing

of “the seriousness of the . . . deficiencies (and thus the extent

of doubt whether the agency chose correctly) and the disruptive

consequences of an interim change that may itself be changed,”

Chamber of Commerce of U.S. v. SEC, 443 F.3d 890, 908 (D.C.

Cir. 2006) (quoting Allied-Signal, Inc. v. Nuclear Regulatory
 Petitioners argue that we are required to vacate any 13

rules we find in violation of the APA, pointing out that the APA

requires us to “hold unlawful and set aside” any such agency

action. 5 U.S.C. § 706(2) (emphasis added). The FCC,

however, cites to a case in which we remanded without vacatur,

albeit without commenting on the issue. See Am. Iron & Steel

Inst. v. EPA, 568 F.2d 284, 310 (3d Cir. 1977). Because we find

remand without vacatur to be inappropriate on the facts of this

case, we express no view as to whether we are authorized to

order this remedy.

 Because we will leave in place 21 C.F.R. 14

§ 1.2111(d)(1), which makes the repayment schedule of

§ 1.2111(d)(2)(i) applicable to violations of the new 25%

attribution rule which we also leave in place, violations of the

25% rule will also be governed by the preexisting five-year

schedule.

52

Comm’n, 988 F.2d 146, 150-51 (D.C.Cir.1993)). We find the 13

deficiencies in the challenged rulemaking to be serious. On the

other hand, vacating the 50% impermissible relationship rule

will mean that DEs will be free to lease or wholesale as much of

their spectrum as they wish, subject to revenue attribution

should they lease or wholesale more than 25% of their spectrum

to a single entity. Vacating the 10-year-hold rule will simply

mean that DEs’ repayment obligations will once again be

governed by the previous 5-year schedule. See Abington Mem. 14

Hosp. v. Heckler, 750 F.2d 242, 244 (3d Cir. 1984) (citing

Action on Smoking and Health v. CAB, 713 F.2d 795, 797 (D.C.

Cir. 1983), for the proposition that “vacating or rescinding
53

invalidly promulgated regulations has the effect of reinstating

prior regulations”); Paulsen v. Daniels, 413 F.3d 999, 1008 (9th

Cir. 2005) (“The effect of invalidating an agency rule is to

reinstate the rule previously in force.”). We do not regard either

of these situations as likely to create any serious disruption.

Accordingly, even assuming we have the authority to remand

the matter without vacatur, we would decline to do so here.

Instead, we will vacate the 50% and 10-year rules and remand

the matter to the FCC.

IV.

In sum, the FCC’s 25% attribution rule was promulgated

after the public notice and opportunity to comment required by

the APA, and is not arbitrary and capricious. The 50%

impermissible-relationship rule, however, was promulgated

without the requisite notice and opportunity to comment. The

10-year bidding-credit repayment schedule likewise was

promulgated in substantial and inseverable part without notice

or comment. Accordingly, we will deny the petition with

respect to the attributable-material-relationship rule articulated

in 47 C.F.R. § 1.2110(b)(1) and (b)(3)(iv)(B). We will grant

the petition with respect to the impermissible material

relationship rule contained in 47 C.F.R. § 1.2110(b)(3)(iv)(A)

and t he 10- year- hol d r u l e c o n t a in e d in 47

C.F.R.§ 1.2111(d)(2)(i). We will vacate the impermissible

material relationship rule and the 10-year-hold rule, order the

reinstatement of the previous version of 47 C.F.R.

§ 1.2111(d)(2), and remand the matter to the FCC for further

proceedings.