PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

___________

No. 15-3754

___________

COUNCIL TREE INVESTORS, INC.,

 Petitioner

v.

FEDERAL COMMUNICATIONS COMMISSION;

UNITED STATES OF AMERICA,

Respondents

__________

On Petition for Review of Orders of 

the Federal Communications Commission

(FCC 15-80 & DA 15-1183)

___________

Argued March 7, 2017

Before: SMITH, Chief Judge, HARDIMAN, and KRAUSE,

Circuit Judges.

(Filed: July 13, 2017)
2

Kevin Russell [Argued]

Goldstein & Russell

7475 Wisconsin Avenue, Suite 850

Bethesda, MD 20814

Attorney for Petitioner

Jacob M. Lewis

Clifford G. Pash, Jr. [Argued]

Federal Communications Commission

445 12th Street, S.W.

Washington, DC 20554

Attorneys for Respondent Federal Communications 

Commission

Robert B. Nicholson

Robert J. Wiggers 

United States Department of Justice, Appellate Section

950 Pennsylvania Avenue, N.W.

Washington, DC 20530

Attorneys for Respondent United States of America

Carl W. Northrop

Telecommunications Law Professionals

1025 Connecticut Avenue, N.W., Suite 1011

Washington, DC 20036

Attorney for Amicus Petitioners

____________

OPINION OF THE COURT

____________
3

HARDIMAN, Circuit Judge.

This case involves the regulation of electromagnetic 

spectrum by the Federal Communications Commission. In 

1993, Congress amended the Communications Act of 1934,

47 U.S.C. §§ 151–622, to allow the FCC to grant spectrum 

licenses through a system of competitive bidding. 47 U.S.C.

§ 309(j)(1), (3). The Act requires the FCC to pursue certain

objectives required by statute, including

promoting economic opportunity and 

competition and ensuring that new and 

innovative technologies are readily accessible 

to the American people by avoiding excessive 

concentration of licenses and by disseminating 

licenses among a wide variety of applicants, 

including small businesses, rural telephone 

companies, and businesses owned by members

of minority groups and women.

47 U.S.C. § 309(j)(3)(B). In FCC parlance, these groups are 

known as designated entities (DEs). 47 C.F.R. § 1.2110(a). At 

this time, the FCC’s “principal means of fulfilling the 

statutory objectives for DEs” is to confer bidding credits upon

small and rural businesses that participate in FCC auctions. 

Updating Competitive Bidding Rules, 80 Fed. Reg. 56764, 

56766 (September 18, 2015). Bidding credits operate as a 

discount on the spectrum DEs purchase, allowing them 

sometimes to outbid companies that make higher bids.
4

Council Tree Comm’ns, Inc. v. FCC, 619 F.3d 235, 239 (3d 

Cir. 2010) (Council Tree III).

1

The question presented here is whether the FCC acted 

legally when it limited the bidding credits available to DEs. 

We hold that it did.

I

In 2014, the FCC began a rulemaking proceeding in 

advance of a special 2016–17 Incentive Auction of “scarce 

low-band radio spectrum.” FCC Br. 13. According to its 

Notice of Proposed Rulemaking, the FCC thought it 

appropriate to

revisit the Commission’s small business 

eligibility rules and evaluate whether to 

rebalance our competing goals in order to 

provide small businesses additional 

opportunities to gain access to new sources of 

capital necessary for participation in the 

provision of spectrum-based services in today’s 

marketplace, while guarding against unjust 

enrichment of ineligible entities.

 

1 Like the parties, we refer to our 2010 decision as 

Council Tree III as it was preceded by two prior challenges to 

the same rulemaking. See Council Tree Commc’ns v. FCC, 

324 F. App’x 3 (D.C. Cir. 2009) (Council Tree II); Council 

Tree Commc’ns v. FCC, 503 F.3d 284 (3d Cir. 2007) 

(Council Tree I).
5

29 FCC Rcd. 12426 (2014), 2014 WL 5088195 at *7. The 

FCC later indicated in April 2015 that it was specifically 

considering a proposal to cap available DE credits within 

“any given auction” in order to “ensure that DEs cannot 

acquire spectrum in a manner that is wildly disproportionate 

to the concept of a small business.” Request for Further 

Comment, 30 FCC Rcd. 4153, 4158 (2015) (citations 

omitted).

On July 21, 2015, the FCC concluded its rulemaking 

and released a final Report and Order entitled In the Matter of 

Updating Part I Competitive Bidding Rules, et al., 30 FCC 

Rcd. 7493 (2015) (hereinafter Order), published at 80 Fed. 

Reg. 56764 (Sept. 18, 2015). In the Order, the FCC issued a 

series of new rules, some designed to assist DEs and others

intended to rein in perceived abuses of the DE program. New 

rules designed to assist DEs included: “greater flexibility” as 

to certain eligibility requirements, 30 FCC Rcd. at 7504, the 

creation of a “new bidding credit for eligible rural service 

providers,” id. at 7521, and raising the revenue ceiling to 

qualify for DE credits. New measures intended to curb abuses

included: revenue attribution rules designed to “restric[t] 

certain large carriers or companies from . . . exercising 

control over a DE,” id. at 7511, limitations on joint bidding 

arrangements, and the rule at issue in this case: caps on 

bidding credits.

Though the FCC determined generally that small 

business credits should be capped in future auctions, it did not 

mandate a particular dollar value for those caps. Rather, it

determined that any future cap would be at least $25 million

per auction. In doing so, the FCC noted that most DEs in 

three recent auctions would not have qualified for more than

$25 million in bidding credits. The FCC also determined that 
6

the $25 million minimum would “allow bona fide small 

businesses” to participate meaningfully in auctions, 

particularly “taking into account the changes we make today 

to increase a DE’s flexibility in other respects.” Id. at 7541.

Looking to the special 2016–17 Incentive Auction, the FCC 

decided to cap bidding credits at $150 million (well over the 

$25 million minimum) because of the “significant difference 

in value between low-band and higher-band spectrum.” Id. at 

7545. Based on data from prior auctions,2the FCC predicted

that the “cap would give small businesses a meaningful 

opportunity to compete” for available licenses in both large 

and small areas. Id.

On November 13, 2015, Appellant Council Tree—a 

DE which had opposed caps during the rulemaking—filed a 

petition in this Court for review of the Order, claiming 

violations of the Administrative Procedure Act and the 

Communications Act.

II

We have jurisdiction over Council Tree’s petition 

under 47 U.S.C. § 402(a) and 28 U.S.C. § 2342(1). We 

 

2 The FCC noted that in the three recent auctions

previously discussed, nearly all DE bids would have been 

unaffected by this cap. Furthermore, reviewing the most 

recent of those three auctions and making appropriate price 

adjustments, the FCC predicted “a $150 million cap would 

not affect a 15 percent or 25 percent bidding credit discount 

for any individual license bid except in the top two markets

(NY and LA).” 30 FCC Rcd. at 7545.
7

review “agency action, findings, and conclusions” to 

determine whether they are “arbitrary, capricious, an abuse of 

discretion, or otherwise not in accordance with law.” 5 U.S.C. 

§ 706(2). Agency action is not arbitrary and capricious when 

the agency “examine[d] the relevant data and articulate[d] a 

satisfactory explanation for its action including a rational 

connection between the facts found and the choice made.” 

Council Tree III, 619 F.3d at 250 (quoting Motor Vehicle 

Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins. Co., 463 

U.S. 29, 43 (1983)). 

III

Council Tree seeks review of the FCC’s Order for 

three reasons. First, it claims the FCC’s explanation of its 

new rule ignored its statutory obligation to promote 

competition and avoid excessive concentration of licenses. 

Second, it argues the imposition of any cap on bidding credits 

was arbitrary and capricious because the FCC lacked 

evidence that the DE designation was being abused. Third, it

contends the FCC set both its general minimum cap and the 

specific Incentive Auction cap in an arbitrary and capricious 

manner because these particular caps are unsupported by the

data. We examine each argument in turn.

A

In designing its competitive bidding process, the FCC 

is bound by statute to “promot[e] economic opportunity and 

competition . . . by avoiding excessive concentration of 

licenses.” 47 U.S.C. § 309(j)(3)(B). Council Tree claims the 

FCC violated its obligation to promote these two objectives 

by not “considering the caps’ anti-competitive effects” or 

“explaining the agency’s reasoning” in how it balanced 
8

concern for competition against its other statutory objectives. 

Council Tree Br. 28.

In Council Tree III, we considered a similar challenge 

to the FCC’s imposition of a rule restricting the ability of DEs

to lease or resell their spectrum capacity, which also was 

aimed at addressing abuse of the DE designation. See Council 

Tree III, 619 F.3d at 251. As part of its challenge in that case, 

Council Tree claimed the FCC had violated its statutory duty 

to promote “economic opportunity and competition . . . by 

avoiding excessive concentration of licenses and by 

disseminating licenses among a wide variety of applicants”—

since such a rule was likely to impede DEs’ profits and 

growth. Id. at 249 n.7 (alteration in original) (quoting 47 

U.S.C. § 309(j)(3)(B)).

We rejected that argument. We noted the FCC’s new 

policy served other statutory objectives, including its 

obligation to “recover a portion of the value of the spectrum 

and prevent unjust enrichment.” Id. (citing 47 U.S.C. 

§ 309(j)(3)(C)). Citing both “the general agreement that the 

DE program can be abused, [and] the continuing participation 

by DEs in auctions held under the new rules,” we could not

“conclude that the FCC has failed to promote small-business 

participation at all.” Id. We also recognized that the 

administrative “record reflect[ed] 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.” Id. at 251–52.

The FCC’s Order at issue in this appeal did more than

take cognizance of the issue of DEs’ competitiveness. It 

reviewed data from past auctions before concluding that the 

cap would not significantly impair the ability of DEs (in the 
9

aggregate) to compete in auctions. See, e.g., 30 FCC Rcd. at 

7541 (explaining the cap floor with reference to prior DE 

auction participation); id. at 7545–46 (justifying the $150 

million cap with reference to past auction results and pricing 

in different markets). The FCC also noted its bidding credit 

cap was paired with regulations that increased flexibility for 

DEs seeking to obtain capital, bolstering its conclusion that 

DEs would still be able to compete in the spectrum license 

market. See id. at 7541 (referring to the adjusted policy of 

when an investor’s revenue will be attributed to a DE, 

detailed at 30 FCC Rcd. 7502–21). The FCC therefore not 

only set forth a policy that is likely to allow continued 

participation by DEs, but also rationally explained why it 

expected no significant loss of DE participation. As such, 

under the standard we articulated in Council Tree III, the FCC 

did not fail to consider DEs’ ability to compete for licenses.

Council Tree responds that the statements just noted 

did not relate to the FCC’s obligations to promote 

competition or avoid excessive concentration of licenses at 

all. Rather, they related only to the FCC’s obligation to 

“promote economic opportunity” for DEs. Council Tree Br. 

37. This strikes us as an artificial distinction. The relevant 

statutory language (47 U.S.C. § 309(j)(3)(B)) links these 

goals together because they are inextricable. When the FCC 

helps small businesses compete in the marketplace against 

large telecommunications providers, it necessarily increases

competition for licenses and reduces license concentration. 

What Council Tree seems to suggest is that an 

appropriate analysis by the FCC would not have assessed 

only whether DEs could continue to participate at nearcurrent levels, but also would have considered whether their 

current level of competition is adequate to challenge our
10

telecommunications quadropoly. See, e.g., Council Tree Br. 

15 & n.31 (referring to the “Big Four” of AT&T, Verizon, 

Sprint, and T-Mobile); id. at 37 (explaining that “the caps’ 

effect on the amount of spectrum,” rather than the number of 

DEs affected by the cap, is “far more relevant” to assessing 

competition); id. at 38 (using auction data to show a mid-level 

DE capped at the minimum of $25 million in bidding credits

would more than exhaust its credits to win a single license in 

most major markets). The problem with this approach is that 

it adds requirements to the statute not found in the text. The 

FCC’s statutory obligation is to ensure that its bidding system

promotes competition and the broad dissemination of 

licenses, while also abiding by its obligations to, inter alia, 

“recove[r] for the public a portion of the value” of the 

spectrum licenses sold, avoid “unjust enrichment,” and ensure 

efficient use of spectrum. 47 U.S.C. § 309(j)(3)(B)–(D). As 

much as Council Tree would like the FCC to not merely 

promote, but maximize, competition against the Big Four,

§ 309 creates no such obligation. And insofar as Council Tree 

comes close to defining “competition” as “competition to [the 

market share of] incumbents in large urban markets, or on a 

regional or national scale,” Council Tree Br. 37, we will not 

insert this limiting language into the statute. See Alabama v. 

North Carolina, 560 U.S. 330, 352 (2010) (“We do not—we 

cannot—add provisions to a federal statute.”)

The FCC’s Order: (1) preserved a significant bidding 

credit program; (2) reviewed data suggesting DE participation 

would continue despite the proposed caps; and (3) altered 

other rules to make DEs more competitive. We therefore 

“cannot conclude that the FCC has failed to promote smallbusiness participation at all,” Council Tree III, 619 F.3d at 

249 n.7, or that the Order at issue in this case failed to 
11

promote the FCC’s dual objectives of competition and 

reduced concentration of licenses, see 47 U.S.C. 

§ 309(j)(3)(B).

B

Council Tree argues that even if the FCC considered 

its statutory objectives under 47 U.S.C. § 309(j), it violated 5 

U.S.C. § 706 by arbitrarily and capriciously imposing caps on 

bidding credits. According to Council Tree, the FCC was 

chasing a phantom because its Order provides no evidence 

that DEs are “gaming the rules” or that DE investors are 

“unjustly enriched.” Council Tree Br. 28–29. 

It is true that the FCC’s Order did little to assess the 

scope and substantiality of the harm posed by large 

companies abusing the DE process. See 30 FCC Rcd. at 

7540–41 (discussing concern for “discourag[ing] entities that 

seek to game the Commission’s rules at taxpayer expense”

without estimating that expense). However, as we stated in 

Council Tree III, there is at least “general agreement that the 

DE program can be abused” by larger companies. 619 F.3d at 

249 n.7. Council Tree itself acknowledges, though it 

minimizes, complaints made to the FCC about one 

telecommunications company—DISH—abusing the DE 

program in a recent auction by allegedly exercising control 

over DE bidders. And the FCC articulated a concern 

regarding increased incentives for abuse, noting “that, as the 

cost of spectrum continues to grow, the incentives for 

structuring transactions to obtain bidding discounts increase[]

significantly.” 30 FCC Rcd. at 7540.

In reviewing the FCC’s explanation for imposing its 

caps, we do not ask whether it would persuade us to impose 
12

the same policy. We instead consider whether the agency

“examine[d] the relevant data and articulate[d] a satisfactory 

explanation for its action including a rational connection 

between the facts found and the choice made.” Council Tree 

III, 619 F.3d at 250 (quoting State Farm, 463 U.S. at 43). 

Here, the FCC identified a threat (abuse of the DE 

designation) to one of its statutory objectives (preventing 

unjust enrichment), and adopted a prophylactic measure. We 

see no reason to bar such measures as a general matter. See 

Stillwell v. Office of Thrift Supervision, 569 F.3d 514, 519 

(D.C. Cir. 2009) (“[A]gencies can, of course, adopt 

prophylactic rules to prevent potential problems before they 

arise.”).

It would, of course, be preferable to have some 

estimate of the unjust enrichment that would have been 

anticipated had the FCC not capped bidding credits. And 

perhaps a prophylactic rule could be irrational if an agency 

(1) made no effort to measure its benefits, and (2) its impact 

on other statutory obligations was also unassessed (or 

negative). See, e.g., Prometheus Radio Project v. FCC, 652 

F.3d 431, 469-72 (3d Cir. 2011). But as explained in Part IIIA, supra, the FCC articulated a rational explanation, based on 

relevant data, as to why it believed its bidding credit caps 

would have only a minor impact on DEs’ ability to compete

in the spectrum license marketplace.

Though Council Tree objects that the FCC did not 

truly balance its obligations here, Council Tree III is again 

instructive. In that case we found the question of whether the 

rule restricting spectrum leasing was arbitrary and capricious 

“a close one” on first review, because “the FCC made few 

factual findings on the impact of the new rules on DE 
13

financing.” Council Tree III, 619 F.3d at 251. But despite the 

lack of concrete findings, we found “enough consideration of 

[the negative impact on] DE capitalization to pass the 

arbitrary and capricious threshold.” Id. at 253.

We reached this conclusion for two reasons. First, the 

FCC’s notice of proposed rulemaking “reflect[ed] the FCC’s 

cognizance of the capitalization issue” based on its stated 

concern for a “delicate balance” between avoiding abuse and

allowing small businesses to access flexible sources of 

capital. Id. at 251–52 (citation omitted). Second, we noted 

that predictions about the future impact of rules were 

“inherently speculative.” Id. at 252. Under our “necessarily 

deferential” review of “line-drawing determinations,” id. at 

250–51 (citation omitted), we found it unnecessary to demand

more despite the FCC’s consideration being “neither as clear 

nor as thorough as would be ideal,” id. at 252–53.

Unlike the rulemaking in Council Tree III, the FCC in 

this matter made factual findings on the likely impact of this 

new rule on DE auction competitiveness. Whether the FCC is 

right or wrong that the impact will be minimal, we cannot say 

its prediction is irrational based on the relevant data of record.

The FCC’s balancing here was not arbitrary and capricious.

3

 

3 As a subsidiary argument, Council Tree suggests that 

the Order actually reflects an FCC determination “that DEs 

should be nothing more than bit players in the wireless 

industry.” Council Tree Br. 28. Because “[t]he caps only 

apply to businesses the FCC has already deemed to be bona 

fide DEs,” Council Tree reasons that “there can be no claim 

that the caps are necessary to limit bidding credits to the kinds 
14

C

Finally, we consider Council Tree’s challenge to the 

specific caps imposed. Council Tree raises three related 

arguments contesting the rationality of these caps, none of 

which we find persuasive.

First, Council Tree complains that focusing on the 

number of affected DEs, instead of on their ability to break 

into major markets, is a poor way to measure the impact of a 

cap on competition. As discussed, we review the FCC’s 

reasoning to confirm that it used relevant data—not that it 

applied the most rigorous analysis available. Here, the FCC 

reviewed relevant auction data before evaluating whether the 

caps on bidding credits would reduce competition.

Second, Council Tree argues that DEs were so 

hampered by old rules in two of the auctions that those 

 

of small businesses Congress had in mind.” Id. at 45. Leaving 

aside the term “necessary,” which is irrelevant to a review for 

rationality, the FCC’s Order explains that its cap acts as “an 

important additional safeguard—or backstop” when its other 

measures for assessing bona fide DE status have failed. 30 

FCC Rcd. at 7540. Council Tree’s related argument on 

efficacy—including that the penalties in place are sufficiently 

“extensive,” Council Tree Br. 49, and that the caps “do not 

eliminate the alleged incentives for gamesmanship,” id. at 

51—are by and large policy disagreements that do not 

undercut the rationality of the FCC’s determination that 

bidding credit caps would serve as a safeguard against 

gamesmanship.
15

auctions should not have been used in estimates, and that 

even the third (ostensibly adequate) auction cannot be 

compared to the “once-in-a-generation” Incentive Auction. 

Council Tree Br. 58 (quoting Order ¶ 95). Here again, we 

review only for the use of relevant, not perfect, data. Council 

Tree III, 619 F.3d at 250. And Council Tree has not offered, 

in briefing or at argument, any alternative data that the FCC 

should have considered in its estimates.

Finally, Council Tree argues that the FCC’s 

justifications in support of the $25 million minimum on 

bidding credit caps and its $150 million cap for the Incentive 

Auction would be as consistent with limits of “$200 million, 

$500 million, or more,” making its explanation inadequate. 

Council Tree Br. 58. In support of this argument, Council 

Tree points to Bluewater Network v. EPA, where the Court of 

Appeals for the D.C. Circuit ordered the EPA to clarify the 

basis of its determination that only 70% of new snowmobiles 

in eight years could be fitted with emission reduction 

technology. 370 F.3d 1, 21 (D.C. Cir. 2004). The Bluewater

court held the EPA’s statements regarding cost concerns for 

manufacturers—that design takes time and manufacturers 

have finite resources—were too vague. See id. (“The 

Agency’s explanation of its reasoning could just as well 

support standards corresponding to 30% or 100% application 

in that time frame.”). By contrast, the FCC’s analysis here 

would not be consistent with a bidding credit cap of any 

value. For example, the FCC rejected caps of $10 million and 

$25 million for the Incentive Auction as less consistent with 

historical bidding thresholds. While the FCC did not 

explicitly reject any upper boundary as too high, we note that 

it set the $150 million cap such that, while “nearly all of the 

small businesses that claimed bidding credits . . . would have 
16

fallen under” the cap, 30 FCC Rcd. at 7545, two successful 

DEs in one of the previous auctions would have exceeded it. 

Council Tree admits those two DEs, allegedly “financed in 

large part by investments from DISH,” prompted the concern

that led to this rulemaking, allowing us to infer grounds for an 

upper bound in the record. Council Tree Br. 20. Even 

excluding that inference, however, the sources underlying the 

decision here are much more concrete than those in 

Bluewater. Besides, setting a reasonable cap is a 

quintessential “line-drawing determination[]” calling for

“necessarily deferential” review in this Court. Council Tree 

III, 619 F.3d at 250–51 (citation omitted). 

In sum, the FCC made a “rational connection” between 

“relevant data” and the caps on bidding credits under review. 

State Farm, 463 U.S. at 43. 

IV

For the reasons stated, we hold that the FCC’s Order

dated July 21, 2015 and published on September 18, 2015

was not arbitrary, capricious, an abuse of discretion, or 

otherwise contrary to law. We will deny Council Tree’s

petition for review.