Caught Between A Milestone and A Hard Place

By | July 26, 2004 | Feature

By Maury Mechanick, White & Chase

On June 24, the Federal Communications Commission released two orders dealing with the consequences of failure to comply with milestone requirements contained in licenses issued for the construction of satellite networks. What is most significant about these decisions is the firmness with which the full commission addressed these issues and the discomfort with the final result expressed by both Commissioners Martin and Copps.

These decisions involved formal commission review of actions taken by its International Bureau to revoke and nullify the 2 GHz mobile satellite service licenses previously issued to Globalstar LP (the “Globalstar Order”) and to Constellation Communications Holdings Inc. and Mobile Communications Holdings Inc. (the “Constellation/MCHI Order”).

The licenses in question each contained a series of five milestones that needed to be achieved within specified time periods. These milestones were: (1) execution of a non- contingent construction contract, (2) completion of critical design review, (3) commencement of physical construction, (4) completion of construction and (5) launch. In both instances, the license nullification was based on a failure to satisfy the first of these milestones.

Assessing The Orders

In the Globalstar Order, the FCC affirmed the International Bureau’s determination that Globalstar’s contract with Loral was inadequate to satisfy Globalstar’s milestone for entering into a satellite-manufacturing contract as specified in the license. Instead, the contract only adhered to a revised implementation schedule proposed by Globalstar but which had not been approved by the commission nor – as the commission determined in the Globalstar Order – would there be good cause to do so.

In the Constellation/MCHI Order, the agency affirmed the International Bureau’s determination that a sharing agreement entered into by Constellation and MCHI with ICO Global Communications (Holdings) Ltd. neither satisfied the requirement that the licensees enter into satellite manufacturing agreements nor demonstrated sufficient commitment to proceed with system implementation.

Both orders contained a fairly lengthy discourse on the role and importance of the milestone process in satellite licensing matters. According to the commission, milestone requirements are essential enforcement tools necessary to help ensure efficient use of limited spectrum resources and that satellite licensees responsibly utilize their respective spectrum assignments.

In the absence of vigorous milestone enforcement, spectrum and orbital resources may be subject to warehousing, in which case the public loses in two ways. First, there is a delay in the licensed operator bringing services to the public. Second, alternative use of the spectrum by another satellite operator or another type of service provider (i.e., wireless providers) is precluded. This latter point is a somewhat new element of the equation, but its relevance is confirmed by the strong support expressed for the International Bureau’s underlying decisions by a group of wireless carriers.

According to the FCC, the first milestone condition regarding execution of a non-contingent, binding contract is particularly critical because it affords an early and objective sense of a licensee’s commitment to implement its system. To satisfy this requirement, a licensee is required to enter into a binding, non-contingent contract with a satellite manufacturer to construct the licensed satellite system and which identifies specific satellite(s), their design characteristics, and firm dates for the start and completion of construction, which are not unreasonably delayed after contract execution. The satellite construction contract also must set forth the licensee’s payment terms and schedule in sufficient detail to demonstrate the licensee’s investment and commitment to completion of the system, compliance with other milestone requirements, and a payment schedule under which significant payments are made throughout the construction phase.

Two Unhappy Commissioners

The draconian consequences of the outcomes reached in the two orders did not sit well with either Commissioner Martin or Commissioner Copps.

Commissioner Martin, in a separate statement concurring in part, chose not to question the orders’ interpretation of the relevant law, but rather the appropriateness of such an approach. In the case of Globalstar, he noted that Globalstar had alternatively sought the opportunity to cure its contract if its modification and extension requests were denied, such that Globalstar was “being penalized for taking a more honest approach.” And in the case of Constellation and MCHI, he felt they “could have provided a viable service through their sharing agreements” and was uncertain if the penalty of nullifying their licenses was a “fair match to the perceived transgressions.” His bottom line assessment was that milestone enforcement may simply be “too blunt an instrument to address these questions,” expressing preference instead for “a more nuanced approach.”

Commissioner Copps was less troubled by the outcome in Globalstar Order, where he accepted the underlying determination, than by the Constellation/MCHI Order, from which he formally dissented. With regard to the latter, he questioned whether the commission’s milestone requirements were sufficiently clear to indicate the unacceptability of the type of sharing arrangement entered into by Constellation and MCHI with ICO. He would have preferred to grant Constellation and MCHI a waiver under these circumstances, rather than impose “the equivalent of the death penalty for satellite company.”

This is one of those situations in which the arguments on both sides are not without merit. On the one hand, the fear that lax or discretionary enforcement of milestones would quickly lead to their erosion as a meaningful measure to combat warehousing and to assure that licensees are fully motivated to bring their systems into service expeditiously is probably valid. Moreover, more discretionary application of the rules could lead to allegations of favoritism or unequal treatment. The stakes are then raised to an even higher level, when, as now, the issue no longer is framed simply in the context of competing satellite operators but involves possible alternative spectrum allocations as well. This is particularly so where such alternative spectrum allocations then can be made subject to an auction process not permitted in the case of satellite spectrum allocations.

On the other hand, the consequences of failing to meet the milestones are quite extreme, only made even more so with the FCC’s imposition of a bonding requirement last year (notwithstanding the more recent reduction in those bonding levels). Also, these cases were, in one sense, easier to address, because the actual financial consequences to the licensee of nullifying a license for missing the first milestone may be less significant, as actual satellite construction will not yet have commenced.

What Will The FCC Do Next?

The same vigor of enforcement in the case of later milestones could carry with it much more significant economic consequences, as a license nullification occurring at the time of the fourth or fifth milestone would be at a time when significant satellite construction expenses would have been incurred. Will the commission be as demanding in those circumstances when the stakes are higher? Consistency certainly suggests that they should be, although reality may suggest a different outcome.

One other consequence of the Constellation/MCHI Order may be to dampen prospects for licensees to engage in post-licensing business negotiations with other licensees, which – in the decision announcing the Commission’s new first come, first served satellite licensing procedures last year – was touted as a preferable alternative to the prior practice of negotiated rulemakings.

Overall, the picture is not pretty. Failure to enforce milestones leads to one set of undesirable consequences while their rigid enforcement leads to another. For the satellite operators that have to live with this regime, as well as the commission that has to apply it, it would appear as though all are caught between a milestone and a hard place.

Maury Mechanick, a former chairman of the Intelsat Board of Governors, is of counsel with White & Chase LLP in Washington, D.C. He can be reached at 202/626-3635 or at mmechanick@whitecase.com.

Live chat by BoldChat