Dish to face lawsuit, used two sham companies in spectrum buys

Dish Network Corp. will be required to face a whistleblower’s False Claims Act (FCA) spectrum license lawsuit for the second time following a Court of Appeals for the D.C. Circuit ruling yesterday.

The carrier is alleged to have used sham small businesses to win FCC licenses worth billions of dollars.

A three-judge panel agreed that Vermont National Telephone Co. showed that a district court was incorrect to rule that the FCA’s “government-action bar” required dismissal.

In the opinion written by Judge David S. Tatel, the court said the bar precludes suits “based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the government is already a party.”

The case arose from Auction 97, in which companies bid for exclusive access to 1,614 Advanced Wireless Services licenses in three radio frequency bands.”

When announcing the auction, the Commission’s Wireless Telecommunications Bureau explained that small businesses would be eligible to receive bidding credits entitling them to either a 15-percent or 25-percent discount on their winning bids.

The size of the bidding credits would depend on the business’s attributable revenues over the preceding three years, which includes the revenues of the small business itself as well as those of any entity with “de facto control” over the business.

Northstar Wireless, LLC and SNR Wireless LicenseCo, LLC each submitted short-form applications to participate in Auction 97, claiming eligibility for the 25-percent bidding credit offered to small businesses with less than $15 million in attributable revenues, the court opinion stated.

Their applications disclosed that “they had acquired the capital that they needed to participate in the auction from Dish Network, a large, established corporation that was itself ineligible for bidding credits.

The applications also disclosed that DISH, Northstar, and SNR had adopted “joint bidding protocols and agreements” pursuant to which the three companies could coordinate their bidding strategies.

Based on their short-form applications, the Commission found Northstar and SNR “qualified to bid” in the auction.

Northstar and SNR were “remarkably successful” in Auction 97, collectively winning 43.5 percent of the licenses in play, according to the opinion.

After the auction, Northstar and SNR submitted long-form applications for the licenses they won, reiterating that they were “very small businesses” entitled to bidding credits.

The use of such credits would discount the price of Northstar’s and SNR’s winning bids from $13.3 billion to approximately $10 billion.

Once the long-form applications became public, eight companies petitioned the Wireless Bureau to deny Northstar’s and SNR’s applications.

All eight challengers argued that Northstar and SNR were ineligible for very-small-business credits because Dish effectively controlled them. One challenger, VTel Wireless, Inc., also argued that Northstar and SNR withheld from the Commission material information about their relationship with Dish.

The Wireless Bureau referred the petitions to the full Commission for “consideration of the questions posed by the petitions to deny.” The Commission concluded that Northstar and SNR were ineligible for bidding credits because they were controlled by Dish, such that Dish’s large annual revenues were attributable to them, according to the FCC.

But the Commission found no evidence “that SNR and Northstar attempted to mislead the Commission about their respective relationships with Dish” or “that they did not adequately disclose the nature of their relationship and joint bidding arrangements with Dish.”

After the Commission issued its ineligibility determination, Northstar and SNR notified the Commission that they would pay the full bid amount for some of the licenses they won but would default on their obligation to buy the rest.

In response, the Commission ordered Northstar and SNR to pay a default payment consisting of compensation for “the difference between their own winning bids in the auction and the amount that the FCC receives when it re-auctions the licenses” and “an additional payment equal to 15 percent of Northstar’s and SNR’s own bids, or 15 percent of the winning bid when their licenses are re-auctioned, whichever is less.

Judge Tatel’s opinion stated, “Northstar and SNR petitioned this court for review of the Commission’s determination that they were ineligible for bidding credits. Our court upheld the Commission’s ineligibility determination but remanded to the Commission to give Northstar and SNR an opportunity to seek to negotiate a cure for the de facto control the FCC found that Dish exercises over them.”

On remand, the Commission directed Northstar and SNR to renegotiate their business arrangements with Dish and then submit revised agreements to the Commission.

Vermont National Telephone Company filed an action against Northstar, SNR, Dish, and several affiliated companies alleging they violated the False Claims Act by making false certifications and manipulating the Commission’s auction rules to secure fraudulent bidding credits on spectrum licenses.

The FCA imposes civil penalties on anyone who ‘knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay . . . money . . . to the Government.’ The Act authorizes private entities like Vermont Telephone to bring actions on behalf of the government, sharing in the recovery when such actions succeed.

The district court, however, dismissed Vermont Telephone’s suit, relying on the Act’s government-action bar which forecloses whistleblower actions based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the Government is already a party. The court also held that Vermont Telephone’s allegations failed to satisfy the Act’s demanding materiality standard.

In oral arguments on March 3, 2022, Vermont Telephone argued that neither basis invoked by the district court supports dismissal. Dish defended the district court’s decision, and argued that Vermont Telephone had failed to plead its FCA claims with the “requisite plausibility and particularity needed to satisfy Federal Rules of Procedure.”

According to the district court, the Commission’s post-auction licensing proceeding, which reviewed Northstar’s and SNR’s long-form applications for spectrum licenses and the petitions to deny them, triggered the government-action bar.

Disagreeing, Vermont Telephone argued that the government-action bar is inapplicable because the Commission’s licensing proceeding was not an “administrative civil money penalty proceeding.’”

The FCA nowhere defines the phrase “administrative civil money penalty proceeding.”

The defendents urged the D.C. Circuit to affirm on the alternative grounds, not reached by the district court, that Vermont Telephone failed to adequately plead its claims.

In its ruling, the court stated, “We decline to do so and conclude that Vermont Telephone has adequately pleaded its claims. Beginning with Rule 8, Vermont Telephone pleaded facts allowing the court to draw the reasonable inference that Northstar and SNR falsely certified their disclosure of all agreements related to auctioned licenses when, in fact, they failed to disclose agreements to act on Dish’s behalf and transfer spectrum rights to Dish. In particular, Vermont Telephone alleged the following: (1) Northstar and SNR were formed as shell companies without any assets or revenues, at Dsh’s direction, shortly before the deadline to apply for Auction 97; (2) Northstar and SNR bid for spectrum licenses in Auction 97 with financing provided almost exclusively from entities controlled by . Dish; (3) Northstar and SNR bid anonymously for the same licenses 744 times during the auction; (4) Northstar and SNR frequently accepted the Commission’s random selection of the winner when they submitted identical winning bids; (5) Northstar and SNR finished the auction with geographic gaps in their spectrum licenses which afforded complete coverage only when combined, (6) Northstar’s and SNR’s post-auction selective defaults created geographic holes in their individual coverage while promoting the uniformity of spectrum coverage provided by their combined holdings; (7) Northstar’s and SNR’s dispersed spectrum blocks from Auction 97 made no sense from the point of view of providing communications services; (8) neither Northstar nor SNR had taken steps to deploy a wireless system in the four years since Auction 97 concluded, and; (9) Dish guaranteed Northstar’s and SNR’s default payment obligations when each entity selectively defaulted.”

“Defendants offer alternative explanations for Northstar’s and SNR’s conduct, asserting that such conduct is consistent with the absence of any undisclosed agreement(s). Perhaps so, but the question before us on a motion to dismiss is only whether the alleged undisclosed agreements to act on Dish’s behalf or transfer spectrum rights to Dish are plausible. They are. As Vermont Telephone alleges in its amended complaint, the aforementioned conduct makes little sense unless Northstar and SNR agreed in advance that Dish would ultimately control the licenses won at auction.” Wireless Estimator