Anti-Collusion, Legal Ethics Rules Likely to Halt M&A in Months Leading to Auction

In the months leading up to the FCC incentive auction, communication and sharing of information among telecom companies will be severely restricted by anti-collusion and conflict of interest rules, likely shutting down mergers and acquisitions within that sphere, said attorneys studying the matter. The concerns are consistent with our report that many major communications law firms face potential conflicts of interest on the first-of-its-kind auction that should raise billions of dollars for the government, giving TV stations selling all or some of their frequencies a cut of proceeds. After the reverse auction application deadline, FCC anti-collusion rules will prevent all Class A and full-power broadcasters from communicating about their auction participation plans or lack thereof, and participants in the forward auction will be barred from communicating anything about auction plans with any TV licensee, the FCC’s incentive auction order said.

Professional responsibility ethics rules will affect law firms with multiple clients participating in the incentive auction, and many may ask current clients and even prospective clients to agree to sign conflict of interest waivers in the lead-up to the auction, the attorneys told us. Though many attorneys said questions about law firms' professional responsibility and anti-collusion rules are likely to come up only in the event of some sort of post-incentive auction legal challenge, they also said firms needed to prepare. Law firms “need to decide how to deal with this now, before they go into the auction,” said Womble Carlyle communications attorney Gregg Skall, who's studying the matter for the firm.

The FCBA held a continuing legal education panel in October on “Understanding the FCC's Anti-Collusion Rule and the Upcoming Incentive Auction.” The well-attended event was the association's first CLE to be explicitly off the record, lawyers said, and the FCBA had no comment. Despite a protest from Communications Daily, FCBA wouldn't reverse the decision to make the event off the record.

From the reverse auction application filing deadline until the FCC announces the results of the incentive auction, all full-power and Class A TV licensees are barred from “directly or indirectly disclosing incentive auction applicants’ bids or bidding strategies to any forward auction applicant or to any other full power or Class A broadcast television licensee,” the FCC said in its incentive auction order. On the timeline most recently projected by FCC officials (see 1411200042), that period will begin in September and stretch until sometime in 2016, and the FCC's obligation to keep auction participation anonymous means the rule extends to disclosure of whether or not a licensee is participating, attorneys said. To prevent licensees' silence from revealing their participation in the auction, the prohibition applies to all “covered television licensees, not just reverse auction applicants,” the order said. The communication rules also prevent wireless bidders in the forward auction from communicating with any TV broadcasters about bidding strategies, and from communicating about bid strategies with any other forward auction participant in the same geographic area, the order said. In the reverse auction, TV licensees will offer to sell spectrum, and in the forward auction wireless carriers will bid on it.

Although the order's anti-collusion rules say the communication barriers don't apply to “business discussions and negotiations that are unrelated to bids and bidding strategies or to post-auction market structure,” the rules may have the practical effect of stopping M&A involving TV stations during the time the gag is in effect, said industry lawyers. It would be extremely difficult for stations to negotiate a transaction without revealing their auction plans to the prospective buyer, said experts. The communication restrictions apply to “all controlling interests in the licensee, and all directors, officers, and governing board members of the license,” the auction order said. The rules don't apply to commonly owned stations, or to stations involved in channel-sharing arrangements at the time the auction applications are filed, the FCC said. The Expanding Opportunities for Broadcasters Coalition, an group of anonymous broadcasters planning to participate in the auction, will split up to participate in the auction as complete individuals after the application deadline in order to comply with the anti-collusion rules, Executive Director Preston Padden told us.

The communication strictures also are an issue for law firms that have multiple broadcast clients or broadcast and wireless clients, said attorneys. Since a lawyer can be a “conduit of communication,” firms with multiple broadcast clients or broadcast and wireless clients will likely have to take steps to “screen” attorneys representing clients in the auction from other lawyers in the same firm doing so for others, said legal practitioners. There's likely more than one answer to the question, said John Griffith Johnson of Telecommunications Law Professionals, calling the matter a “policy-level” decision that law firms have to decide for themselves. The bar association and FCC generally don't challenge or issue rulings on law firm conflicts of interest, attorneys told us. A law firm's policies on conflicts are only likely to be scrutinized if a client files a complaint with the courts or bar association over its representation, the attorneys said.

Parties found to have violated the commission’s rules in connection with the incentive auction may be “subject to forfeiture of their winning bid incentive payments and revocation of their licenses,” the order said. It said they could also be “prohibited from participating in any other auction.”

Along with the anti-collusion rules, law firms have to account for ethics regulations in the rules of professional conduct. Washington, D.C., Virginia and the American Bar associations have rules dictating when a law firm can represent clients in conflict with each other, several attorneys said. Though different state bar association rules could apply to different law firms, the D.C. Bar rules seem to be the most relevant since the FCC is based there, the lawyers said. Although the bar association hasn't issued an ethics opinion on the incentive auction, many attorneys told us a 1986 D.C. Bar legal ethics committee ruling involving an FCC construction permit lottery is relevant to the auction. The ruling concluded that an attorney could prepare lottery applications for multiple clients as long the clients were informed of the conflict and agreed to it. The ruling also concluded that if one of the attorney's multiple clients challenged another's position in the lottery, the practitioner would have to withdraw from representing one or both clients.

Though the ethics committee decision isn't binding and a lottery isn't an auction, the ruling indicates telecom law firms can probably represent multiple clients in applying to participate in the auction, but would likely have to withdraw representation if one of those clients challenged another's auction gains, said an attorney who has studied the bar association's conflict rules. Broadcasters or wireless firms taking each other to court over the auction results is unlikely, said a communications attorney -- they're more likely to sue the FCC.

To satisfy the anti-collusion and the conflict rules, many law firms likely will ask clients to sign retainer letters that make it clear the firm will have multiple clients in the auction, asking them to waive potential conflicts of interest and informing them that the firm could be limited in its scope of representation, said lawyers. Such letters are not unusual in spectrum auctions, Skall and others said. However, waiving conflicts in advance is not always an effective strategy for preventing later ethics challenges, D.C. Bar Senior Legal Ethics Counsel Saul Singer told us. If a matter involving pre-waived conflicts comes under review, the law firm and client can disagree over whether the waiver covered the extent of the conflict, Singer said. “Circumstances can change, and then it’s a question of fact,” Singer said.

With the auction time frame having been pushed back by the FCC to early 2016 from mid-2015, such letters are unlikely to go out any time soon, lawyers said. With extra time, and an ongoing legal challenge against the auction, there's also a chance the FCC could alter some of the communication rules, said a lawyer. Such a change could happen when the FCC announces the final auction procedures in 2015, said the attorney.