Holy LTE, Batman! While all of us wireless broadband fans were sleeping restfully in our beds, little did we know that over $30 billion in Federal Communications Commission wireless spectrum licenses hung in the balance.

Turns out that a bunch of disgruntled spectrum bidders from the last two major auctions had taken the FCC to court over some of its auction rules, asking the agency to "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." In other words, they wanted a do-over.

We're talking about the FCC's two biggest recent wireless broadband sell offs—Auction 66, which in 2006 generated about $14 billion in winning bids, and the 2008 700MHz sale, which put another $19.5 billion into the United States Treasury and laid the foundation for 4G wireless across the country.

The Third Circuit Court of Appeals ruled on Tuesday that it was "loath" to nuke the results of these huge sales, "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," the justices added.

Well, like, yeah. Thanks, Third Circuit judges.

So maybe you're wondering what the big issue was that could have turned the whole Verizon/AT&T next-generation LTE and WiMAX shebang upside down? Allow us to explain.

The concern

When the FCC runs its auctions, the agency tries to look out for the little guy or gal who hasn't got anything like the capital to match Verizon, AT&T, or other deep-pocketed bidders. The Commission does this by classifying certain bidders as "Designated Entities" (basically small businesses), and it gives them bidding credits.

"Entities" averaging annual gross revenues of $40 million or less over the last three years get a 15 percent credit. Entities averaging annual gross revenues of $15 million or less get a 25 percent credit. And a 35 percent credit goes to entities that average $3 million or less.

But there's a potential problem with this system. What's to stop your poor, longsuffering little DE from setting up a deal with a fat cat, moneybags company, undermining the notion that it's really a small business in the first place?

And what's to stop that DE from buying some spectrum at a 35 percent discount, then quickly selling it off to wealthy investors and making a nice pile of cash? The point of these rules, after all, is to give smaller companies a chance at the wireless business, not a shot at the lottery.

Rules of the road

The FCC set up various guidelines to prevent this sort of mischief. One of them is an "attributable material relationship" rule to evaluate whether the subsidiaries or affiliates of big businesses should qualify for DE credits [all italics below are ours]:

[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 attributable rule offers some wiggle room, but more strict was the latest version of the "impermissible material relationship" rule:

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.

Finally, there's what could be called the "ten-year rule," which stipulated that a DE that resells its spectrum at a premium to a non-DE loses its DE eligibility and has to repay some money under the following schedule:

If the DE cut a resale deal in the first five years after the auction, it has to pay all the credit money back; on the sixth or seventh year, 75 percent repayment is required; on the eighth or ninth year, 50 percent; and on the tenth, 25 percent. After ten years, the resale has no penalty.

Arbitrary and capricious

The three plaintiffs in this case are Council Tree Communications, Bethel Native Corporation, and the Minority Media and Telecommunications Council. Although the FCC's rules of the road regarding Designated Entity status are obviously based on legitimate concerns, it's not a black-and-white issue. Various small business advocates argue that even with the FCC's DE credit rules, smaller entities need to partner with some kind of backer to make their wireless venture work, and the ten-year rule is way too long, given the vicissitudes of the wireless biz.

In any event, the Third Circuit ruled that the FCC launched some of these regulations without giving the public proper notice and chance to comment, thus violating the Administrative Procedures Act. This was the case with the "50 percent impermissible relationship rule" and the 10-year bidding-credit repayment schedule.

But rather than pressing the reset button on those auctions, which it could have done, the court has instead vacated these specific rules and remanded the matter back to the FCC for more proceedings.

Bottom line: "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 percent of their spectrum to a single entity," the court says. "Vacating the 10-year-hold rule will simply mean that DE's repayment obligations will once again be governed by the previous 5-year schedule."

Had the Third Circuit done otherwise, that would have been, well, very big news.