SES-Intelsat CBA Fight Has Competing Claims Over C-Band Clearing Terms

U.S. District Judge Robert Payne seemed open multiple times in oral argument Monday to deciding U.S. Bankruptcy Court erred in dismissing SES claims against Intelsat over the collapse of the C-Band Alliance (CBA) (see 2210030050). Oral argument before the U.S. District Court for the Eastern District of Virginia in Richmond (docket 3:22-cv-668) lasted nearly four hours. Payne said he might require additional briefing.

Counsel for both companies said there were mediation discussions but not recently. "It does seem to me to be a case where reasonable people could reach a compromise," Payne said.

At one point, observing the Bankruptcy Court decision seemingly sidesteps SES' arguments and evidence about course of performance and all the work the two did jointly after the FCC's C-band order determining that the satellite operators wouldn't negotiate directly with wireless carriers for the C-band spectrum and reap all the rewards, Payne said, "You've got to address" important evidence. After SES counsel Helgi Walker of Gibson Dunn argued that Bankruptcy Court addressed only the negotiating history that Intelsat filed but ignored SES-submitted negotiating history evidence -- which is another instance where the judge could reverse and remand, she said -- Payne acknowledged there could be error in focusing on evidence provided by one side but not the other, but he questioned whether it was reversible error.

Intelsat and SES separately maintain the CBA agreement unambiguously backs their opposing stances, but Payne found it far less clear. "It's a bollixed-up contract in my judgment," he said. Walker said the fact Bankruptcy Court found the agreement unambiguous is also a reversible error, if Payne finds it ambiguous.

Payne pressed Intelsat counsel on where the CBA agreement limited itself solely to a market-based approach, with the two satellite operators negotiating directly with wireless carriers about clearing the spectrum. “I agree the word ‘only’ is not in there,” Kirkland & Ellis’ John O'Quinn said after a challenge by Payne. But O’Quinn said language in the CBA agreement shows there was an intentional decision to pursue only the market-based approach.

What about that the agreement has language about its amendment regarding the approach the FCC took, Payne asked. O'Quinn said that recognizes details can be changed. “We're talking about details, not fundamentals,” and the FCC fundamentally rejected the approach CBA hinged on, he said.

The bankruptcy court clearly erred by saying the CBA agreement unambiguously applies only to secondary market agreements, Walker said. "We could look at this contract all day long” and not find language limiting it only to that market-based approach, she said. Walker said there's substantial evidence in the record Intelsat understood it still to be a joint effort to monetize spectrum even after the FCC's public auction decision. She cited the company telling investors the 50-50 split of spectrum-clearing proceeds was still operative. The CBA agreement language on how parties could withdraw shows "they were in it together for the long haul” and Intelsat couldn't just break away after the FCC public auction announcement, she said. Payne pressed Walker on what the CBA agreement said about the source of proceeds and how much joint effort there was between the two after the FCC issued its C-band order.

O’Quinn said the key issue is the CBA agreement definition of “project.” He said every term sheet, memorandum of understanding and draft focused on the market-based approach. He and Payne disagreed whether the wireless carriers were paying for rights to the C band or to incentivize accelerated clearing, and what costs are entailed in clearing. "There's so much nuance here that it looks like a facade” regarding what is actually being paid for, Payne said. "Nobody thinks" the allocation to the satellite operators is tied to the value of the spectrum itself, since the C-band auction raked in $80 billion and the satellite operators are netting $9.7 billion in incentives, O'Quinn said. Payne's tone seemed frustrated as he challenged O'Quinn on whether the record contains a comparison at all of what the financial distributions would have been for the market-based and public auction approaches.

Intelsat and SES counsel were diametrically opposed in their oral arguments on such issues as whether the two companies completed terms of the CBA agreement, such as selection of what spectrum blocks would be vacated, or whether those terms became moot with the FCC’s C-band order making those decisions. “The FCC picked i[the spectrum blocks]; that’s not the project,” O’Quinn said.

Intelsat and SES “were hedging your bets” by trying to get the most available under the public auction approach and still push for a market-based approach after the FCC opted to go with the former, Payne said. The judge voiced skepticism that the CBA agreement wouldn’t apply to a 50-50 proceeds split under a public auction approach. “Don't graft on language … that isn’t in the documents,” he told O’Quinn. Challenged by Payne about the 50-50 split being communicated to investors, O’Quinn said it was general guidance for purposes of investor modeling that Intelsat “would get about half.” O'Quinn said Intelsat discussing the split with the agency without SES’ knowledge wasn’t important because there was no substantive effect of that back-channeling. “Intelsat was not enriched at SES’ expense,” he said.

Attending the oral argument virtually was former Intelsat CEO Steve Spengler.