Mobilicity backers’ lawsuit describes government courting of new entrants

New details about the government’s push for new-entrant carriers in the 2008 AWS auction were revealed in a lawsuit filed this week against Industry Canada by two of the original investors in Mobilicity, alleging the government department is blocking the sale of the struggling carrier to Telus Corp. out of spite. In the statement of claim filed Thursday, Quadrangle Group LLC seeks $1.2 billion in damages, accusing the government of bad faith in failing to follow through on promises it made to Mobilicity founder John Bitove that would have let the wireless carrier, in bankruptcy protection since September 2013, compete effectively against Canada’s wireless incumbents. Industry Canada has blocked three attempts by Telus to buy Mobilicity, most recently in April, and reportedly threatened to bar Telus from future spectrum auctions if it persisted in its attempts to buy the new entrant. "Its refusal was a breach of its assurance made for the irrational and unlawful purpose of punishing the Plaintiffs for trying to sell Mobilicity to Telus and for the wrongful purpose of intimidating and retaliating against Telus for speaking out against Industry Canada's conduct," Quadrangle's court filing said. Bob Richardson, a public relations representative for Quadrangle, said the company has participated in discussions with the government, though the telecom rules had changed so much since the firm made its investment that it felt compelled to file the lawsuit. " exhausted their other opportunities to deal with the government and they felt they had to take a legal action at this point," he said. Quadrangle and DAVE Wireless Enterprises Investments Inc., which is owned by John Bitove and has joined the lawsuit as a plaintiff, were the original backers of Mobilicity. Quadrangle said in the court filing it invested $217 million in equity and $95 million in debt in the carrier, while Bitove’s company contributed $44 million. Quadrangle's court filing said Michael Binder, former assistant deputy minister at Industry Canada, approached Bitove in the fall of 2006 to suggest the possibility of new-entrant wireless carriers entering the Canadian market. The filing said, before that meeting, Bitove had no experience or interest in the wireless market, though he was a successful businessman who had been involved in bringing satellite radio to Canada. Quadrangle said in that meeting and a series of encounters and phone calls that followed, Binder and other Industry Canada representatives said the government would pursue policy changes to ensure the competitiveness of the new entrants, namely that incumbents would be forced to provide wholesale roaming and tower-sharing at reasonable rates, that the incumbents would be prevented from anti-competitive practices and that any spectrum purchased by the new entrants could be transferred to incumbents after the expiration of five-year transfer moratoriums. “On the strength of these assurances, Mr. Bitove and his partners did exactly what Industry Canada asked them to do,” Quadrangle said in the filing. “In return, Industry Canada ignored all of its promises.” Mobilicity spent $243.2 million in the 2008 AWS auction, buying licences in Ontario, Alberta and British Columbia. Licences for that spectrum were issued in February 2009 and expired in February of this year. According to the filing, Industry Canada’s lack of action on the very issues it promised to address was what led to Mobilicity’s failure, rendering it “unable to compete in exactly the way the Plaintiffs were assured would not happen.” The blocking of the third attempt at a sale to Telus was the ultimate rejection of the deal that was understood before the 2008 auction, according to the filing. “Having caused the Plaintiffs to lose substantially all of their investment, Industry Canada broke its final promise by refusing to allow the sale of the business after five years,” Quadrangle said. Jake Enwright, press secretary for Industry Minister James Moore, said the government would not comment on the merits of this specific lawsuit. “Our government is committed to protecting Canadian consumers and we will continue to support policies that lead to more choice and greater competition in the wireless sector,” was his response to The Wire Report when asked for comment on this case. Industry Canada said in a January 2014 court filing that it had never told incumbent carriers they would be able to obtain the spectrum even after the expiration of moratoriums. The department was responding to an application filed in July 2013 by Telus seeking a judicial review of spectrum-transfer regulations following the collapse of the first deal with Mobilicity. Canaccord Genuity telecom analyst Dvai Ghose said in a Friday research note that the Quadrangle lawsuit is a “further embarrassment for the Canadian government.” He added: “While the incumbent wireless providers have expressed their frustration at the government, what is interesting is that the new entrants, who Industry Canada is supposedly supporting, seem even more frustrated,” he said. “We note that Verizon , who looked at entering the Canadian wireless market last year, decided not to enter, in part, due to significant regulatory inconsistencies.” The struggles of Mobilicity, Ghose said, lead to questions about the government’s fourth-carrier policy. “We wonder why any financial or strategic investor would be interested in being a wireless new entrant without any obvious exit strategy, as a sale to an incumbent has been the only exit strategy for new entrants like Public Mobile, Clearnet, Microcell, Call-Net and Allstream,” he said. SeaBoard Group telecom analyst Iain Grant said the sale of Mobilicity became a more pressing concern following the announcement of the upcoming AWS-3 spectrum auction, as the company's most attractive asset is its AWS holdings. "When the government said more spectrum would become available, the value of Mobilicity's spectrum fell," he said. Grant said the lawsuit was Quadrangle's only course of action, given the government's firm line against the sale of Mobilicity to an incumbent. "The minister's been speaking without equivocation, saying they will not change the policy," he said. “The frequencies were set aside for new entrants and that's the way it's going to be.” Grant said that if the legal process stretches past the next federal election, due in the fall of 2015, a government led by another leader might look to settle the case in order to start fresh in wireless regulation. "It's a billion dollars, though, which isn't a sneeze," he said. "In terms of government cost, it's not that much, but it's not something that Tom Mulcair or Justin Trudeau are going to make their political lives with." Mobilicity declined to comment on the Quadrangle lawsuit. Industry Canada must file a statement of defence or notice of intent within 20 days of receiving Quadrangle’s statement of claim. — With writing by Peter Henderson at phenderson@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

Mobilicity backers’ lawsuit describes government courting of new entrants

News | September 5, 2014

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