Eighth Circuit Blocks Sharing of Leased Broadband Radio Service Channels With Licensee's Competitor

A unanimous panel of the Eighth Circuit Court of Appeals blocked a Sprint subsidiary's customer from sharing leased Broadband Radio Service channels with a Sprint competitor. PCTV Gold, Inc. v. Speednet, LLC, No. 07-2189 (8th Cir., November 29, 2007). The Court upheld a district court finding that Sprint was likely to prevail on its claim that Speednet, LLC's proposed joint venture with Clearwire, Inc. in Saginaw, Michigan, would breach a "Right of First Offer," which ostensibly required SpeedNet to offer to sell its assets to Sprint before selling to any other party. The Court found that Sprint would suffer irreparable harm "if the district court should later find Sprint is entitled to specific performance" because "it will be difficult if not impossible to undo the transfer of assets to Clearwire."

The Sprint subsidiary, PCTV Gold, Inc., is licensed by the FCC to operate a Broadband Radio Service in the Saginaw, Michigan area. SpeedNet, a provider of fixed and portable high-speed wireless internet services, leased BRS channels from Sprint pursuant to a Market Operation Agreement (MOA). After entering into the MOA, SpeedNet began negotiations with Clearwire, one of Sprint's competitors, and in August, 2006, SpeedNet and Clearwire executed a Purchase Agreement, under which they agreed to either merge or enter into a joint venture that would offer services using the spectrum leased from Sprint.

On March 1, 2007, Sprint filed a breach of contract action against SpeedNet, seeking injunctive relief and specific performance to enforce SpeedNet's obligation to first offer the sale of its assets to Sprint. In April 2007, Sprint moved for a preliminary injunction to prohibit SpeedNet from transferring its assets or otherwise altering the structure of its company before Sprint's rights under the ROFO provision of the MOA had been adjudicated.

The Court found that the Sprint subsidiary would suffer irreparable harm because "if the district court should later find Sprint is entitled to specific performance, it will be difficult if not impossible to undo the transfer of assets to Clearwire."

Following a hearing on the motion, the Court found that Sprint appeared likely to succeed on the merits of its claims, and that Sprint was subject to irreparable injury if SpeedNet was permitted to merge or enter into a joint venture with Clearwire. The Court entered a preliminary injunction, which enjoins SpeedNet from:

(1) closing upon, transferring assets in furtherance of, or completing any portion of the transaction envisioned in the Purchase Agreement between SpeedNet and Clearwire;
(2) executing or entering in to the draft Joint Venture Agreement between SpeedNet and Clearwire; or
(3) selling or transferring any assets to any third party entity other than transactions in the ordinary course of business.

SpeedNet appealed from portions of paragraphs (2) and (3) of the district court's order relating to the joint venture with Clearwire. The Court recited the standard for granting a preliminary injunction: "Whether a preliminary injunction should issue involves consideration of (1) the threat of irreparable harm to the movant; (2) the state of the balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest." Dataphase Sys., Inc. v. C L Systems, Inc., 640 F.2d 109, 114 (8th Cir.1981). The Court concluded that the district court did not abuse its discretion in granting the preliminary injunction, and properly applied the Dataphase factors. According to the Court:

(1) Sprint is subject to irreparable injury should SpeedNet be permitted to merge or enter into a joint venture with Clearwire because monetary relief will not provide adequate or complete relief to it; (2) Sprint is likely to succeed on the merits as to its claim of SpeedNet breaching the ROFO provision of its MOA agreement with Sprint and must first tender an offer to sell to Sprint before all others; (3) the balance of equities warrants the issuance of a preliminary injunction; and (4) the granting of the preliminary injunction promotes the public interest under Kansas law by protecting the freedom to contract through enforcement of contractual rights and obligations.

With respect to irreparable injury, the Court pointed out that "the SpeedNet JV will alter the structure of SpeedNet before Sprint has the opportunity to purchase it." According to the Court, "if the district court should later find Sprint is entitled to specific performance, it will be difficult if not impossible to undo the transfer of assets to Clearwire."

Moreover, according to the Court, "spectrum has unique characteristics that make its loss one which cannot be fully compensated by an award of money damages." The Court pointed out that "the parties specifically agreed in Section 13.2 of the MOA that because spectrum rights are 'of a special, unique, unusual and extraordinary character,' the non-defaulting party is entitled to obtain injunctive and other equitable relief." Accordingly, the Court concluded that "the district court did not err in finding Sprint will be irreparably harmed if SpeedNet is allowed to execute the SpeedNet JV before Sprint's claims are adjudicated."

With respect to Sprint's likelihood of prevailing on the merits, SpeedNet argued that it did not breach the MOA, and that Sprint is equitably estopped from preventing the SpeedNet JV. As characterized by the Court, "SpeedNet contends it did not breach the ROFO provision because such provision didn't prohibit it from speaking with a third party about a potential sale."

Additionally, SpeedNet contended that the ROFO provision does not apply because Sprint is incapable of matching Clearwire's "unique" offer of privately held stock and warrants. On the other hand, as framed by the Court, "Sprint contends that the ROFO provision requires SpeedNet to inform Sprint when it first considers selling its assets and to provide Sprint with written notice of the sale terms SpeedNet would find acceptable," and that SpeedNet is absolutely prohibited from signing a purchase agreement with a third party prior to offering the sale to Sprint.

Abjuring any need to "decide which interpretation of the ROFO is the correct one," the Court limited its inquiry to the "district court's assessment of Sprint's likelihood to prevail on the merits." The Court concluded that "the district court considered each party's arguments carefully and did not err in concluding Sprint has demonstrated a reasonable likelihood of success on the merits of its claim."

The Court rejected SpeedNet's argument that Sprint is equitably estopped from preventing the SpeedNet JV because Sprint encouraged, promoted and benefitted from it. According to the Court, "a party requesting estoppel must show the other party engaged in affirmative conduct designed to mislead it." Under Kansas law—

a party asserting equitable estoppel must show that another party, by its acts, representations, admissions, or silence when it had a duty to speak, induced it to believe certain facts existed. It must also show it rightfully relied and acted upon such belief and would now be prejudiced if the other party were permitted to deny the existence of such facts…. Estoppel will not be held to exist where facts are ambiguous or subject to more than one construction.

SpeedNet claimed Sprint engaged in affirmative conduct which misled SpeedNet into thinking Sprint supported the SpeedNet JV and it would now be prejudiced if prevented from consummating the deal. The Court acknowledged that "in the absence of SpeedNet's alleged breach of the ROFO provision, SpeedNet might be correct that Sprint would be estopped from attempting to prevent the SpeedNet JV." However, according to the Court, "Sprint cannot be estopped from enforcing the ROFO provision because Sprint never engaged in conduct designed to mislead SpeedNet into thinking it would not enforce the provision.

The Court concluded that the district court did not err in assessing the balance of the harms. The Court found that the alleged harm to SpeedNet—a lost business opportunity—was undermined by the fact that a preliminary injunction would only delay its transfer of assets, and outweighed by the potential harm to Sprint, which would "forever lose its rights to purchase SpeedNet in its current state."

The Court found that the district court adequately considered the pubic interest when it carefully considered SpeedNet's argument about a preliminary injunction giving Sprint a monopoly over the spectrum in the Detroit market. According to the Court, "the transcript suggests the district court was persuaded by Sprint's assurances its alleged monopoly would not harm the public interest." In addition, the district court "considered the public's interest in protecting contractual rights.," and "did not abuse its discretion by concluding its grant of a preliminary injunction promoted the public interest by protecting freedom to contract through enforcement of contractual rights and obligations."