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The legal thicket surrounding foreign investment in the U.S. telecommunications market received a much needed pruning on April 24, 2001. With its approval of Deutsche Telekom’s acquisition of VoiceStream, the Federal Communications Commission blessed the largest foreign acquisition ever of a U.S. telecom provider. The FCC’s unanimous decision established that U.S. laws granting overseas telecom companies access to the U.S. market apply with equal force to companies in which foreign governments have an ownership interest. Moreover, the ruling affirmed the FCC’s presumption that investments by companies from World Trade Organization member countries serve the “public interest” (where such a finding is required to grant a license). With the release of the FCC’s well-reasoned order in the Deutsche Telekom case came predictable calls from a vocal minority in Congress to amend the underlying statute. Claiming the need to protect U.S. companies and consumers from the “unfair” advantages possessed by certain foreign companies, these lawmakers would bar the holding of U.S. telecom licenses by companies in which a foreign government holds, even indirectly, a greater than 25 percent interest. Recently, the FCC and other federal agencies have acted to open U.S. markets and ensure vigorous competition for basic and value-added telecom services. Preventing potential abuse of dominant home market positions and other advantages enjoyed by some former monopoly providers abroad remains an important objective of the FCC’s approach. The U.S. government has a vital interest in promoting the competitiveness of American telecom markets, whether the participants are domestic or foreign. In this context, Sen. Ernest Hollings (D-S.C.) and other political opponents of the Deutsche Telekom order have wildly exaggerated the risk that foreign-government-owned carriers might absorb their American rivals to eliminate competition here. The vast majority of former overseas monopoly providers have now “corporatized” and sold at least a minority of their shares to the general public, while also facing comprehensive regulation of their home market operations in accordance with WTO rules. Just as important, the U.S. government after the Deutsche Telekom ruling retains every bit as much authority as before to evaluate and counteract any potentially anti-competitive effects of such foreign investments. Additional protections are already in place to promote competitive behavior by foreign participants in the American market and protect other public interests (e.g., law enforcement and national security). Any new legislation to condition entry to the U.S. market on prescribed levels of private ownership would be not only unnecessary, but also harmful to U.S. companies doing business abroad, by provoking potential foreign retaliation and undermining the market access principles established by the 1997 WTO Agreement on Basic Telecommunications Services. HELLO, DEUTSCHE TELEKOM Since the announcement last year that Deutsche Telekom would seek to acquire the American wireless carrier VoiceStream, the issue of Deutsche Telekom’s partial ownership by the German government has nearly overshadowed the economic significance of the $26 billion transaction itself. Led by Sen. Hollings (D – S.C.), detractors alleged that the FCC lacked the legal authority to approve the transaction. They also contended that companies with foreign government ownership enjoy privileges (low-interest loans, subsidies, and home market protection) that would enable them to overwhelm private U.S. competitors in the American market. As one of the most enthusiastic supporters of telecom market liberalization, the U.S. delegation to the WTO Agreement negotiations had promised to open U.S. markets to investment by foreign companies regardless of government ownership. The delegation had made only one relevant reservation: that ownership of U.S. telecom licenses by foreign companies must take place through U.S. corporate licensees and holding companies, so that “alien” ownership of the necessary licenses would be “indirect.” At the time the WTO Agreement was signed, many in Congress (including Sen. Hollings) felt that implementation of the agreement required legislative action to modify Section 310, the foreign ownership provision of the 1934 Communications Act. But perhaps worried that opening up the Communications Act to legislative modification carried undesirable risks, the Clinton administration never submitted the agreement to Congress, implementing it instead as an executive agreement. Owing in part to his anger over the agreement’s handling, but ostensibly also to prevent government-owned carriers from distorting the U.S. market, Sen. Hollings filed a series of formal submissions to the FCC in the Deutsche Telekom proceedings. He argued that the FCC’s past interpretations of Section 310 required it to reject Deutsche Telekom’s application to acquire VoiceStream, since the merger would result in a foreign government “holding” U.S. radio station licenses. THE TRIUMPH OF TEXT At issue were two subsections of Section 310. Section 310(a) prohibits outright the “holding” of U.S. radio station licenses by a “foreign government or the representative thereof.” Section 310(b)(4) expressly permits the holding of licenses by a U.S.-incorporated “corporation directly or indirectly controlled by any other corporation of which more than one-fourth of the capital stock is owned of record or voted by aliens, their representatives, or by a foreign government or representative thereof,” subject to an FCC public interest finding. While the statutory text clearly permits foreign-government-owned corporations to hold licenses indirectly through U.S. subsidiaries, earlier bureau-level rulings at the FCC had seemed to invite extension of Section 310(a)’s strict prohibition to indirect license holdings where a foreign government had “de jure or de facto control” over the licensee. The existence of this control test confused the relationship between Sections 310(a) and (b)(4), served to bolster Sen. Hollings’ legal contentions, and threatened to derail not only the Deutsche Telekom-VoiceStream merger but also future U.S. investments by foreign-government-owned corporations (and the U.S. WTO commitments on which they could otherwise rely). Fortunately, the full commission issued an Opinion and Order in the Deutsche Telekom case that restored the meaning of the statute’s plain language. The FCC made clear that Section 310(a) prohibits only the direct holding of licenses by foreign governments or their representatives; Section 310(b)(4) permits any corporation (even one owned indirectly by a foreign corporation or a foreign government) to hold a license if the commission finds that the public interest will be served. The FCC also confirmed that an incorporated business entity does not constitute a “representative” (e.g., emissary) of a foreign government or otherwise fall within the scope of Section 310(a). The Deutsche Telekom opinion is a welcome victory for careful statutory construction, for open telecom markets, and for the integrity of U.S. WTO commitments. It should not, however, be interpreted to signal inattention or disinterest by U.S. authorities with respect to the competitive or other public interest implications of investments by foreign-government-owned companies. The FCC emphasized that it would use its authority under Section 310(b)(4) and other relevant provisions to assess the risks that indirect foreign-government ownership of a U.S. telecom carrier might pose in individual cases. The decision therefore does not diminish the power of regulators to promote competition within the United States, regardless of who (or what) owns shares in the market’s participants. SECURITY CONCERNS The Deutsche Telekom debate also included, as a more subtle theme, the national security and law enforcement implications of telecom investments by foreign-government-owned companies. The FCC’s public interest review, at least potentially, includes consideration of these and other factors. In practice, however, the FCC largely relies on (and thereby supports) other agencies in their review of proposed investments to address such concerns. The Committee on Foreign Investment in the United States (CFIUS), a Cabinet-level inter-agency committee, enforces the Exon-Florio provisions of U.S. law, which grant the president authority to block a planned foreign acquisition in the United States, or even order the divestiture of a completed acquisition, to protect national security. The president may invoke his Exon-Florio powers upon finding “credible evidence that leads the President to believe that the foreign interest exercising control might take action that threatens to impair the national security.” If the investor is not only based abroad but also controlled by a foreign government, the president must apply a stricter standard of review — namely, whether the investment “could affect” national security. In either case, presidential intervention is only warranted if national security concerns are not adequately addressed by other means under U.S. law. In recent Exon-Florio reviews involving foreign-government-owned telecom carriers (including Deutsche Telekom), the most significant issues were raised by the Department of Justice and the Federal Bureau of Investigation. The FBI has generally sought to preserve and even expand its ability to conduct wiretaps and associated data collection for law enforcement purposes using telecom facilities. Because VoiceStream is a cellular phone service provider, the FCC had licensing authority over the transaction and thus was able to address adequately the FBI’s interests. In contrast, when Japan’s state-owned carrier, NTT, last year acquired Verio, a U.S. Internet application service provider, no radio licenses were involved and the FCC had no blocking authority. The CFIUS review provided the only means (i.e., the potential blocking authority) for the U.S. government to obtain an agreement from NTT to institute a special procedure to accommodate FBI wiretapping and data monitoring. It is widely understood that NTT had to accept conditions above and beyond the actual requirements of U.S. wiretapping law. The law enforcement concerns of the Justice Department and the FBI go beyond physical access to U.S. facilities. These agencies typically seek continued retention in the United States of stored wire and electronic communications and other records and subscriber information, as well as a long-term commitment to maintain in the United States (and not to transfer abroad) the “carrier facilities that are part of, or are used to direct, control, supervise or manage all or any part of the transmission of domestic U.S. communications, as well as that end of a call that originates or terminates in the United States” (according to a September 2000 statement by FBI General Counsel Larry Parkinson). The Justice Department and the FBI also seek protection of U.S. government and private citizens’ communications from interception by foreign espionage agencies or other foreign interests. Both NTT and Deutsche Telekom reached agreements that addressed these law enforcement, security, and privacy concerns in the course of their acquisitions. CLASSIFIED PRECAUTIONS Because large U.S. telecom carriers generally have at least some contracting work with U.S. military services and agencies, the Department of Defense also takes precautions. The department has jurisdiction over telecom contracts with the military and maintains an Industrial Security Program intended to prevent “foreign ownership, control or influence” from compromising the security of classified information exchanged by the department with its contractors. For instance, where service providers require facility security clearances, foreign acquirers must institute some form of “mitigation,” including potentially the establishment of a separate U.S. operating company so that noncitizens may not access classified information. In short, any foreign acquisition of a U.S. telecom company that deals with classified information may involve complex negotiations and structuring to resolve Defense Department concerns. The U.S. telecom market attracts foreign investment because of its size, diversity, and technical sophistication, among other reasons. Rather than deny the American economy and consumers the benefits of foreign investment, including investment by foreign-government-owned companies, Congress should applaud the FCC’s Deutsche Telekom decision and the carefully considered regulatory approach that it represents. Under the U.S. legal and regulatory framework affirmed by the FCC, competitive concerns and other important public interests will remain fully protected, without sacrificing the benefits of foreign investment or undermining U.S. obligations under the WTO Agreement. George D. Kleinfeld and Damon A. Terrill are adjunct professors at the George Mason University School of Law, and counsel and associate, respectively, in the D.C. office of Clifford Chance. The firm represents a number of international telecommunications clients.

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