pd TADAHIRO KABURAKJ (SB. #311823) ENDOR MYERS LLP SAN Two Embarcadero Center MATEO 28th Floor APR 1 San Franc1sco, CA 94111 0 2017 Telephone: (415) 984-8700 Clerk of Facsimile: (415) 984-8701 311% MCI-EEK B. ANDREW BEDNARK (pro hac vice forthcoming) MYERS LLP 7 Times Square New York, NY 10036 Telephone: (212) 326-2000 Facsimile: (212) 326?2061 Attorneys for Plaintiffs LocusPoint Networks, LLC and LoeusPoint II KCSM, LLC I?lhul HO SUPERIOR COURT OF THE STATE OF CALIFORNIA DJN COUNTY OF SAN MATEO .b UNLIMITED JURISDICTION 17C L?uv?I mm LOCUSPOINT NETWORKS, LLC, Case No. a Delaware Limited Liability Company; LOCUSPOINT KCSM, LLC, COMPLAINT FOR a Delaware Limited Liability Company, BREACH OF CONTRACT puts?I Plaintiffs, DEMAND FOR JURY TRIAL \0 v. SAN MATEO COUNTY COMMUNITY COLLEGE DISTRICT, NM Defendant. U) COMPLAINT m. S?o?gh??uN?oemnamswwuo LocusPoint Networks, LLC and LocusPoint II KCSM, LLC by and through their undersigned counsel, for their complaint against the San Mateo County Community College District (?the District?), respectfully allege, upon knowledge as to their own actions and information and belief as to others? actions, as follows: 1. This is an action for damages to recover what LPN would have received but for the District?s breaches of its three May 2013 contracts with LPN. 2. Those contracts involved the District?s broadcast television station, KCSM-TV which the District had operated at a signi?cant loss for years. By 2011, the District had decided to explore selling the station outright rather than continuing to fund losses, going as far as to issue a Request for Proposal (RFP) that solicited six acquisition proposals. 3. Then, in February 2012, a federal law was passed that required the Federal Communications Commission to hold a special auction in which holders of FCC broadcast licenses, such as the District, would have the unique opportunity to sell the spectrum- usage rights?essentially, the right to use the public airwaves?associated with their licenses at prices brokered by the FCC in a multiple-round auction (the ?Auction?). The relinquished spectrum would be repackaged by the FCC and auctioned to wireless-communications providers, making licenses covering large metropolitan areas?such as KCSM?s??especially attractive. But the critical details of the Auction, such as timing, design, station valuation, and spectrum supply and demand, were yet to be determined. 4. Sensing the opportunity, the District decided not to accept any of the six acquisition proposals, and chose instead to seek an arrangement under which it could obtain from a third-party the funding KCSM needed to continue to operate until the Auction, whenever it might occur. Outside funding was crucial because the District had ?approximately $1 million in losses every year at and the District?s Board of Trustees (the ?Board?) was ?clear that the District cannot afford to continue this ?nancial subsidization,? as reported in the May 15, 2013 Board meeting minutes. 5. The District solicited four bids with a second RFP, but only two bids to ?md 2 COMPLAINT \DOO?mth-bUJNr?a KCSM. On May 15, 2013, the Board selected bid, which provided up to $3.6 million in funding to KCSM, on the recommendation of the District?s staff that ?the proposed agreement with LocusPoint Networks is the best and most valuable option for the District.? 6. The value to the District of commitment went far beyond the dollar amount?LPN?s funds would also buy the District the necessary time until the Auction since it was unwilling to continue to fund KCSM on its own. 7. The Auction opportunity enabled the District to negotiate favorable funding terms and transfer to LPN the risks associated with the Auction. LPN agreed to forgo any guaranteed repayment or investment return in exchange for an option to receive 36.5% of the District?s proceeds ?'om the Auction. Thus, the District assumed no risk to its ongoing operating budget. By contrast, at a time of great uncertainty regarding the Auction?the principal trade association for broadcasters had opposed it and the FCC had not yet adopted a framework or rules to govern risked its entire investment in exchange for a share of the District?s Auction proceeds. If the Auction were delayed or did not occur, or if the o??er fell below an agreed minimum price, the District would get to keep funding while LPN could get nothing. Operating a noncommercial, nonpro?t television station at a signi?cant loss, the District could not have obtained such advantageous ?nancing terms from any traditional source such as a bank?to the extent it could have obtained any ?nancing at all. 8. Because LPN staked its investment on the Auction rather than on a guaranteed repayment or return from the District, LPN sought assurances ?om the District about the District?s participation in the Auction. For example, the Funding Agreement required the District to ?take all actions necessary to cause the Spectrum usage rights associated with the FCC License to be relinquished in the Auction?; (ii) the Bid Management Agreement obligated the District to ?[t]ake all such other actions as may be reasonably required or as LPN . . . may request in order for the District to successfully participate in the Auction and relinquish the Spectrum usage rights associated with the License at a price that is at or above the [$3,000,000] Minimum Bid Amount?; and the Put/Call Option Agreement bound the District to its obligations under COMPLAINT the other Agreements.I The District expressly agreed to reimburse funding payments upon a breach of these obligations (among other events). 9. The District and LPN began their preparations for the Auction in December 2015. Those preparations included establishing procedures that the District?s three authorized bidders? the only individuals allowed under FCC rules to place bids on a licensee?s behalf?would follow to ensure successful participation in the Auction. Foremost among those procedures was continuing and documenting each of the District?s bids as they were submitted in light of the repeated warnings that the failure to submit a bid would result in being dropped ?om the Auction. 10. The District ?led an application with the FCC to participate in the Auction on January 6, 2016, and active bidding began on May 31, 2016. Following agreed procedures, the District successfully participated in all the Auction rounds between May 31 and November 14, 2016, that required the District?s participation. 11. But during the morning round on November 15, 2016, the District failed to take the most fundamental ?action necessary? to successfully participate in the Auction?placing a bid. Despite knowing that the FCC would deem a bidder?s failure to enter a bid as a decision to drop out of the Auction, the District?s authorized bidder admitted that she did not ?think to actively submit a bid.? The offer was $114,494,613 in that round, well above the contractual Minimum Bid Amount. 12. The District failed to follow the procedures and perform the checks that the District and LPN had established to prevent just such an outcome. Contrary to the agreed procedures, the District did not generate a Bid Summary con?rmation from the FCC Auction website (which only the District?s authorized bidder could access); (ii) signed a Bid Submission Continuation Sheet certifying falsely that the District had submitted a bid, despite not obtaining the Bid Summary con?rmation; and failed to verify that the bid had been submitted at any time while the bidding for that round remained open. I The May 16, 2013 Funding Agreement, Bid Management Agreement, and Put/Call Option Agreement (and their amendments) are attached as Exhibits A, B, and C, respectively. 4 COMPLAINT 13. If the District had participated in the Auction as contractually required, it would have submitted all the required bids and Spectrum-usage rights would have been fully relinquished, like those of other ?ill-power television stations in the same television market for bids in excess of $80 million, on information and belief.2 14. Instead, as the direct and immediate result of the District?s actions (and inaction), the FCC, in accordance with its well-publicized procedures, dropped KCSM ?'om the Auction. 15. In an instant, option for 36.5% of the District?s Auction proceeds became worthless. investment?the subsidies to fund KCSM until the Auction and the time and effort to prepare the District for it?was wasted. 16. Depriving LPN of the bene?t of its bargain did not stop the District ?'om continuing to take funds. The District did not tell LPN in 2016 that it had failed to submit a bid and been dropped from the Auction. Rather, despite its known failure to bid, the District falsely certi?ed on December 16, 2016, that it had ?performed in all material respects all agreements? with LPN so it could satisfy a condition precedent to funding obligation. 17. In reliance on the District?s false certi?cation, LPN made its next quarterly payment of $225,000 to the District on December 20, 2016. 18. During its ?rst post-auction conversation with LPN on February 8, 2017, the District kept silent about the false certi?cation and the payment it induced. In breach of its contractual reimbursement obligations, the District has not returned any portion of $3,375,000 funding payments. 19. LPN seeks damages, in an amount to be proven at trial, adequate to compensate for the value of its option to receive 36.5% of the Auction proceeds the District would have received had it performed its obligation to bid in the Auction; and (ii) the District?s failure to reimburse $3,375,000 funding payments (plus interest) as the Funding Agreement requires. 2 The FCC is expected to issue a public notice announcing winning bidders and ?nal bid prices in April 201 7. 5 COMPLAINT THE PARTIES 20. Plaintiff LocusPoint Networks, LLC is a Delaware limited liability company with its principal place of business in Pleasanton, California. 21. Plaintiff LocusPoint II KCSM, LLC is a Delaware limited liability company with its principal place of business in Pleasanton, California. 22. On information and belief, Defendant San Mateo County Community College District is a community college district operating three colleges?Canada College, College of San Mateo and Skyline College?located in San Mateo County, California. JURISDICTION AND VENUE 23. This action arises under the laws of the State of California and is within the subject matter jurisdiction of this Court. 24. The District is a California community college district subject to the personal jurisdiction of this Court. The District accepted this Court?s jurisdiction in Funding Agreement 10.14. 25. Venue is proper under California Code of Civil Procedure 394(a) because this is an action against a California community college district located in San Mateo County, California; and (ii) Funding Agreement 10.14, in which the District accepted the jurisdiction of, and venue in, this Court. 26. The amount in controversy exceeds $25,000, and unlimited civil jurisdiction is proper under California Code of Civil Procedure 88. The District Operates KCSM 27. The District holds the FCC licenses and authorizations necessary to operate KCSM-TV (RF Channel 43), a ?rll-power, noncommercial, education television station located in San Mateo, California (FCC Facility ID No. 58912). 28. An FCC Television Broadcast Station License authorizes a licensee ?to use and operate the radio transmitting apparatus? described in the license. The FCC authorizes licensees to use radio transmitters at only the speci?c ?equency, power, and location (among other things) 6 COMPLAINT g?gung?cemqa?MAwnwo described in the license. 29. The KCSM website states that: KCSM is located in the San Francisco Bay Area, the heart of the ?fth largest television and radio market in the United States with the potential of reaching an audience of more than 6 million people. KCSM TV broadcasts 24 hours a day, and our 500 kilowatt broadcast signal has a coverage area that includes San Mateo, San Francisco, Santa Clara, Santa Cruz, Alameda, Contra Costa, Marin, Solano, Sonoma and Napa counties. 30. KCSM transmits in the UHF band, at 644?650 31. According to an FCC white paper, ?[t]he propagation characteristics of the TV bands, especially in UHF ranges between 470 and 698 are well-suited for wireless broadband applications.?3 The District Plans to Sell KCSM or Auction Its Spectrum Usage Rights 32. As of June 2011, KCSM was running an annual de?cit of $800,000. At the June 8, 2011 meeting of the Board, the Board President stated that the District cannot continue to subsidize KCSM. 33. Because of the de?cit, the District hired an attorney practicing FCC regulation and compliance law from a Washington DC. ?rm to explore options for selling KCSM. 34. After debate, the Board agreed to proceed with an and sale process? for KCSM. On December 7, 2011, the District issued an RFP to ?quali?ed entities? to acquire KCSM. 35. The District reported on February 14, 2012, that it had received bids ?om six entities. 36. Eight days later, on February 22, 2012, President Obama signed into law the Middle Class Tax Relief and Job Creation Act of 2012, which required the FCC to hold the Auction within ten years. 37. Recognizing the potential to receive greater proceeds ?om the Auction than from a sale, the Board decided on October 24, 2012, not to accept any of the six acquisition proposals. 3 FEDERAL COMMUNICATIONS COMMISSION, SPECTRUM ANALYSIS: OPTIONS FOR BROADCAST SPECTRUM (June 2010), available at anal?is-paperpdf, at 6. 7 COMPLAINT MN ll 38. Rather, as the November 14, 2012 Board meeting minutes re?ect, Vice President of the College of San Mateo? Jan Roecks?with a team including the District?s FCC counsel-? proposed a new plan under which the District would contract with a third party to fund operating de?cit until the District could sell spectrum-usage rights in the Auction. Going forward, the District would require its FCC counsel?s approval on all decisions regarding the Auction. 39. The May 15, 2013 Board meeting minutes report that the District received four proposals, but only two bids to subsidize KCSM until the Auction. Ms. Roecks recommended the proposal ??om LPN as ?the best and most valuable option for the District.? The Board accepted that recommendation. LPN Agrees to Fund KCSM for a Share of the Auction Proceeds 40. District Chancellor Ron Galatolo negotiated with LPN the general structure of the agreements regarding funding of KCSM and the sale of spectrum rights in the Auction. 41. The District and LPN signed a binding Letter of Intent on March 19, 2013. The letter documented the District?s ?interest in obtaining support in funding the operating expenses of as soon as possible,? and (ii) agreement to provide that funding in the amount of $3.6 million. 42. The District incurred no obligation to repay or provide any return on investment. Rather, return (if any) would come as a portion of any proceeds the District received from the Auction (when or if it occurred). The District represented that it ?will agree to participate in the Auction and to place bids under which it would relinquish to the FCC spectrum usage rights?; and (ii) will agree to pay LPN 36.5% of the ?proceeds derived from the District?s participation in the Auction.? 43. Thus, the District secured the funding it wanted and needed at no out-of-pocket cost or risk to its ongoing operating budget, because LPN was willing to risk its investment capital and return in exchange for the prOSpect of receiving 36.5% of uncertain Auction proceeds 4 The titles of District employees in this Complaint re?ect their current known positions. 8 COMPLAINT NHmI?In?Ii-dr?ni?iwli?Ir?u at a time when the Auction?s timing, design, process, spectrum supply and demand, and bidding levels were all unknown. 44. In fact, there was substantial risk that the Auction might not occur at all. On January 25, 2013, nearly two months before the parties signed the Letter of Intent, the National Association of Broadcasters argued in a ?ling with the FCC that the pending Auction design could not move forward unless certain ?critical elements [were] fully addressed and resolved,? and pushed for a slower process.5 The NAB followed through by petitioning on August 18, 2014, for judicial review of the order adopting rules to govern the Auction. The lawsuit caused the FCC to delay the Auction in the face of ?undeniable impediments,?6 and was not resolved until an appellate court sustained the FCC order on June 12, 2015.7 45. The District and LocusPoint Networks, LLC formalized the arrangement described in the Letter of Intent in three agreements executed on May 16, 2013: a Funding Agreement (amended December 17, 2015); (ii) a Put/Call Option Agreement (amended December 17, 2015); and a Bid Management Agreement (amended December 8, 2015) (collectively ?the Agreements?). 46. Effective September 1, 2013, as the Agreements permitted, LocusPoint Networks, LLC assigned its rights and obligations under the Agreements to its wholly owned subsidiary, LocusPoint II KCSM, LLC. LPN ?s Subsidy Payments 47. In the Funding Agreement, LPN agreed to subsidize the District?s operation of KCSM up to $3,600,000, with ?each Subsidy Payment . . . in an amount equal to $225,000,? payable quarterly. 48. As a condition precedent to obligation to make each quarterly payment, the District agreed to provide LPN ?a duly executed Compliance Certi?cate attesting,? among other 5 See National Association of Broadcasters, Comments on Auction Design (Jan. 25, 2013), . 6 See Gary Epstein, Incentive Auction Progress Report, FCC Blog, October 24, 2014, . 7 See Nat'l Ass ?n of Broadcasters v. F.C.C., 789 F.3d 165 (DC. Cir. 2015). 9 COMPLAINT (things, that there had been no breaches or ?Triggering Events??i.e., the District?s breach of a representation or warranty or ?default in the performance of or compliance with any term? in the Agreements: The representations and warranties contained in the Funding Agreement and in the other Funding Documents are true, correct and complete in all material respects to the same extent as though made on and as of the date hereof . . . (ii) No event has occurred or would result ?om the making of such Subsidy Payment that would constitute a Triggering Event or a Potential Triggering Event; [the District] has performed in all material respects all agreements and satis?ed all conditions which the Funding Agreement and each other [Agreement] provides shall be performed or satis?ed by it on or before the date hereof; . . . (vi) No Material Adverse Effect has occurred. 49. Under the Funding Agreement, a Material Adverse Effect included ?the impairment of the ability of [the District] to perform, or of LPN to enforce, . . . [the District?s] material obligations under any [Agreement] 50. LPN made every Subsidy Payment required under the Funding Agreement after receiving a Compliance Certi?cate from the District. 5 . To date, LPN has paid the District a total of $3,375,000 in Subsidy Payments. The Auction: the District '3 Obligation to Bid and LPN ?s Option for Its Share of Proceeds 52. In consideration for Subsidy Payments, the District made several promises about its participation in the upcoming Auction to protect investment. 53. The District promised that KCSM would ?participate in the Auction.? (Put/Call Option Agreement (5 10b.) The District was to designate ?up to three individuals who shall serve as the District?s authorized bidders during the Auction? and who are ?authorized to place bids on behalf of the District during the Auction.? (Bid Management Agreement 2.6.3, as amended.) 54. The District committed in all three Agreements to take all the necessary actions to relinquish broadcast spectrum usage rights in the Auction: the Funding Agreement required the District to ?take all actions necessary to cause the spectrum usage rights associated with the FCC License to be relinquished in the Auction? (ii) the Bid Management 1 0 COMPLAINT Agreement bound the District to ?[t]ake all such other actions as may be reasonably required or as LPN, acting in its capacity of bidding consultant and agent, may request in order for the District to successfully participate in the Auction and relinquish the spectrum usage rights associated with the License at a price that is at or above the [$3,000,000] Minimum Bid Amount? and the Put/Call Option Agreement bound the District to perform its obligations under the other Agreements 55. The District granted LPN an option ?to receive the LPN Share of the proceeds derived from the relinquishment of the Station?s spectrum usage rights in connection with the Auction? (the ?Auction Option?). (Put/Call Option Agreement 56. In addition to the District?s af?rmative obligations to participate in the Auction, the District promised not to do anything to jeopardize the Auction Option: the District committed to ?take no action that could reasonably be expected to impede, interfere with, delay, postpone or materially adversely affect the transactions contemplated by this [Put/Call Option] Agreement or the likelihood of such transactions being consummated.? (Put/Call Option Agreement {3 10.d.) LPN ?s Contractual Reimbursement Right 57. The Funding Agreement requires the District to reimburse Subsidy Payments upon a ?Triggering Event,? including any ?default in the performance of or compliance with any term? in the Agreements. 58. Upon such an event that results in a Material Adverse Effect, LPN has ?sole discretion? to ?declare all or any portion of the Subsidy Payments . . . immediately due and II payable,? and the District shall deliver the amount due in ?same day funds, free of any restriction or condition, . . . to LPN not later than noon San Francisco time on the date due in the LPN Accoun 9.1 9.2.3.) 59. The District also agreed to return payments with interest at 8% annually in the event of the District?s willful breach of any Agreement. (Funding Agreement 9.1.) The FCC Adopts Rules for the Auction and Simpli?es Auction Participation 60. The Auction, as described by the FCC, would consist of ?two separate but interdependent auctions?a reverse auction, which will determine the price at which broadcasters ll COMPLAINT will voluntarily relinquish their spectrum usage rights; and a forward auction, which will determine the price companies are willing to pay for ?exible use wireless licenses.?8 The FCC would stand in the middle, establishing the supply of spectrum usage rights in the reverse auction by making offers to broadcasters willing to relinquish them, as well as the demand for spectrum in the forward auction by soliciting bids for new wireless licenses from wireless providers. 61. As the FCC described, the reverse auction and the forward auction must ?work together. Ultimately, the reverse auction requires information about how much bidders are willing to pay for spectrum licenses in the forward auction; and the forward auction requires information regarding what spectrum rights were tendered in the reverse auction.?9 62. The role was to manage the market for the spectrum licenses ?to allow market forces to determine the highest and best use of 63. Throughout its development of bidding procedures for the Auction, the FCC sought to facilitate broadcaster participation by simplifying the bidding process for bidders. The FCC published an order establishing the Auction design framework, followed by a detailed public notice explaining all bidding and application procedures. And it conducted numerous educational efforts (such as outreach meetings, webinars, and tutorials) and published a Incentive Auction Reverse Auction Bidding System User Guide? User Guide?)12 speci?cally for participating stations. 8 Federal Communications Commission, How It Works: The Incentive Auction Explained, 3: fcc. (last visited March 28, 2017). 9.1d For an explanation of the operation of forward and reverse auctions, see Federal Communications Commission, Incentive Auction Rules Option and Discussion, at :l/wireless.fcc. ov/incentiveauctions/learn- e-o don/introduction. (last visited March 28, 2017). COMMUNICATIONS COMMISSION, FCC 15- 78, PUBLIC NOTICE: PROCEDURES FOR COMPETITIVE BIDDING IN AUCTION 1000, INCLUDING INITIAL CLEARING TARGET DETERMINATION, QUALIFYING TO BID, AND BIDDING IN AUCTIONS 1001 (REVERSE) AND 1002 (FORWARD) (2015), available at hgps: ?apps. fcc. gov/edocs public/attachmatch/FCC- 15- 78A1 Red. 2df at 3. ?See FEDERAL COMMUNICATIONS COMMISSION, FCC 14- 50, IN THE MATTER OF EXPANDING THE ECONOMIC AND INNOVATION OPPORTUNITIES OF SPECTRUM THROUGH INCENTIVE AUCTIONS REPORT AND ORDER (2014), available at ht_t2s: l/a223. fcc. gov/edocs 2ublic/attachmatch/FCC? l4- 50A1.2df; see also FCC 15? 78. Available at h;t_tp_s gov/?le/3797/download 12 COMPLAINT Nn?In?ni?n?In?II?I?nmn?In?A 64. Before each round of the Auction, the FCC would inform each bidder whether its station would be in ?bidding? status whether it would be able to submit a bid in that round). For bidders such as the District that offered to fully relinquish their spectrum, the choice in bidding status was either to accept or reject the price offered by the FCC. The FCC stated that a bidder such as the District ?that has or is interested in only a single bid Option will have a simple choice: whether to accept the lower clock price offered for its station?s currently held option or to reject that offer and drop out of the 65. If a broadcaster were to enter a bid accepting the price, the FCC would determinewhether to declare that bid a ?provisionally winning? bid or to offer a lower price in a subsequent round.? 66. Once all stations had either dropped out or been declared ?provisionally winning,? wireless providers would bid for the offered spectrum in a forward auction stage. The Auction would end (and ?provisionally winning? bidders would be named winning bidders) when forward-auction prices in the largest markets met FCC benchmarks and total forward-auction revenues covered the winning reverse?auction bids, (ii) the cost to reimburse stations assigned new channels as a result of the Auction for their reasonably incurred relocation expenses, and the administrative costs. 67. If those criteria were not met at the end of a stage, the FCC would conduct another stage of the Auction at a lower spectrum?clearing target, resulting in a lower price offered to participating stations. The Auction was expected to have multiple stages, each containing dozens of bidding rounds lasting over several months- The District and LPN Prepare for the Auction to Ensure the District?s Successful Participation 68. The District ?led an application? with the FCC to participate in the Auction on ?3 FCC 15-78 at 60. The FCC could also determine that the broadcaster was not needed, and remove it from the Auction. '5 As a broadcaster, the District applied to participate in the ?reverse auction? portion of the Auction. 1 3 COMPLAINT January 6, 2016, selecting ?Go Off-Air? as its sole bidding option.? 69. The District designated its employees Ms. Roecks, Eugene Whitlock, and Executive Vice Chancellor Kathy Blackwood to act as its ?authorized bidders.? Under the procedures, only these three au?iorized bidders would receive and be authorized to use an electronic code key (a ?SecurID token?) from the FCC, which was necessary to ?place bids for the applicant during the auction?? 70. Even before the application was ?led, the District?s authorized bidders held meetings with LPN to begin preparing for the Auction, consistent with agreement to ?[t]rain and supervise the qualified personnel that the District appoints to act as its authorized bidders in the Auction to assure their satisfactory performance of the duties associated with authorized bidders in the Auction.? 71. These meetings were vital because the consequences of not submitting a bid were enormous?as the FCC repeatedly warned, a missing bid would be deemed a bid to drOp out of the Auction, precluding any future bidding in any future stage or round. This warning was included in of?cial documents adopted by the FCC, in the RABS User Guide, in materials provided in connection with the FCC Mock Auction documents, and in other education materials disseminated before the Auction. 72. To ensure that bidders could deal with contingencies and avoid an unintentional failure to submit a bid, the FCC also implemented backup mechanisms, such as permitting applicants to identify ?up to three authorized bidders who are authorized to place bids for the applicant in the auction?; and (ii) installing a telephonic backup bidding system if a bidder were to experience technical problems with its computer or with the online Auction bidding system. '6 Bidders with a station in the UHF television band also could preserve the option to bid to move t? the VHF band. In its agreements with LPN, the District forswore that option. FEDERAL COMMUNICATIONS COMMISSION, DA 15-1252, INSTRUCTIONS FOR FCC FORM 177 APPLICATION TO PARTICIPATE IN THE REVERSE AUCTION (AUCTION 1001) (2015) available at .pdf at 7. The FCC also Speci?ed that ?[t]he username and the RSA token Should be used only by the authorized bidder to which it was assigned.? (RABS User Guide at 7.) 14 COMPLAINT 73. The District?s three authorized bidders met with an LPN representative in December 2015 to begin their Auction preparation. Joining them at this meeting were representatives from PricewaterhouseCoopers which LPN had engaged at its expense to consult with the District because an FCC rule, scheduled to take effect in January 2016, established a ?Quiet Period? prohibiting communications between the District and LPN during the Auction about the District?s bids or bidding strategy."3 74. In amending the Bid Management Agreement on December 8, 2015, the District agreed to ?consult in every round during the Auction with but acknowledged that was ?not assuming any additional duties or obligations directly to the District.? 75. Chancellor Galatolo and two of the District?s authorized bidders attended another meeting with an LPN representative in December 2015. 76. At request, one of the District?s authorized bidders Signed a Con?dential Bidding Plan for KCSM for Incentive Auction on January 11, 2016. The plan required that I ?Authorized Bidders will complete and sign a Bid Submission Con?rmation sheet, located in a secured Auction Playbook, following the submission of the bid for each Licensee in each round of the Auction.? 77. requested that the District?s authorized bidder also generate a Bid Summary from the Auction website that con?rmed the time and amount of the bid. 78. The District submitted a commitment to accept the Opening price offer for the relinquishment of the KCSM spectrum usage rights on March 29, 2016. 79. The District participated with in the May 2016 mock auction. The District?s three authorized bidders practiced the bidding process and followed the procedures to which the District had agreed. ?8 The FCC issued this regulation, 47 CPR. 1.2205, on August 15, 2014, and released guidance on October 6, 2015, regarding prohibited communications during the ?Quiet Period? covering the time of the Auction. See FEDERAL COMMUNICATIONS COMMISSION PUBLIC NOTICE, DA 15-1129, GUIDANCE REGARDING THE PROHIBITION OF CERTAIN COMMUNICATIONS DURING THE INCENTIVE AUCTION, AUCTION 1000 (2015), available at public/attachmatch/DA- 15-1129A1pdf 15 COMPLAINT g?gagmbowoxoeo-QGMAwwh-c The District Fails to Enter a Bid and Is Dropped from the Auction 80. Bidding in the Auction began on May 31, 2016. Following the strategy and procedures to which the District had agreed, one of the District?s authorized bidders, Ms. Roecks, placed a bid on the District?s behalf to accept the opening price offer of $353,887,920. 81. Over-the three stages of the auction, until November 14, 2016, an authorized District bidder logged into the FCC Reverse Auction Bidding System for 52 rounds in which a bid was potentially required. 82. While any of the District?s three authorized bidders could have executed the bidding function on the District?s behalf, Ms. Roecks performed this role in 46 of those 52 rounds. And she successfully placed bids on the District?s behalf in 17 rounds in which a bid submission was required. 83. After doing so, her general practice?consistent with the agreed procedures?~was to sign the Bid Submission Con?rmation Sheets and generate Bid Summaries from the FCC Auction website con?rming the District?s bids in rounds that required a bid. 84. As the Auction progressed, however, the District?s bidders strayed from the agreed procedures. For example, on September 2, 2016 (Stage 2, Round 12) and November 10, 2016 . (Stage 3, Round 18), the District?s authorized bidder failed to sign the Bid Submission Con?rmation Sheets. 85. Stage 3, Round 23 of the Auction occurred on November 15, 2016. The bidding window for that round was open between 7:00 am. and 8:00 am PST. 86. Ms. Roecks, the only District authorized bidder who was present for the bidding, did not submit a bid on the District?s behalf in Stage 3, Round 23. 87. Ms. Roecks stated that she did not ?think to actively submit a bid? and did not click the ?bid? button ?which we had done for all active rounds since May.? 88. Nor did Ms. Roecks follow her admitted ?normal activity? in generating a Bid Summary con?rmation from the FCC Auction website, as had requested. 89. Ms. Roecks signed a Bid Submission Con?rmation Sheet stating that she had ?submitted the bid according to bid strategy? at ?7:12 AM for Stage 3, Round 23, in the 6 COMPLAINT amount of $1 14,494,613. 90. Thus, the District not only failed to submit a bid, but also failed to follow its normal procedure of generating a con?rmation directly from the FCC Auction website, (ii) falsely certi?ed that it had submitted a bid despite not obtaining that con?rmation, and failed to verify whether it had submitted a bid during the remaining approximately 48 minutes that Round 23 bidding remained open. 91. When Ms. Roecks logged into the FCC Auction website for the next round approximately three hours later, she learned that the District had been dropped from the Auction due to its failure to submit a bid in the prior round. 92. The FCC informed the District?as it had repeatedly warned?that ?the auction is automated, is not built to reinstate bidders for any reason, and there was no way to get back into the auction regardless of the reason.? 93. Ms. Roecks informed Chancellor Galatolo of the failure to bid. At his request, Ms. Roecks and both documented the events of the day and closed down the bidding for KCSM as it was no longer allowed to participate in the Auction. The District Falsely Certifies Its Performance in Order to Continue Receiving Quarterly Subsidy Payments from LPN 94. The District did not inform LPN that it had failed to submit a bid and had consequently been dropped from the Auction. 95. Despite its known failure to bid, the District certi?ed on December 16, 2016, that event has occurred . . . that would constitute a Triggering Event? and the District had ?performed in all material respects all agreements? with LPN. The District?s failure to submit a bid was a ?Triggering Event? under the Funding Agreement because it was a ?default in the performance of or compliance with? the Agreements. 96. The District?s false certi?cation enabled it to continue receiving quarterly Subsidy Payments from LPN, which LPN had no obligation to make unless (among other things) the District had performed its contractual obligations and no Triggering Events had occurred. 97. In reliance on the District?s false certi?cation, LPN made its next quarterly 7 COMPLAINT r?Iu?Ir?tp?In?Ir?Ir?nn?sr?nr?s ?388?88_8emanAuN?e Subsidy Payment of $225,000 to the District on December 20, 2016. 98. The District could have taken action to avoid inducing LPN to make a payment on the basis of a false certi?cation, or to return the funds as soon as possible. For example, the District could have declined to sign the December 16, 2016 certi?cate it knew was false. Or it could have segregated December 20 payment. 99. And even if the District had legitimate concerns about communicating with LPN during the Quiet Period, it did not alert LPN about its false certi?cation (and the Subsidy Payment it induced) even after the Quiet Period ended on February 6, 2017, when the District had the opportunity to correct the record during a February 8, 2017 call with LPN. 100. Instead, the District deposited money and stayed silent. 101. Under Funding Agreement 9.1 LPN noti?ed the District on February 21, 2017, that the $3,375,000 in Subsidy Payments that LPN had paid to date were ?immediately due and payable.? 102. As of the date of this Complaint, the District has kept all $3,375,000 of ?mds. FIRST CAUSE OF ACTION Breach of Contract Under California Civil Code 3300 et seq. (Funding Agreement 6.9) 103. LPN hereby incorporates the preceding paragraphs 1 through 102 of this I Complaint by reference as if set forth here again in ?ll. 104. The Funding Agreement (amended December 17, 2015) is a valid and enforceable written agreement between the District and LPN. 105. LPN has fully performed its duties under the Funding Agreement. 106. Funding Agreement 6.9 required the District to ?take all actions necessary to cause the spectrum usage rights associated with the FCC License to be relinquished in the Auction (as such term is de?ned in the Option Agreement), subject to the terms set forth in the Bid Management Agreement.? 107. Entering a bid in the Auction, which only the District?s authorized bidders were 1 8 COMPLAINT authorized to do, was ?necessary to cause the spectrum usage rights associated with the FCC License to be relinquished in the Auction.? 108. As detailed above, the District willfully failed to enter a bid in Stage 3, Round 23 of the Auction on November 15, 2016, which resulted in the District being dropped from the Auction. 109. The Auction Option was consideration for Funding Agreement obligations. (Funding Agreement at 1.) As a direct and proximate result of the District?s breach, the Auction Option became worthless. LPN therefore suffered damages in the amount of 36.5% of the Auction proceeds to which it would have been entitled by the Auction Option, and which would have resulted from the relinquishment of spectrum if the District had performed its obligations under the Funding Agreement. 1 10. LPN is entitled to recover from the District the damages sustained by LPN as a result of the District?s wrong?il acts described in this Complaint. The amount of such damages will be proven at trial. SECOND CAUSE OF ACTION Breach of Contract Under California Civil Code 3300 et seq. (Bid Management Agreement 2.6.5) 1 11. LPN hereby incorporates the preceding paragraphs 1 through 110 of this Complaint by reference as if set forth here again in ?ill. 112. The Bid Management Agreement (amended December 8, 2015) is a valid and enforceable written agreement between the District and LPN. 113. LPN has fully performed its duties under the Bid Management Agreement. 114. Bid Management Agreement 2.6.5 required the District to ?[t]ake all such other actions as may be reasonably required . . . in order for the District to successfully participate in the Auction and relinquish the spectrum usage rights associated with the License at a price that is at or above the [$3,000,000] Minimum Bid Amount.? 115. Entering a bid in the Auction, which only the District?s authorized bidders were authorized to do, was ?reasonably required . . . for the District to successfully participate in the 19 COMPLAINT NNu?IH?au?m?or?Iu?nu?sr?n Auction and relinquish the spectrum usage rights associated with the License.? 116. As detailed above, the District failed to enter a bid in Stage 3, Round 23 of the Auction on November 15, 2016, when the offer was above the Minimum Bid Amount. 1' The District?s failure to bid resulted in the District being dropped from the Auction. 117. The Bid Management Agreement, the Put/Call Option Agreement, and the Funding Agreement together formed the entire agreement between LPN and the District. (Bid Management Agreement 8.6.) As a direct and proximate result of the District?s breach, the Auction Option became worthless. LPN therefore suffered damages in the amount of 36.5% of the Auction proceeds to which it would have been entitled by the Auction Option, and which would have resulted from the relinquishment of spectrum if the District had performed its obligations under the Bid Management Agreement. 118. LPN is entitled to recover ?om the District the damages sustained by LPN as a result of the District?s wrongful acts described in this Complaint. The amount of such damages will be proven at trial. Breach of Contract Under California Civil Code 3300 et seq. (Bid Management Agreement 2.6.5) 119. LPN hereby incorporates the preceding paragraphs 1 through 118 of this Complaint by reference as if set forth here again in full. 120. The Bid Management Agreement (amended December 8, 2015) is a valid and enforceable written agreement between the District and LPN. 121. LPN has fully performed its duties under the Bid Management Agreement. 122. Bid Management Agreement 2.6.5 required the District to ?[t]ake all such other actions . . . as LPN, acting in its capacity as bidding consultant and agent, may request in order associated with the License at a price that is at or above the [$3,000,000] Minimum Bid Amount.? 123. In the Con?dential Bidding Plan for KCSM for Incentive Auction, to which the District agreed on January 11, 2016, LPN requested that the District?s authorized bidders 20 ll COMPLAINT for the District to successfully participate in the Auction and relinquish the spectrum usage rights a?nu?no?Imr-nn?Iu?In?I? ?complete and sign a Bid Submission Con?rmation sheet, located in a secured Auction Playbook, following the submission of the bid for each Licensee in each round of the Auction.? By virtue of Bid Management Agreement 2.6.5, the District was contractually bound to perform this obligation. 124. The District breached this obligation because, as detailed above, Ms. Roecks signed a false Bid Submission Con?rmation Sheet stating that she had ?submitted the bid according to bid strategy? at ?7:12 AM for Stage 3, Round 23, in the amount of $1 14,494,613. 125. As a direct and proximate result of the District?s breach, the District was dropped from the Auction, and Auction Option therefore became worthless. LPN therefore suffered damages in the amount of 56.5% of the Auction proceeds to which it would have been entitled by the Auction Option, and which would have resulted ?'orn the relinquishment of spectrum if the District had performed its obligations under the Bid Management Agreement. 126. LPN is entitled to recover ?'om the District the damages sustained by LPN as a result of the District?s wrongful acts described in this Complaint. The amount of such damages will be proven at trial. FOURTH CAUSE OF ACTION Breach of Contract Under California Civil Code 3300 et seq. (Bid Management Agreement 2.6.5, Amendment Attachment A: Letter of Authorization) 127. LPN hereby incorporates the preceding paragraphs 1 through 126 of this Complaint by reference as if set forth here again in full. 128. The Bid Management Agreement (amended December 8, 2015) is a valid and enforceable written agreement between the District and LPN. 12.9. LPN has ?rlly performed its duties under the Bid Management Agreement. 130. Attachment A to the Amendment to the Bid Management Agreement was a Letter of Authorization that required the District to ?cooperate with in accordance with Section 2.6 of the Agreement as it performs its engagement by LPN to help ensure compliance with the 2 COMPLAINT rules pertaining to the Auction under the Agreement.? 131. Bid Management Agreement 26.5 required the District to ?[t]ake all such other actions . . . as LPN, acting in its capacity as bidding consultant and agent, may request in order for the District to successfully participate in the Auction and relinquish the spectrum usage rights associated with the License at a price that is at or above the [$3,000,000] Minimum Bid Amount.? 132. As detailed above, the District breached (5 2.6.5 of the Bid Management Agreement (as amended) by, among other things, failing to generate a con?rmation directly from the FCC Auction website in Stage 3, Round 23 of the Auction on November 15, 2016, as requested by 10 5 133. As a direct and proximate result of the District?s breach, the District was dropped 11 from the Auction, and Auction Option therefore became worthless. LPN therefore 12 1 suffered damages in the amount of 36.5% of the Auction proceeds to which it would have been 13 i entitled by the Auction Option, and which would have resulted from the relinquishment of 14 spectrum if the District had performed its obligations under the Put/Call Option 15 Agreement. 16, 134. LPN is entitled to recover from the District the damages sustained by LPN as a 17. result of the District?s wrongful acts described in this Complaint. The amount of such damages 18 will beproven at trial. 19' FIFTH CAUSE or ACTION 20! Breach of Contract Under California Civil Code 3300 et seq. 21: (PutICall Option Agreement 10.d.) 22 135. LPN hereby incorporates the preceding paragraphs 1 through 134 of this 23 Complaint by reference as if set forth here again in full. 24 136. The Put/Call Option Agreement (amended December 17, 2015) is a valid and 25 enforceable written agreement between the District and LPN. 26 137. LPN has fully performed its duties under the Put/Call Option Agreement. 27 138. Put/Call Option Agreement 10.d. obligated the District to ?take no action that 28 could reasonably be expected to impede, interfere with, delay, postpone or materially adversely 22 COMPLAINT affect the transactions contemplated by this Agreement or the likelihood of such transactions being consummated.? 139. As detailed above, the District breached 10.d. by, among other things, failing to bid in Stage 3, Round 23 of the Auction on November 15, 2016, which resulted in the District being dropped from the Auction; (ii) failing to follow its normal procedure of generating a con?rmation directly from the FCC Auction website; certifying that it had submitted a bid despite not obtaining that con?rmation, and (iv) failing to verify whether it had submitted a bid during the remaining time that Round 23 bidding remained open. 140. The District?s conduct could have reasonably been ?expected to impede, interfere with, delay, postpone or materially adversely affect the? Auction Option. 14]. As a direct and proximate result of the District?s breach, the Auction Option became worthless. LPN therefore suffered damages in the amount of 36.5% of the Auction proceeds to which it would have been entitled by the Auction Option, and which would have resulted from the relinquishment of spectrum if the District had performed its obligations under the Put/Call Option Agreement. 142. LPN is entitled to recover ?'om the District the damages sustained by LPN as a result of the District?s wrongful acts described in this Complaint. The amount of such damages will be proven at trial. SIXTH CAUSE OF ACTION Breach of Contract Under California Civil Code 3300 et seq. (Put/Call Option Agreement 10.b.) 143. LPN hereby incorporates the preceding paragraphs 1 through 142 of this Complaint by reference as if set forth here again in full. 144. The Puthall Option Agreement (amended December 17, 2015) is a valid and enforceable written agreement between the District and LPN. 145. LPN has fully performed its duties under the Put/Call Option Agreement. 146. Put/Call Option Agreement 10.b. required the District to perform its obligations under the Funding Agreement and the Bid Management Agreement. 23 COMPLAINT 147. As described above in the ?ve Causes of Action of this Complaint, the District breached its obligations under the Funding Agreement and the Bid Management Agreement, thereby breaching Nb of the Put/Call Option Agreement. 148. As a direct and proximate result of the District?s breach, the Auction Option became worthless. LPN therefore suffered damages in the amount of 36.5% of the Auction proceeds to which it would have been entitled by the Auction Option, and which would have resulted from the relinquishment of spectrum if the District had performed its obligations under the Put/Call Option Agreement. 149. LPN is entitled to recover from the District the damages sustained by LPN as a result of the District?s wrong?il acts described in this Complaint. The amount of such damages will be proven at trial. SEVENTH CAUSE OF ACTION Breach of Contract Under California Civil Code 3300 et seq. (Funding Agreement 6.9) 150. LPN hereby incorporates the preceding paragraphs 1 through 149 of this Complaint by reference as if set forth here again in full. 151. The Funding Agreement (amended December 17, 2015) is a valid and enforceable written agreement between the District and LPN. 152. LPN has ?illy performed its duties under the Funding Agreement. 153. Funding Agreement 6.9 required the District to ?perform all of its obligations under the terms of? the Bid Management Agreement and the Put/Call Option Agreement. 154. As described above in the six Causes of Action of this Complaint, the District breached its obligations under the Bid Management Agreement and the Put/Call Option Agreement, thereby breaching 6.9 of the Funding Agreement. 155. As a direct and proximate result of the District?s breach, the Auction Option became worthless. LPN therefore suffered damages in the amount of 36.5% of the Auction proceeds to which it would have been entitled by the Auction Option, and which would have resulted from the relinquishment of spectrum if the District had performed its 24 COMPLAINT obligations under the Funding Agreement. EIGHTH CAUSE OF ACTION Breach of Contract Under California Civil Code 3300 et seq. (Reimbursement under Funding Agreement 9.1-9.2) 156. LPN hereby incorporates the preceding paragraphs 1 through 155 of this Complaint by reference as if set forth here again in full. 157. The Funding Agreement (amended December 17, 2015) is a valid and enforceable written agreement between the District and LPN. 158. LPN has ?illy performed its duties under the Funding Agreement. 159. The Funding Agreement obligates the District to reimburse Subsidy Payments upon a ?Triggering Event,? which includes any ?default in the performance of or compliance with any term contained in this [Funding] Agreement . . . or the [Put/Call] Option Agreement or the Bid Management Agreement? that ?result[s] in a Material Adverse Effect.? Under Funding Agreement 1.1, Material Adverse Effects include ?the impairment of the ability of [the District] to perform, or of LPN to enforce, the Reimbursement Obligations or any other material obligations under any? of the Agreements. 160. As described above in the seven Causes of Action, the District defaulted in the performance of the Funding Agreement, the Put/Call Option Agreement, and the Bid Management Agreement. 161. These defaults resulted in a Material Adverse Effect because they resulted in the District being dropped from the Auction, which impaired the District?s ability to perform its obligations under the Agreements, such as its obligations to ?participate in the Auction? (Put/Call Option Agreement 10b) and to ?take all actions necessary to cause the spectrum usage rights associated with the FCC License to be relinquished in the Auction? (Funding Agreement 6.9). 162. Thus, the defaults described above in the seven Causes of Action constitute Triggering Events. 163. A Triggering Event also occurs when ?[a]ny representation, warranty, certi?cation or other statement made by [the District] shall be false in any material respect on the date as of 25 COMPLAINT which made? and results in a Material Adverse Effect. (Funding Agreement 164. As described above, the District?s December 16, 2016 certi?cation was false when made. The District certi?ed that event has occurred . . . that would constitute a Triggering Event? and the District had ?performed in all material respects all agreements? with LPN, despite knowing that it had failed to enter a bid on November 15, 2016, which constituted a breach of the Agreements resulting in a Material Adverse Effect, thus rendering the breaches Triggering Events. 165. The District?s false certi?cation also breached the District?s warranty in Funding Agreement 4.13 that representation or warranty of [the District] contained in any . . . certi?cate or written statement furnished to LPN by or on behalf of [the District] . . . contains any untrue statement of a material fact.? 166. The false certi?cation resulted in a Material Adverse Effect because it prevented LPN from enforcing the District?s reimbursement obligations under Funding Agreement 9.1 9.2. 167. In light of the Triggering Events described in paragraphs 160?166 that resulted in a Material Adverse Effect, LPN had ?sole discretion? to ?declare all or any portion of the Subsidy Payments made on or prior to [the Triggering Event] date . . . immediately due and payable,? requiring the District to deliver the amount due in ?same day funds, free of any restriction or condition, . . . to LPN not later than noon San Francisco time on the date due in the LPN Account.? 9.1 9.2.8.) 168. Under Funding Agreement 9.1, LPN noti?ed the District on February 21, 2017, that the $3,375,000 in Subsidy Payments that LPN had paid as of that date were ?immediately due and payable.? Because the breaches described above in the seven Causes of Action and the Triggering Events described in paragraphs 160-166 were will?il, the District must return the $3,375,000 with interest at an 8% annual rate. (Funding Agreement 9.1.) - 169. The District has not paid LPN any portion of the $3,375,000 or the 8% interest thereon. 170. The District has therefore breached and continues to breach its Funding Agreement 26 COMPLAINT ?e obligation to reimburse $3,375,000 in Subsidy Payments plus interest. 17]. As a direct result of the District?s continuing breach, LPN has suffered damages in the amount of $3,375,000 plus interest accruing at an 8% annual rate. NINTH CAUSE OF ACTION Attorneys? Fees Under the Funding Agreement 172. LPN hereby incorporates the preceding paragraphs 1 through 171 of this Complaint by reference as if set forth here again in 173. The Funding Agreement is a valid and enforceable written agreement between the District and LPN. 174. LPN has fully performed its duties under the Funding Agreement. 175. Section 10.2 of the Funding Agreement allows the prevailing party to recover its reasonable attomeys? fees and costs in any litigation arising out of the Funding Agreement: If either party to this Agreement shall bring any action for relief against the other, declaratory or otherwise, arising out of this Agreement, the losing party shall pay to the prevailing party reasonable attorneys? fees and costs incurred in bringing such suit and/or enforcing any judgment granted therein. Any judgment or order entered in such action shall contain a speci?c provision providing for the recovery of attorneys? fees and costs incurred in enforcing such judgment. 176. This action arises out of the Funding Agreement. Thus, the prevailing party is entitled to recover its reasonable attorneys? fees and expenses incurred in bringing this action and enforcing any judgment. PRESENTATION OF CLAIMS 177. The ?rst breach of contract described in this Complaint occurred on November 15, 2016, three months and six days before LPN presented its claims to the District. 178. LPN presented its claims to the District in compliance with Cal. Gov. Code 910. 179. Speci?cally, the claims were delivered by hand and sent by certi?ed mail from San Francisco, Califomia, to the District?s Chancellor?s Of?ce and the District?s Board of Trustees on February 21, 2017. On the same date, the claims were sent by e?mail to Chancellor Galatolo, Mr. Whitlock, and the members of the District Board of Trustees. 180. The claims included notice that LPN declared the Subsidy Payments made to date 27 COMPLAINT 1 immediately due and payable because a Triggering Event had occurred, which terminated 2 obligation to make further payments under the Funding Agreement. 3 181. The District did not provide a notice of insuf?ciency under Cal. Gov. Code 4 910.8 within 20 days after the claims were presented. 5 182. The District did not respond to claims by April 6, 2017. The District?s 6 Board is therefore deemed to have rejected claims under Cal. Gov. Code 7 8 Plaintiff LPN demands a jury trial in this actiOn. 9 PRAYER FOR RELIEF 10 LPN prays for judgment against the District, as follows: 1 1 a. For compensatory damages in a sum to be determined at trial; 12 b. Directing the District to pay attorneys? fees and costs incurred in bringing 13 this action, in an amount to be determined upon an offer of proof to the Court, and 14 granting LPN leave of the Court to offer a report constituting such proof to the 15 Court; 16 c. For prejudgment interest; and 17 d. For such other and timber relief as the court may deem proper. 18 19 DATED: April 10, 2017 Tadahiro Kaburaki (3.3. #311823) B. Andrew Bednark (pro hac vice forthcoming) 20 MYERS LLP 21 22 ca 23 2 Tadahiro Kaburaki 24 25 Attorneys for LocusPoint Networks, LLC and LocusPoint II KCSMCOMPLAINT