Wheels of justice grind slowly for Mobilicity’s initial investors

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Brace yourself. We’re going back to the future.

The original investors of Mobilicity – yes, the failed wireless carrier that was gobbled up by Rogers Communications Inc. RCI-B-T – are finally seeing momentum on their $1.3-billion lawsuit against the federal government. It’s taken nearly a decade to go to trial, but the case is now being heard by an Ontario court.

Need your memory jogged about the details? No problem.

Here are the Coles Notes: The plaintiffs include U.S. private equity firm Quadrangle Group LLC and holding company Obelysk Media Inc. The latter is owned by John Bitove, a Toronto businessman and Mobilicity’s former executive chairman.

Back in 2014, when Mobilicity was under creditor protection, the plaintiffs launched a lawsuit alleging they lost “substantially all of their investment” because the Harper government, which was in power at the time, broke promises it made to persuade them to capitalize a new wireless player.

Chief among those commitments, the plaintiffs argued, was an assurance that struggling new entrants could sell their spectrum licences to established carriers Rogers, BCE Inc. BCE-T and Telus Corp. T-T after a five-year standstill period expired in 2014. (Spectrum refers to the invisible radio waves carriers use to provide cellular services.)

Instead, the government reneged on that pledge, interfered in a bidding war for Mobilicity and scuttled at least three takeover offers from Telus to the detriment of the plaintiffs, alleged their lawyer, Jonathan Lisus, in court this week.

The government’s objective, he added, was to force Mobilicity into a less lucrative deal with Rogers because it was politically advantageous for the Harper government to do so.

His reasoning? Rogers had struck a side deal to provide another new entrant carrier, Wind Mobile (now known as Freedom Mobile), with a larger number of spectrum licences as a condition of its purchase of Mobilicity. The benefits to Wind better suited the Harper government’s “political whims” because of an upcoming election, Mr. Lisus said.

Indeed, the Conservatives sent out a fundraising e-mail just hours after quashing one of Telus’s proposed offers for Mobilicity, The Globe and Mail reported at the time.

Although the Trudeau government inherited this case many moons ago, the lawsuit is a timely reminder of why it is problematic for politicians to pick winners and losers in the wireless market. It raises important questions about investors’ rights and the potential for cabinet ministers to misuse their regulatory powers for political gain.

The plaintiffs’ allegations have not been proven in court, and the government denies that it provided Mobilicity’s investors with assurances that spectrum transfers would be approved in their favour after the five-year moratorium.

The government’s lawyer, Sandy Graham, argued in court this week that “a spectrum licence is not a contract” – only “an opportunity” – and that its conditions are a function of a fluid regulatory environment.

“It is not, in our submission, a commodity or a commercial asset that can be freely traded,” Mr. Graham told Justice Peter Osborne, later adding the industry minister, who regulates spectrum transfers between carriers, has no duty to consider the financial implications of evolving spectrum rules on investors.

Trouble is, erratic rule making is an investment killer – and wireless is a capital-intensive business. Logic dictates that no investor would ever agree to finance a new entrant carrier without regulatory certainty about a viable exit strategy.

The government acknowledges the high barriers to entry that new carriers face and required inducements, including spectrum licence transferability, in declassified documents entered as evidence in this case.

In fact, it was the government that first approached Mr. Bitove in 2006 about establishing a new wireless carrier – not the other way around. That’s why the financial harm caused to investors in this case is vexing.

The government enticed Mobilicity’s investors with various promises, and it was on that basis they spent heavily to build out a new wireless network in urban areas of Ontario, British Columbia and Alberta. Their spectrum costs alone amounted to $243-million.

“The assurance was given that if you can’t make a go of it, if the incumbents were too powerful, market forces would allow the licences to be transferred after five years,” Mr. Lisus told the court.

The government, however, retroactively changed the rules governing spectrum transfers in 2013 and argued that new entrant spectrum was never meant to fall into the hands of incumbent carriers – one of many moves that harmed Mobilicity’s investors by decreasing the value of the carrier’s spectrum assets.

Through hindsight, we now know that Ottawa’s decision to favour Wind over Mobilicity failed to result in sustainable competition. Wind was later purchased by Shaw Communications Inc. and rebranded as Freedom Mobile. But Shaw, too, called it quits on wireless and sold itself to Rogers.

The Trudeau government then fixed it so that Freedom would be acquired by Quebecor Inc. QBR-B-T in a related deal – even though at least one other investor consortium, which had inked a network-sharing deal with Telus, offered a much higher price.

In doing so, the Liberals took a page out of the Harper government’s playbook. Quebecor’s expansion in other parts of Canada is a political slam dunk for the party’s future electoral prospects in Quebec.

That’s precisely why this history lesson about Mobilicity is still relevant in 2023. The government isn’t serving the public interest if it plays favourites or punishes investors who answer its call to invest.