Yesterday brought good and bad news to LightSquared, which still wants to get an approval from the FCC that would swamp out most GPS receivers already on the commercial market and interfere with a critical aviation system used by commercial pilots to avoid obstacles like … mountains.  The good news?  Sprint paid LightSquared $65 million, cash badly needed by LSQ to pursue the waiver needed to roll out its network.  The bad news?  Sprint paid it as a severance, ending the partnership that drove the network plan:

Hedge fund manager Philip Falcone’s LightSquared lost its main business partner, Sprint Nextel Corp , but gained $65 million from the breakup that may help its last-ditch effort to get regulatory approval to establish a high-speed wireless network.

Sprint said on Friday it would exercise its right to scuttle the $9 billion agreement that would have allowed LightSquared to use a network Sprint is building to sell its own high-speed wireless services.

Sprint had the right to back out of the deal if LightSquared failed to get regulatory approval by a deadline that was twice extended, first by a month from its original December 31 date and then to mid-March.

LSQ has continued its public-relations blitz, the only other forum still open to them, claiming that the FCC’s decision amounts to “a bait and switch by the federal government of historic scale.”  That’s a reference to the FCC’s decision to grant the temporary, limited waiver that encouraged LSQ to ramp up its development rather than simply test the devices and networking itself, which the FCC had plenty of capacity to do.  In fact, Senator Charles Grassley has spent almost a year demanding answers to that question, which the FCC and its chair Julius Genachowski refuses to answer.  Now, however, the House Energy and Commerce chair Fred Upton has requested answers to those same questions, and Upton’s committee has jurisdiction over the FCC — which means Upton can subpoena their records if needed, and slap Genachowski with a contempt charge if he continues to stonewall.

The real bait-and-switch, though, would have been on users of GPS, including commercial aviation and the military, both of which objected from the beginning to LSQ’s plans.  GPS receivers have been built for years — decades, really, including military and aviation systems — on the understanding that adjacent frequency bands would only be used for low-power satellite transmissions.  Philip Falcone and Harbinger formed LSQ from satellite communications firms they consolidated or licensed, and attempted to use their licensed frequencies to built a high-power terrestrial 4G network, with a waiver from the FCC to allow them to use the frequencies despite the power restrictions on that spectrum.  That represented a bait-and-switch for millions of current GPS users, all of whom would have had to replace their GPS receivers, which would have worked much less effectively thanks to greatly-lowered sensitivity — sensitivity needed to receive and amplify those low-power satellite signals that allow the receivers to accurately pinpoint terrestrial locations.

The other forum still open to LSQ is the courts, of course, and it looks like LSQ is headed there.  According to this report, they have retained some very high-powered — and conservative — legal counsel: Ted Olson and Eugene Scalia.  People don’t hire Olson to avoid litigation, and Falcone can hardly afford to blow that kind of money on a whim:

When asked if LightSquared may pursue legal action against the FCC, Carlisle said the company is prepared to examine all options.

The company’s fate is critical to investors in Falcone’s Harbinger Capital Partners, which once controlled $26 billion in assets but is now down to about $4 billion.

A little more than half of Harbinger’s money is tied up in LightSquared. The hedge fund is the company’s single largest equity investor.

They don’t have a prayer in court of overturning the FCC denial of the waiver, thanks to the terms of the waiver itself.  LSQ had to show that their network didn’t interfere with GPS systems for the waiver to be granted permanently.  At least two rounds of testing by government agencies showed that LSQ substantially interfered with most current uses for GPS, and that it was so bad that mere mitigation wouldn’t solve the problem.  If LSQ goes to court, it will be to sue over the lost investment resulting from the waiver grant, and the plaintiffs will oddly find themselves on the same side as Grassley and Upton — challenging the FCC to explain why they didn’t just test the system themselves rather than have a year and many millions of dollars wasted on an obviously insurmountable problem.

Stay tuned.