March 14, 2023

Is Universal Service at Risk?

4 min

March 29, 2023 Update:

To follow up on our post about Consumers' Research. v. FCC and its threat to the Universal Service Fund (USF): The Fifth Circuit on Friday upheld the program, ruling that its funding mechanism and administration do not violate the non-delegation doctrine, and that Congress had indeed provided the FCC with sufficient "intelligible principles" to guide its and Universal Service Administrative Company's (USAC) administration of the USF. Key to the decision is the panel's finding that the authorizing statute "expressly requires" the FCC to ensure certain sufficiently concrete principles, including that telecom services are of decent quality and reasonably priced, and that they are equally available in rural and urban areas. The panel further held that any imprecise language in the statute just reflects congressional acknowledgment that telecommunications services are "constantly evolving," and "that understanding also drove Congress to implement a unique revenue raising mechanism for the USF. That the mechanism is unique is not in itself a nondelegation violation—especially where Congress has placed identifiable limits on what USF distributions can fund."

We note that similar suits challenging the USF on the same ground and involving the same plaintiff remain pending in the Sixth and Eleventh Circuits, which if held differently could lead the cases to the Supreme Court, so this issue is not necessarily dead.

In Consumers' Research v. FCC, the Universal Service Fund (USF) is under legal and constitutional attack in the Fifth Circuit. A decision striking the USF would have wide-ranging impacts on the telecommunications industry and the various beneficiaries, such as consumers in high-cost areas, low-income households, schools, libraries, and rural healthcare providers. That outcome, while unlikely, is still possible.

The case involves the core funding mechanisms for the FCC's Universal Service Fund. The challengers argue that Section 254 of the Communications Act, the statute governing the USF, unconstitutionally delegates legislative and/or taxing authority to the FCC. They also attack the Universal Service Administrative Company (USAC), arguing that the FCC's use of USAC to administer the fund is an impermissible delegation of regulatory authority to a private entity.

Some background: The USF is a fund administered by USAC, a nonprofit entity, under the direction of the FCC. Telecommunications providers contribute to the USF based on an assessment of their interstate and international end-user revenues, which is then subjected to a contribution factor to determine how much is owed. Billions are then distributed through USAC to other entities through various programs, such as carriers serving high-cost areas, low-income households, schools, libraries, and rural healthcare providers. If the court were to side with the challengers, revenues for the USF program would drop to zero, and there would be no money to distribute.

In the case, the challengers are asking the Fifth Circuit to vacate the first quarter 2022 USF contribution factor, arguing that the USF contribution system is unconstitutional because it involves Congress unlawfully delegating legislative and taxing authority to the FCC, and then to USAC. The challengers argue that Section 254 "place[s] no formula or meaningful limitations on the amount the FCC can raise," which fails to provide an intelligible principle bounding the program, a constitutional requirement. The challengers also contend that the system is an improper delegation of Congress's taxing power because USF contributions are taxes and not regulatory fees in that they are designed to further broad societal goals. With regard to USAC, the challengers argue that the FCC's "re-delegation" to USAC, a private entity, violates the private nondelegation doctrine by delegating to a non-government entity regulatory power over the program and its participants.

The FCC has responded by denying that there is an improper delegation in that Congress provided sufficient guidance to the agency (by requiring that "all universal service contributions be equitable and nondiscriminatory") in Section 254 to bound the program, by denying that USF contributions as a matter of fact are not taxes, and by stating that USAC only performs "fact gathering" functions by making various expense, demand, and revenue projections that are then used by the FCC to calculate the contribution factor.

The case is fully briefed and was argued on December 5, 2022. While odds are that the court will uphold the delegation and the program, the Fifth Circuit is notoriously aggressive and suspicious of agency overreach, so there is some possibility that the USF is in jeopardy.