We just had a court decision that shook the telecom industry. In an Opinion in Case No. 22-6008 titled “On Petition For Rehearing En Banc” released on July 24, 2024, the Fifth Circuit Court of Appeals in New Orleans by a 7 to 5 vote found the Universal Service Fund (USF) unconstitutional. The Court, which is heavily Republican, called the Fund a “misbegotten” tax and sent the issue back to the FCC for further consideration. This is not the end of the story however, with three other appeals courts, including the DC Circuit, recently coming to the opposite conclusion, the issue is likely headed to the Supreme Court.
The Universal Service Fund consists of four programs: the High-Cost Program, the Lifeline Program, the E-rate Program, and the Rural Health Care Program. The High-Cost Program subsidizes the provision of voice and broadband service in rural high-cost areas. The Lifeline Program subsidizes the provision of phone service to low-income consumers. The E-Rate Program (also called the School and Libraries Fund) keeps the costs low for broadband and Wi-Fi to schools and libraries. And the Rural Health Care Program subsidizes the provision of telecommunications services to rural healthcare providers.
In its Opinion, the Fifth Circuit was brutal toward the FCC and its handling of USF. Specifically, the Court is critical of the fact that the Commission does not administer the Fund itself, but instead turns it over to the Universal Service Administrative Company (USAC), a company with members who have an incentive to keep the Fund growing.
Most prominently, though, USAC is responsible for deciding the quarterly USF contribution amount—a projection of the dollar value of demand for universal support programs and the costs of administering them. The contribution amount dictates the size of the universal service contributions levied on telecommunications carriers and, in turn, American telecommunications consumers. To set the contribution amount, USAC relies on “information from universal service program participants” to “estimate how much money will be needed each quarter to provide universal service support.”. In other words, the contribution amount ultimately derives from the universal service demand projections of private, for-profit telecommunications carriers, all of whom have “have financial incentives” to increase the size of universal service programs. (Fifth Circuit Opinion, at p. 5).
The Court claims that the Commission rubberstamps the contribution percentage determined by the “corrupted” USAC.
FCC then uses USAC’s contribution amount to impose a tax on America’s telecommunications carriers. (FCC calls this tax the USF “contribution factor”; but we call it what it is—the “USF Tax.”) The USF Tax is the percentage of end-user telecommunications revenues each carrier must contribute to USF in a particular quarter. As a practical matter, USAC sets the USF Tax—subject only to FCC’s rubber stamp. True, FCC “reserves the right to set projections of demand and administrative expenses at amounts that [it] determines will serve the public interest. But FCC never made a substantive revision to USAC’s proposed contribution amount prior to this litigation, and it does not even have a documented process for checking USAC’s work. Instead, FCC has provided that if it “take[s] no action within fourteen (14) days of the date of release of the public notice announcing [USAC’s] projections of demand and administrative expenses, the projections of demand and administrative expenses . . . shall be deemed approved by the Commission. (Id., 6-7).
The Court notes that in 1995, the USF amount was $1.37 billion. But by the end of 2021, USAC ballooned the USF to over $9 billion. It concludes that the increase was caused by self-interested USAC members determining a Fund amount that is always accepted by the FCC without review. Moreover, it asserts that there are no controls in USAC or oversight by the FCC to detect waste or fraud. The Court provides examples of this. For example, in 2004, FCC’s Inspector General affirmed that schools view the E-Rate Program as “a big candy jar” of “free money.” There are also examples of waste and fraud in the Lifeline program, noting that USAC had not even considered “the possibility that multiple carriers may claim support for the same telephone line and that households may receive more than one discount, contrary to program rules.”
Based on the problems discussed above, the Court finds the FCC’s administration of the USF unconstitutional.
Section 254 (the section of the Telecommunications Act which covers universal service) reflects a policy goal of making telecommunications services available to all Americans. It is emphatically the province of Congress to make such policy choices. But it is our judicial duty to ensure that Congress pursued its goal through lawful means. And in that regard, our brief survey of the USF’s history makes three things clear. First, Congress’s instructions are so ambiguous that it is unclear whether Americans should contribute $1.37 billion, $9 billion, or any other sum to pay for universal service. Second, private entities bear important responsibility for universal service policy choices. And third, it is impossible for an aggrieved citizen to know who bears responsibility for the USF’s serious waste and fraud problems. All three of those things implicate bedrock constitutional principles. (Id., at 10).
It is important to note that the Court’s Opinion does not immediately impact the Universal Service Fund. With various courts reaching different conclusions on the Fund’s constitutionality, the FCC is poised to appeal this Opinion to the Supreme Court and the High Court is very likely to take the case. We will follow all the twists and turns as they happen.
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