FCC’s Universal Service Fund Found Unconstitutional by Fifth Circuit

On July 24, 2024, an en banc panel of the U.S. Court of Appeals for the Fifth Circuit released a decision in Consumers’ Research et al. v. FCC holding that the Federal Communications Commission’s Universal Service Fund (“USF”) contribution mechanism violates Article I, Section 1 of the Constitution and remanded the issue to the FCC for further proceedings.  The case stems from petitioner’s constitutional challenge of the First Quarter 2022 USF contribution amount.  The court explained that (1) USF contributions are a tax; (2) Congress may have improperly delegated the legislative power to tax to the FCC without any intelligible guiding principles; (3) the FCC, in turn, may have impermissibly delegated taxing power to private entities; and (4) even absent a definitive answer on these delegation questions, the combination of Congress’s broad delegation and the FCC’s sub-delegation to private entities “certainly amounts to a constitutional violation.”  The 9-7 decision reverses a March 2023 three-judge panel decision and creates a circuit split with the DC, Sixth, and Eleventh Circuits, which rejected similar arguments in July 2012, May 2023, December 2024, respectively.

Section 254 of the Communications Act authorizes the FCC to establish policies to advance universal telecommunications service, with a major goal of providing underserved areas, elementary and secondary schools, health care providers, and libraries with access to telecommunications services.  Under Section 254, telecommunications carriers providing interstate telecommunications services must contribute to a USF program – and those costs are generally passed through to consumers.  The FCC, however, does not administer the USF program itself.  Instead, it relies on a private company, Universal Service Administrative Company (“USAC”), to determine the contribution rates charged to telecommunications carriers. The court stated that such delegation would be lawful only if the FCC (1) retains final decision-making power, (2) actually exercises that power, and (3) exercises “pervasive surveillance and authority” over USAC.

The majority found that Congress supplied minimal guidance to the FCC with respect to how much the agency should levy to pay for the USF, raising concern under the Supreme Court’s nondelegation precedent.  But it sidestepped a definitive holding on that issue, reasoning that the unprecedented nature of the delegation combined with other factors (i.e., the manner in which the FCC sub-delegated to private entities) was enough to find Section 254 unlawful.  Specifically, while the court acknowledged that the FCC “reserves the right to set projections of demand and administrative expenses” with regard to USF contributions, the FCC lacked a documented process for checking USAC’s work, and, prior to litigation, had never made substantive revisions to USAC’s proposed contribution amount or ever reversed USAC’s projections of demand.  The court reasoned that Congress’s broad delegation of taxing power to the FCC combined with the FCC’s subdelegation of that power to a private entity, USAC, was a de facto abdication of the FCC’s responsibility to make governmental decisions, impermissibly turning a “private company into a lawmaker in its own right” and undermining accountability.

The dissent, written by Circuit Judge Carl E. Stewart and joined by Chief Judge Richman and Circuit Judges Southwick, Haynes, Graves, Higginson, and Douglas, criticized the majority’s opinion as “blur[ring] the distinction between taxes and fees,” creating an unstructured new standard to examine delegations, and overturning precedent.

Shortly after the decision was released, FCC Chairwoman Rosenworcel issued a brief statement calling the decision “misguided and wrong” and stating that the FCC will pursue all available avenues for review – likely a petition for certiorari to the Supreme Court to resolve the newly created circuit split among the Fifth, Sixth, Eleventh, and DC Circuits.  Commissioners Starks and Gomez released similar statements conveying disappointment with the decision.

For additional information on the Universal Service Fund, or your company’s obligations, please contact Pillsbury’s Communications Practice.