5th Circuit Finds USF Funding Mechanism Unconstitutional in En Banc Decision

On September 9, 2024, Federal Communications Commission (FCC) Chairwoman Jessica Rosenworcel announced at an event in Washington, D.C. that the agency will be seeking Supreme Court review of a recent decision finding aspects of the FCC’s universal service program unconstitutional.

Background

This summer, the 5th Circuit Court of Appeals sitting en banc (the Court) held 9-7 that the system under which the FCC and the Universal Service Administrative Company (USAC) determine and collect funds for the Universal Service Fund (USF) is unconstitutional.

Currently, the FCC allocates USF funding to a variety of programs supporting broadband access to schools and libraries, rural health care facilities and low-income Americans, as well as funding deployment to areas where per-location costs render deployment uneconomical. USAC determines the amount of funding required for these programs and assesses a “contribution” on each provider of interstate and international telecommunications services in the U.S., which is then usually passed on to consumers through monthly bills. This funding mechanism has been challenged as an unconstitutional delegation of Congress’s taxing power, and as an unconstitutional delegation of the FCC’s authority to a private entity, USAC.

The en banc decision held that the Communications Act (the Act) granted the FCC too much discretion to set the USF contribution rates, effectively allowing the agency to both operate outside of congressional control and make major policy determinations. Additionally, the en banc court determined that the FCC’s delegation of certain functions to USAC was not expressly authorized by the Act and represented an independent unconstitutional delegation.

Analysis

The Court looked to the text of Section 254 of the Act and found “no principle at all” by which the FCC could be constrained. Section 254(d) requires funding that is “sufficient…to preserve and advance universal service,” with Section 254(b) specifying that service “should be available at…affordable rates.” As Section 254(c) defines “universal service” as “an evolving level of telecommunications services that the Commission shall establish periodically,” the Court read Section 254 as a whole to give the FCC license to collect as much money “as [the] FCC thinks is good.”

The Court found that because the term “sufficient” does not require that USF support equal the amount spent by carriers on universal service efforts, the Act does not even limit the contribution the FCC could potentially assess on carriers. Additionally, the statutory language is “aspirational” and allows the FCC to formulate other universal service principles that it finds “necessary and appropriate.” And while the Act provides that the FCC should keep services affordable through subsidies, it does not specify the degree to which prices should be reduced, leaving the FCC with far too much discretion over the size of subsidies and, accordingly, the contribution rate.

Furthermore, the Court found that the USF contribution system allowed the FCC to operate outside of congressional control. Normally, when funds are appropriated by Congress, it retains control over the agency because the agency cannot act without Congress appropriating the necessary funds. The FCC, however, can continue running the universal service programs as it sees fit, through its own funding mechanism, without the need to seek congressional appropriations for those funds.

The Court found that Congress could not have reasonably delegated these broad policy determinations to the FCC based on technical expertise, as “determining the ideal size of a welfare program involves policy judgments, not technical ones.” Arguments that Congress can delegate executive functions to executive agencies are unavailing as Section 254 delegates the power to tax, which is unquestionably legislative.

The Court also found that the FCC’s delegation to USAC of the power to determine the contribution rate that carriers and consumers must pay into the USF to be a further constitutional violation. First, USAC’s determination of the rate takes effect without any action by the FCC. The rules stipulate that the rate will be effective 14 days after the release of the public notice setting the proposed rate for the quarter, unless the FCC takes action to change it. Second, the FCC has never actually used this power to independently review the calculation and exercise its own judgment in setting the rate (except one instance in which it rounded a five-decimal rate to one with only three decimals to ensure compatibility with all carriers’ computer systems).

The Court also determined that even if the delegation from the FCC to USAC were constitutional, it was not expressly authorized by the Act, and statutory authorization would be required for any legitimate subdelegation. Section 254(b)(5) instructs the FCC to establish “mechanisms to preserve and advance universal service,” which the Court did not find to be sufficient authorization to delegate those mechanisms to a private entity. In fact, the Court read that language as express instruction that the FCC should carry out those functions, itself.

Lastly, the Court held that even if one of the delegations were constitutional—from Congress to the FCC, or from the FCC to USAC—the combination of both delegations is undoubtedly unconstitutional. The Court reasoned that separation of powers questions should be reviewed holistically, and Supreme Court precedent has held that two issues that are not independently unconstitutional can become unconstitutional when combined.

A concurring opinion filed by three judges would have gone one step further and found that each of the two delegations was unconstitutional, rather than concluding that the combination of the two delegations is unconstitutional. Another concurrence argued that the Court should have simply overturned precedent that the majority opinion needed to distinguish from this case.

Counter View—Dissents and Other Circuits

In March 2023, a three-judge panel of the same Court unanimously upheld the constitutionality of the USF funding system, finding that Congress had provided the FCC with intelligible principles to limit the FCC’s revenue raising activity, and that USAC’s determinations were ultimately reviewable by the FCC. The 6th and 11th Circuit Courts of Appeals have also upheld the constitutionality of the existing system, finding that Congress had provided intelligible principles.

In May 2023, the 6th Circuit held that Section 254 articulated seven specific principles to guide universal service policies, and four factors to determine which services are covered by the universal service policies. The Act also specifies which parties must pay the contributions, and which services may benefit from the contributions through the USF. Additionally, the 6th Circuit found that USAC was subordinate to the FCC and performs ministerial and fact-gathering functions overseen by the FCC. As such, Section 254 did not violate the non-delegation doctrine.

In December 2023, the 11th Circuit followed the same reasoning as the 5th and 6th Circuit panels, although a concurrence argued that while the Act did not provide much guidance to or restraint on the FCC, it still met the basic requirements of the intelligible-principle standard.

Two dissents were also filed in this summer’s 5th Circuit en banc case. The first largely reiterated arguments from the 2023 panel opinion finding that the text of the Act provided enough guidance to limit the FCC’s action, and that the FCC is capable of exercising control over USAC and the contribution factor, regardless of whether the FCC has actually overruled USAC’s calculations. Additionally, the first dissent took issue with the majority’s characterization of the contribution as a “tax” rather than a “fee.”

The second dissent put forward a differing interpretation of the Supreme Court precedent providing that a combination of conditions can be unconstitutional even when each might independently be constitutional. The second dissent also argued that the FCC effectively sets the contribution factor when it initially authorizes the subsidies paid by the USF, and USAC performs a ministerial function to determine the contributions required to fund the FCC’s approved outlays. The second dissent also worries that prohibiting Congress from delegating legislative power to agencies, or agencies to private entities could “leav[e] the political branches powerless to govern.”

Looking Ahead

The decision still leaves many questions for companies in the communications industry, with providers that receive funds from the USF and providers that pay contributions into the USF wondering what the future holds for their rights and obligations. However, the Court has issued a stay of its ruling, while the FCC seeks review at the Supreme Court, so there will be no immediate changes for the industry. Under the terms of the stay, the FCC has until September 30, 2024, to file its petition for certiorari at the Supreme Court.

The Supreme Court originally declined to take up petitions challenging the 6th and 11th Circuit decisions that were filed in advance of the en banc 5th Circuit decision. But the 5th Circuit’s latest ruling creates a circuit split and declares a federal law unconstitutional, which materially increases the likelihood of Supreme Court review.

Separately, there are ongoing debates in Congress and at the FCC about how to reform the universal service system, which have all been shaken up by this decision. It will be important to keep abreast of developments at the FCC, in Congress and the Supreme Court in the coming months.