Fifth Circuit Court of Appeals Declares FCC’s Universal Service Fee Unconstitutional

On July 24, 2024, the en banc Fifth Circuit Court of Appeals issued its ruling in the Consumers’ Research v. FCC case declaring the Federal Communications Commission’s (FCC) Universal Service Fee (USF) to be unconstitutional. The court found that the structure and application of the USF, managed by the Universal Service Administrative Company (USAC), violates the nondelegation doctrine and the Appointments Clause of the U.S. Constitution. This ruling has profound implications for the telecommunications industry and the future of universal service funding.

Key Points of the Ruling

Nondelegation Doctrine:

• Core Issue: The court found that Congress violated the nondelegation doctrine by delegating legislative power to the FCC and USAC without providing an intelligible principle to guide their actions. The nondelegation doctrine requires that when Congress delegates authority, it must lay down clear and specific guidelines.
• Court’s Analysis: The court emphasized that the lack of clear guidelines left too much discretion to the FCC and USAC, allowing them to effectively create and enforce laws. This unfettered discretion disrupts the balance of powers between the legislative and executive branches of government, as the Constitution does not permit Congress to transfer its legislative responsibilities in such an open-ended manner.
• Implications: This ruling suggests that any delegation of authority from Congress must be accompanied by clear, precise instructions that limit the scope of the delegated power, ensuring that the administrative bodies act within a well-defined framework.

Appointments Clause:

• Core Issue: The court ruled that the way USAC operates violates the Appointments Clause of the U.S. Constitution. This clause mandates that significant authority can only be exercised by officers of the United States, who must be appointed in accordance with constitutional procedures.
• Court’s Analysis: USAC, a private entity, has been given substantial authority to manage and administer the USF, including making decisions about the collection and distribution of funds. The court held that this level of authority requires oversight and accountability mechanisms that are not in place. USAC’s significant decision-making power, without proper appointment and oversight, breaches the constitutional requirement.
• Implications: This decision underscores the necessity for proper appointment and supervision of individuals or entities wielding substantial governmental authority, ensuring they are accountable to the public through established constitutional channels.

Immediate Impact:

• Funding Mechanism Invalidated: The court’s decision effectively invalidates the current mechanism for funding the USF for companies within the Fifth Circuit, while not changing the obligations for companies located elsewhere in the country. However, as further explained below, the Fifth Circuit’s decision to “remand” (and not “vacate”) the rules it declared unconstitutional likely means there will be no immediate impact on the USF program. The program likely remains in full force and effect for all stakeholders.
• Uncertainty for Stakeholders: Nevertheless, the Court’s invalidation of the USF funding mechanism has created significant uncertainty for telecommunications providers who contribute to the fund and consumers who benefit from the supported services. Providers may face confusion over their financial obligations, and there may be disruptions in the availability of services that rely on USF support.
• Need for Legislative or Administrative Action: To address this uncertainty, prompt legislative or administrative action will be required to establish a new, constitutionally sound mechanism for funding the USF. This could involve clearer statutory guidelines from Congress or a restructured approach to USAC’s role and oversight (actions the FCC is likely to begin contemplating in the near future).

This ruling by the Fifth Circuit Court of Appeals not only questions the validity of the current USF funding structure but also sets the stage for significant legal and regulatory reforms. Stakeholders should prepare for potential changes and remain engaged with ongoing legislative and judicial developments.

What Now? What’s Next?

What Does the Remand to the FCC Mean? The remand to the FCC means that the court has sent the case back to the FCC for further action consistent with the court’s ruling. The FCC must now reassess and potentially restructure the USF program to comply with constitutional requirements. This involves:

• Reevaluating Delegated Authority: The FCC must ensure that any delegation of authority to manage the USF aligns with the nondelegation doctrine, providing clear and specific guidelines.
• Addressing the Appointments Clause Violation: The FCC needs to revise how the Universal Service Administrative Company (USAC) operates, ensuring that those administering the USF are properly appointed and accountable.

Key Questions for Businesses Following the Fifth Circuit Ruling

• Do companies have to comply with the USF program?
  On its surface, the ruling appears to cast doubt on the obligation of companies in the Fifth Circuit to comply with the current USF contribution requirements. However, because the Court remanded the rules to the FCC and did not vacate them, the rules very likely remain in full force and effect pending the conclusion of anticipated FCC proceedings to address the remand or, ultimately, a Supreme Court ruling that supports the Fifth Circuit. We anticipate FCC guidance on the status of the rules, which should alleviate some of the uncertainty. In the meantime, companies should consult with legal counsel to determine their best course of action.

• Will companies still be funded under the USF program?
  The immediate impact on funding for companies relying on USF support is likely to be minimal. Since the Fifth Circuit remanded the rules to the FCC without vacating them, the existing rules likely remain in effect for the entire program. Therefore, companies in the Fifth Circuit are still bound by the rules and should not experience any differences compared to businesses outside the Fifth Circuit. Companies should monitor FCC communications closely for updates on any potential interim measures or adjustments to the program.

• Will the USF contribution factor increase for companies outside the Fifth Circuit?
  Given that the Fifth Circuit’s decision did not vacate the rules, companies in the Fifth Circuit remain obligated to contribute to the USF. Therefore, the financial burden on companies in other jurisdictions is unlikely to increase significantly. The contribution factor should remain stable, avoiding additional financial pressure on businesses outside the Fifth Circuit.

Predictions for the Long-Term Future of the USF Program

Looking beyond the aforementioned questions, which impact the immediate and near-term future of the USF program, the Fifth Circuit’s ruling sets the stage for significant changes in the way the USF is funded and administered over the long term. The future of the program, which has been a cornerstone of U.S. telecommunications policy for the past 25 years, is now in flux. Here are some possible scenarios:

Democrats Win in November:

• Legislative Response: A Democratic-controlled Congress is likely to act swiftly to address the court’s concerns. This could involve passing new legislation to explicitly define the FCC’s authority and provide clear guidelines for USF administration.
• USAC’s Continuity: Under this scenario, USAC is expected to remain intact, with its role potentially expanded.
• Broader Contribution Base: The USF contribution base could be significantly expanded to include revenue from broadband services and certain edge providers, ensuring a more robust and sustainable funding model.

Republicans Win in November:

• Judicial Enforcement: A Republican-controlled Congress may take a different approach. Considering the circuit split this decision has created, the Supreme Court may grant certiorari forcing Congress to address the issue, but only after SCOTUS has established precedent.
• USAC’s Jeopardy: USAC’s role and even its existence could be in jeopardy as Congress explores alternative funding mechanisms.
• Favoring Big Broadband: The new funding model might favor broadband providers, potentially shifting future financial burdens away from “Big Broadband” and towards “Big Tech” companies and, in doing so, fundamentally altering the competitive landscape.

Implications for Telecommunications Providers

Regardless of the political outcome, USF reform is imminent. Providers should prepare for potential changes by:

• Monitoring Legislative Developments: Stay informed about Congressional actions and proposed legislation related to USF reform.
• Reassessing Financial Contributions: Evaluate the impact of potential changes on your financial contributions to the USF.
• Engaging in Advocacy: Consider participating in industry advocacy efforts to shape the future direction of USF funding and administration.

Conclusion

The Fifth Circuit’s ruling on the FCC’s Universal Service Fee marks a pivotal moment in U.S. telecommunications policy. As we anticipate the Supreme Court’s review and potential legislative responses, it is crucial for stakeholders to stay engaged and proactive in navigating the forthcoming changes. The CommLaw Group will continue to monitor developments closely and provide updates as the situation evolves.

For further information or specific legal advice regarding this ruling, please do not hesitate to contact us.  Please direct your inquiries to the attorney assigned to your account or, in the alternative, contact Jonathan S. Marashlian at jsm@commlawgroup.com.