On 24 July, the US Circuit Court of Appeals for the Fifth Circuit ruled in Consumers’ Research v. FCC that the funding mechanism for the Universal Service Fund (USF) is unconstitutional. The decision jeopardises the billion-dollar connectivity programme and is likely to be appealed to the Supreme Court.
The USF was established in 1997 under Section 254 of the Telecommunications Act of 1996. This section directs the Federal Communications Commission (FCC) to create “mechanisms to preserve and advance universal [telecommunications] service” across the country. To fulfil this mandate, the USF provides financial support for telecommunications infrastructure projects, low-income consumer assistance, and services for schools and libraries to help bridge the digital divide and promote economic growth nationwide.
In Consumers’ Research v. FCC, the petitioners challenged the legality of the USF’s funding mechanism. Section 254 requires all telecommunications service providers offering interstate services to contribute to the mechanism facilitating universal service on an equitable and non-discriminatory basis. Pursuant to this, the FCC has funded the USF through contributions from these providers, calculated as a percentage of their end-user revenues.
Although the FCC oversees the USF, it created a non-profit corporation, the Universal Service Administrative Company (USAC), to determine a “contribution factor” on a quarterly basis, which guides the amount needed to administer the Fund. Current FCC rules permit telecom carriers to pass these contribution costs to their customers, often as an additional fee on their bills.
The petitioners brought nearly identical cases to the Fifth, Sixth, and Eleventh Circuits, arguing that these USF contributions are a tax, rather than a fee, and that Section 254 violates the Constitution by delegating Congress’s taxation powers to the FCC without sufficiently clear direction. They further contended that the FCC’s sub-delegation of determining the contribution factor to USAC, a private entity, was also unlawful, as doing so was not expressly authorized by Congress under the Telecommunications Act or anywhere else.
All three Circuits rejected these arguments in 2023. However, the Fifth Circuit reversed its decision after the petitioners requested a rehearing en banc. The court remanded the case to the FCC but did not vacate the contribution factor, meaning the USF funding mechanism remains in place for now. However, given the vital importance of the contribution factor to the USF’s operation, the Fund’s future is now uncertain. The FCC is expected to challenge the Fifth Circuit’s decision in the Supreme Court and will likely request a stay to ensure the USF can remain functional during the ongoing adjudication.
If you are interested in learning more about telecommunications policy or Universal Service Fund developments in the United States, please reach out to Jacob Hafey at [email protected].
