One U.S. Court of Appeals Declares Universal Service Fund Unconstitutional—But Impact of Decision Awaits Further Legal Review

Although the impact will not likely be immediate, and it may be further changed on appeal, on Wednesday July 24, 2024, the U.S. Court of Appeals for the Fifth Circuit found the Universal Service Fund (USF), as administered by the Federal Communications Commission (FCC), to be unconstitutional in a 9 to 7 en banc ruling of all the judges in the Fifth Circuit. The Fifth Circuit opinion is in conflict with two other U.S. Courts of Appeal that rejected almost identical challenges to the USF over the last 14 months. 

The decision has the potential to undermine key programs, including the FCC’s E-Rate program, which provides $4 billion annually to schools and libraries. While the court found the program to be unconstitutional, it did not vacate the current program, instead remanding it to the FCC for further proceedings. FCC Chairwoman Rosenworcel has already announced her intent to appeal the ruling, which likely means the agency will seek a stay and review in the U.S. Supreme Court. While the decision could ultimately have significant impact on schools, libraries and consumers that rely on the programs funded by the USF, it will take some time for the legal process to play out and no immediate impact on USF-funded programs is likely in the near term. 

The Fifth Circuit concluded that: 

1. Financial Universal Service contributions made by telecommunications carriers and often passed on to consumers, constitute a tax not a fee;
2. Congress impermissibly and unconstitutionally delegated the authority to tax  the FCC because it failed to offer the FCC required “intelligible principle” to guide the FCC’s discretion;
3. The FCC impermissibly delegated its authority to the Universal Service Administrative Company which administers the USF;
4. Even if both delegations of authority were permissible, the combination of both delegations exceeds constitutional bounds. 

As noted above, the Fifth Circuit’s decision squarely conflicts with virtually identical Consumers’ Research cases in two other circuits. Consumers’ Research v. FCC, 67 F. 4th 773 (6th Cir. 2023);  Consumers’ Research v. FCC, 88 F. 4th 917 (11th Cir. 2024).  The circuit conflict raises the question whether the Fifth Circuit’s decision applies only in Texas, Mississippi and Louisiana (the Fifth Circuit’s boundaries) or nationwide. The size of the program and the direct circuit conflict means the case is unusually likely to be reviewed by the U.S. Supreme Court. The decision may also spur currently stalled efforts in the U.S. Congress to consider the structure and scope of the USF.

The USF collects and disburses approximately $8 billion annually. The USF funds the E-Rate, which subsidizes connectivity for schools and libraries; the Lifeline program, which subsidizes low-income households with their phone and broadband bills, and will be increasingly important with the end in funding for the Affordable Connectivity Program; and programs that fund services in rural, high cost areas. (The decision does not apply directly to separate state USF programs, such as California’s because they are not subject to the federal Constitution’s Article I delegation and taxing authority requirements, but it could complicate some aspects of state USF funds.)  

The case is Consumers’ Research et al v. Federal Communications Commission, No. 22-60008 (filed Jul 24, 2024).

This is a high-level summary of the decision and likely immediate outcomes, clients seeking to further understand the ruling and its implications for e-rate or other USF programs of importance to local governments, including those that may want to support review by the U.S. Supreme Court, should contact their BBK counsel for advice.

Disclaimer: BBK Legal Alerts are not intended as legal advice. Additional facts, facts specific to your situation, or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.