The Fifth and D.C. Circuit federal appellate courts are now poised to issue pivotal decisions in the ongoing litigation challenging the constitutionality of the FCC’s universal service support mechanisms. Their opinions will arrive in a political and regulatory environment vastly changed since Consumers’ Research, a non-profit research and advocacy organization, began its litigation campaign in 2022. This Client Alert takes a fresh and timely new look at the impact those court decisions could have.

Consumers’ Research challenged fundamental aspects of the FCC’s universal service framework in four separate federal circuit courts of appeals – in addition to the Fifth and D.C. Circuits, previous opinions of the Sixth and Eleventh Circuits are now each the subject of a pending Supreme Court Petition for Writ of Certiorari. The organization’s near-term goal seems to be to generate a split among the opinions of these four intermediate appellate courts, in order to enhance the likelihood that the Supreme Court will agree to hear the matter.

It appears likely that the FCC’s universal service programs will continue in some form, regardless of the outcome of these challenges. The programs provide, in the aggregate, about $10 billion in support for the cost of voice, broadband, and related services used by those living in high-cost areas, low-income consumers, schools and libraries, and rural health care providers, respectively. Those programs were created under the Telecommunications Act of 1996 and, today, they represent a central pillar supporting important national policies favoring universal access to affordable telecommunications and broadband services. Universal service support is a vital revenue stream for over a thousand service providers across the nation. It impacts the constituents of every Senator and House Member. If there were a successful challenge to the current framework, it is likely that there would be a significant effort, both legislative and at the FCC, to preserve this support, though of course, given the current environment, other factors could pull the effort in surprising directions and make the outcome difficult to predict.

The Universal Service Administrative Company (USAC), an independent, not-for-profit entity designated by the FCC, collects funding for the annual cost of federal universal service programs through mandatory assessments on the revenues of certain service providers. Those service providers, in turn, almost invariably pass the cost along to consumers and other end-user customers via line-item surcharges on individual bills. The current collections framework is essentially unchanged since it was created more than 25 years ago. Since then, revenues from the telecommunications services that are assessed have generally declined, while broadband and other services that are not assessed have greatly expanded. In addition, companies that may formerly have purchased assessable telecommunications services have, in many cases, built their own networks that now exist outside the current universal service framework altogether. As a result, where it applies, the so-called universal service “contribution factor” has grown from the low-single digit percentages originally to about 30% or more of assessable end user revenue in recent years.

The impending demise of the “Affordable Connectivity Program” – a parallel, COVID-era mechanism created and funded via a $14 billion congressional appropriation in 2021 to subsidize broadband services for qualifying consumers – creates new opportunities to address these arguments. The ACP is predictably popular, but April 2024 is the last month for which participating households will receive full support, and there has been no legislative agreement to appropriate further ACP funding.

The exhaustion of the ACP has jumpstarted broader legislative efforts to reform the FCC’s authority to collect and distribute funding for universal service. The FCC’s current assessment mechanism, with its well-recognized shortcomings, would collapse under the weight of the additional ACP demand. (With 23 million households participating, the ACP current costs about $7 billion each year, which would come close to doubling the size of the current universal service fund.)

Legislative reforms to incorporate the ACP into the FCC’s permanent universal service mechanisms would also need to update the FCC’s authority to collect funding for universal service and provide clear new guidance expanding the range of entities and services to be assessed. Such new legislation could help address the various challenges being pursued by Consumers’ Research today. At a minimum, such new legislation could serve to re-start the non-delegation debate.

In general, the Consumers’ Research challenges assert that USAC’s universal service collection activities represent an unconstitutional delegation of what is ultimately the Congressional taxing authority. Specifically, Consumers’ Research argues that the current statutory framework for funding universal service (under Section 254 of the Communications Act) is unconstitutional because (1) it rests on an unlawful delegation of taxing power from Congress to the FCC under the “non-delegation doctrine”; and (2) the FCC’s further delegation of administrative authority to USAC further violates the “private non-delegation doctrine.”

Essentially, Consumers’ Research argues that Congress unlawfully delegated to an independent government agency the legislative authority and discretion that the Constitution vests in Congress. By giving the FCC power both to decide what is meant by “universal service” and power to collect essentially unlimited sums to implement that decision, Congress failed to provide the required “intelligible principles” needed to govern the FCC’s use of those powers. Consumers’ Research further argues that the FCC’s subsequent delegation of that authority to USAC is unlawful because the FCC has failed to exercise the necessary oversight, thereby placing that power with a private, independent entity whose interests may not align with the public interest goals of Congress or the FCC.

So far, Consumers’ Research has not prevailed in these arguments. As a brief recap:

• A Fifth Circuit panel ruled against Consumers’ Research and in favor of the government in March 2023. The full Fifth Circuit voted to rehear the case en banc before all of its active judges, and the panel decision was therefore vacated. The en banc oral argument was held in September 2023, but the en banc opinion has not yet been issued. This probably represents the best opportunity for a win for Consumers’ Research.
• A panel of the Sixth Circuit ruled against Consumers’ Research in May 2023. Consumers’ Research filed a Petition for Certiorari with the Supreme Court in October 2023, which remains pending with the Court.
• A panel of the Eleventh Circuit ruled against Consumers’ Research in December 2023. Consumers’ Research filed a Petition for Certiorari with the Supreme Court in January 2024. Briefing is not yet complete, so it too remains pending with the Court.
• A panel of the D.C. Circuit heard oral argument in January 2024, but no decision has yet been issued. While it’s always risky to predict the outcome based on the tenor of the oral argument, the panel sounded somewhat skeptical of the positions presented by Consumer’s Research.

Any potential impact would depend on the specifics of an adverse decision. For example, if a court were to uphold the delegation under Section 254 to the FCC, but not the further delegation to USAC, the FCC would need to find ways either to exert additional control or move some operational responsibilities for the program “in-house” within the agency itself. On the other hand, if Section 254’s original delegation to the FCC were faulted, then that could require a legislative fix. It is likely that any significant loss for the FCC would be stayed pending the outcome at the Supreme Court, which could take a year or more to resolve and would also provide additional time for legislative action.

Even if Consumers’ Research prevails, it would be difficult for a court, as part of this litigation, to order “refunds” to those that have historically paid into the universal service fund. Universal service payors are not parties to these cases and questions of liability for individual damages for thousands of payors would be difficult to assess on the current record by any of these appellate courts. Depending on the specific outcome, however, it will be interesting to see how payors assess their own potential future opportunities to seek damages against USAC or the FCC itself.

[View source.]