Fifth Circuit Holds Federal Universal Service Fund Program Unconstitutional, Creates Circuit Split

On July 24, 2024, the U.S. Court of Appeals for the Fifth Circuit struck down the Federal Universal Service Fund (USF) in Consumers' Research et al. v. FCC. In a 9-7 en banc decision, the majority reversed an earlier decision by a three-judge panel and held that the program created by the Federal Communications Commission (FCC) based on provisions in the 1996 Telecommunications Act constitutes an unlawful delegation of taxing power from Congress and thus violates Article I, § 1 of the Constitution.

The USF is a system for subsidizing telecommunications service to low-income households and high-cost areas by assessing telecommunications carriers; it also provides support to schools and libraries as well as rural health care facilities. USF accomplishes this through four main mechanisms: the High-Cost Program, which provides support to certain telephone companies that serve high-cost areas; the Low Income Support Program, which subsidizes monthly telephone and broadband service for low-income customers; the E-rate Program, which subsidizes the provision of broadband connectivity and Wi-Fi to schools and libraries; and the Rural Health Care Program, which subsidizes the provision of telecommunications services to rural healthcare providers.

The FCC created the Universal Service Administrative Company (USAC) and charged it with certain administrative functions of the program, including "billing contributors, collecting contributions to the universal service support mechanisms, and disbursing universal service support funds." 47 C.F.R. § 54.702(b). USAC also is responsible for determining the quarterly USF contribution amount, which the FCC uses to determine the size of universal service contributions.

The Fifth Circuit majority stated that this contribution mechanism violates the Legislative Vesting Clause of Article I. The majority explained that "the power to levy USF 'contributions' is the power to tax-a quintessentially legislative power" and that Congress "may have delegated legislative power to FCC because it purported to confer upon FCC the power to tax without supplying an intelligible principle to guide FCC's discretion." The majority added that the "FCC may have impermissibly delegated the taxing power to private entities" and that "the combination of Congress's broad delegation to FCC and FCC's subdelegation to private entities certainly amounts to a constitutional violation." The court held the first-quarter 2022 USF contribution factor to be unconstitutional and remanded it to the FCC for further proceedings.

The ruling creates a circuit split with the Sixth Circuit and Eleventh Circuit Courts of Appeal, which both rejected challenges to USF contribution factors since those courts identified an "intelligible principle" guiding the FCC's delegation. As we covered here, last month the U.S. Supreme Court declined to review the Sixth and Eleventh Circuit decisions. Petitioners based their request for review in part on what they described as a potential circuit split, while the FCC argued in response that there was no circuit split while the en banc Fifth Circuit reviewed the case.

Following the decision, FCC Chairwoman Jessica Rosenworcel stated that that the FCC "will pursue all available avenues for review." Given the national scope and multi-billion dollar impact of the USF program, the FCC is expected to seek review of the Fifth Circuit opinion split by the Supreme Court, and the Court could consider the case next Term.