U.S. Supreme Court upholds FCC’s Universal Service Fund framework

Background

Originally, the Communications Act of 1934 tasked the FCC with making communications services available to all the people of the United States at reasonable prices, which the FCC achieved through rate regulation. In 1996, Congress amended the Communications Act and created the USF, under which the FCC has established programs for low-income consumers (Lifeline), rural consumers (the Connect America Fund), schools and libraries (E-Rate), and rural hospitals (the Rural Health Care Program). 

The USF is funded through quarterly assessments on telecommunications providers. The assessments, known as “contributions,” are calculated as a percentage of providers’ revenues. The “contribution factor”—i.e., the ratio of the USF’s projected expenses to all contributing providers’ projected revenues—is applied to each provider’s projected quarterly revenues to determine that provider’s contribution obligation. A provider may pass the cost of its contribution on to consumers. Rising demand for communications services that receive support under the USF—along with the decreasing popularity of services that are subject to USF contributions—has led to increased financial pressure on the USF, spurring calls for reform across the ideological spectrum. 

Against this backdrop, the advocacy group Consumers’ Research filed lawsuits in multiple circuits alleging that: 

(1) USF contributions constitute a tax;

(2) Congress had unconstitutionally delegated its taxing power to the FCC; and

(3) The FCC had unlawfully delegated its administrative authority to USAC.

While the Sixth and Eleventh Circuit Courts rejected these claims, the Fifth Circuit accepted them, striking down the contribution mechanism as unconstitutional under the nondelegation doctrine. 

The Supreme Court’s Decision

To assess whether Congress’s delegation of authority to the FCC was permissible, the Court applied the “intelligible principle” test, asking whether Congress provided a general policy goal for the FCC and clearly defined the boundaries of the FCC’s authority. The Court found that Congress had met this standard by guiding and constraining the FCC’s discretion to implement the USF framework. Section 254 of the Communications Act, as amended, directs the FCC to provide “sufficient” support for universal service, identifies the intended beneficiaries (low-income and rural consumers, schools and libraries, and rural hospitals), and specifies the types of services eligible for support (i.e., those that are essential to education, public health, or safety; widely subscribed to; and available at affordable rates). The Court also rejected the argument that USF contributions are in fact taxes subject to a more stringent constitutional standard. 

In evaluating whether the FCC impermissibly delegated authority to USAC—which is a private, not-for-profit entity—the Court asked whether USAC is: (1) functionally subordinate to the FCC, and (2) subject to the FCC’s authority and surveillance. The Court concluded that USAC is “broadly subordinate” to the FCC because the FCC appoints USAC’s board of directors, approves its budget, and requires USAC to comply with the FCC’s rules and directives. The Court also found that the FCC retains decision-making authority over the USF and relies on USAC “only for non-binding advice.” 

Finally, the Supreme Court rejected the Fifth Circuit’s view that even if the two delegations were individually permissible, their combined effect violated the Constitution. The Court reasoned that the delegations operate on different axes, so any potential harm posed by one does not amplify the harm posed by the other. 

Key Takeaways

1. USF survives—for now.

The Consumers’ Research decision preserves the decades-old USF framework under which stakeholders have operated. Still, USF remains politically vulnerable. While all three sitting FCC commissioners cheered the Court’s ruling, they also noted the need for reform. Similarly, different stakeholders used the Court’s ruling to recite their priorities for updating or restructuring USF. 

2. Potentially new momentum for USF reform.

In principle, universal service has broad support across the political spectrum. With potential challenges on the horizon, the Consumers’ Research decision may prompt policymakers to discuss reforms to USF, either at the FCC or in Congress. 

3. More constitutional challenges to USF could follow.

In his dissent, Justice Gorsuch (joined by Justices Thomas and Alito) agreed with the argument that USF contribution obligations are a tax and highlighted other USF-related provisions that may be the subject of future challenges. 

4. Justice Kavanaugh’s concurrence tees up other challenges under the nondelegation doctrine.

Justice Kavanaugh conditioned his support for the majority opinion, in part, on his determination that the FCC is an executive agency rather than an independent agency. This distinction may lay the groundwork for future nondelegation challenges involving independent agencies.

Authored by John Castle and Ambia Harper.