US appeals court finds FCC telecom subsidy program unconstitutional

A longstanding initiative from the Federal Communications Commission designed to support the affordability and availability of communications services was ruled unconstitutional by a federal appeals court, setting up a likely Supreme Court battle.

The US Court of Appeals for the 5th Circuit ruled 9-7 that the FCC's Universal Service Fund (USF) violates Article I of the US Constitution, which requires that legislative powers shall be vested in Congress. The court found the fund amounts to a tax more so than a fee, and the ability to tax should not be delegated out from the legislative branch.

"In the Telecommunications Act of 1996, Congress delegated its taxing power to the Federal Communications Commission. FCC then subdelegated the taxing power to a private corporation," Circuit Judge Andrew Oldham wrote in his majority opinion. "That private corporation, in turn, relied on for-profit telecommunications companies to determine how much American citizens would be forced to pay for the 'universal service' tax that appears on cell phone bills across the nation."

The fund supports programs that subsidize the cost of services in areas and for individuals or locations that might otherwise struggle to connect. In 2023, authorized disbursements from the fund totaled $8.12 billion, with more than half of that going to the High Cost program, designed to expand voice and broadband networks in undeserved areas. The three other programs under the fund are E-Rate, which helps schools and libraries connect; Rural Health Care, which supports connectivity for rural healthcare facilities; and Lifeline, which offers subsidies to low-income households for phone or internet service.

The fund has long been subject to some controversy because it is funded through assessments on revenues from telecommunications services like those provided by AT&T Inc., Verizon Communications Inc. and T-Mobile US Inc. — namely, services over traditional landline or mobile phones and voice over IP services. Given the sharp decline in landlines in recent decades, the revenue pool long supporting the USF has shrunk. To cover the shortfall, the FCC has increased the contribution factor for the telecom providers that pay into the fund, with the contribution factor hitting 34.4% for the third quarter of 2024, up from 15.7% a decade earlier.

While the court found that the fund supports a noble cause, its creation and management has resulted in "a multibillion-dollar tax nobody voted for," Oldham wrote.

FCC Chairwoman Jessica Rosenworcel called the ruling "misguided and wrong" in a statement.

"It upends decades of bipartisan support for FCC programs that help communications reach the most rural and least-connected households in our country," Rosenworcel said. "The opinion reflects a lack of understanding of the statutory scheme that helped create the world's best and most far-reaching communications network."

Rosenworcel's Democratic colleague, Commissioner Geoffrey Starks, also criticized the decision, noting that two US circuit courts recently found the USF to be constitutional.

"I'm gravely disappointed by today's ruling in the 5th Circuit," Democrat FCC Commissioner Geoffrey Starks told Market Intelligence in a statement. "This decision is a monumental blow in our long-running effort to close the digital divide."

The case seems bound for the Supreme Court. As Starks alluded to, Consumers' Research, the free-market research and advocacy organization leading the legal challenge to the USF in the 5th Circuit, has filed challenges in three other separate federal circuit courts of appeals — the DC Circuit, the 6th Circuit and the 11th Circuit.

"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," Womble Bond Dickinson partner Richard Cameron wrote in a legal blog.

Joe Kane, director of broadband and spectrum policy at the science and technology think tank Information Technology and Innovation Foundation, said the ruling will result in some short-term chaos in the broadband industry but could also spark needed policy reforms. "Now, since the old course also has been found to be legally unsound, there is all the more reason for Congress to directly appropriate funding for important broadband programs ... while letting obsolete and redundant ones fall away," Kane said in a statement.

Rosenworcel said the FCC will pursue all available avenues for review.