New court ruling puts Universal Service Fund in hot water

  • The future of the Universal Service Fund (USF) is in question after the U.S. Fifth Circuit Court of Appeals ruled the Federal Communication Commission's method for funding the USF unconstitutional.

  • The Fifth Circuit Court previously upheld the constitutionality of the USF - as have the Sixth and Eleventh Circuit Courts - but an en banc review by 16 judges on the Fifth Circuit reversed the original ruling.

  • At issue is the FCC's decision to outsource management of the USF to Universal Service Administrative Company (USAC).

  • FCC Chairwoman Jessica Rosenworcel in a statement called the decision "misguided and wrong," vowing to pursue avenues to appeal.

  • New Street Research Analyst Blair Levin said the USF will likely continue to operate under the status quo until the Supreme Court weighs in.

In a ruling that quickly caused shock waves in the U.S. telecommunications industry, the Fifth Circuit Court of Appeals today ruled, 9-7, that the Universal Service Fund (USF) is unconstitutional as currently administered.

Federal Communications Commissioner (FCC) Chairwoman Jessica Rosenworcel issued a statement saying: “This decision is misguided and wrong. It upends decades of bipartisan support for FCC programs that help communications reach the most rural and least-connected households in our country, as well as hospitals, schools and libraries nationwide. The opinion reflects a lack of understanding of the statutory scheme that helped create the world’s best and most far-reaching communications network. We will pursue all available avenues for review.”

New Street Research policy analyst Blair Levin wrote several months ago in anticipation of such a ruling that it “could throw the entire system, already under financial and political stress, into chaos with potentially negative implications for all ISPs.”

Levin said the case will affect all ISPs, both fixed and mobile, because it influences how they pay in and receive benefits from the governments’ interest in assuring that all have access to and can afford baseline broadband services.

He added in a note issued following the ruling that the USF will likely continue to operate under the status quo until the Supreme Court weighs in, likely by June 2025.

***UPDATE 5:04 PM ET

The Court explained its ruling by saying that the USF is a “misbegotten tax” that violates Article I, § 1 of the Constitution, which states that all legislative powers are given to Congress, which is made up of the Senate and the House of Representatives.

It said that Congress, via the Telecommunications Act of 1996, delegated its taxing power to the FCC. But then the FCC sub-delegated the taxing power to a private corporation — the Universal Service Administrative Company — to determine how much American citizens would be forced to pay for USF taxes.

The seven dissenters to the court’s ruling argued that the USF program collects administrative fees and not taxes and that the court is blurring the distinction between the two.

The 6th and 11th Circuits have already ruled the opposite way, upholding the current USF funding mechanism. For this reason, the issue will likely be taken to the Supreme Court.

In comments after today’s ruling, Levin wrote, “The Supreme Court has already overturned several other 5th Circuit decisions that themselves disrupted existing precedent. We think the Supreme Court will do the same here. We think the status quo will stay in effect until the Supreme Court rules, which could be by June 2025.”

Several telecom groups immediately issued criticisms of today’s ruling.

The trade groups the Competitive Carriers Association, NTCA–The Rural Broadband Association, and USTelecom–The Broadband Association released a statement, saying, “The Universal Service Fund has been, and continues to be, a critical tool to narrow the digital divide and help address connectivity gaps. The court’s decision today deals a severe blow to these efforts and could put at risk the availability and affordability of essential communications services for millions of rural Americans, low-income consumers, and community anchor institutions.”

But the director of broadband and spectrum policy with the think tank Information Technology and Innovation Foundation (ITIF) Joe Kane was more optimistic. Kane said policymakers have known for years that USF needs reform and that it was unsustainable. He said even though today’s ruling “throws federal broadband policy into an uncertain future” and “may cause some chaos,” the ruling is also an opportunity for policymakers to refocus broadband funding in ways that will do the most good for the most people.

Executive Editor Diana Goovaerts contributed to this report.