Federal appeals court finds FCC’s management of broadband subsidies unconstitutional

The way the Federal Communications Commission has been managing its broadband subsidy programs is unconstitutional, the Court of Appeals for the Fifth Circuit ruled Wednesday in a decision that upends decades of telecom policy.

The 71-page decision finds fault with the FCC’s delegation of rate-setting authority to the Universal Service Administrative Company (USAC), which the majority of judges characterized as a “private company” managed by “interest groups.” The FCC describes it as “an independent, not-for-profit corporation designated as the administrator of the federal Universal Service Fund.”

According to the opinion, USAC determines how much carriers must pay into the fund on a quarterly basis to support services ranging from school wi-fi to rural broadband infrastructure, and most of those costs are then passed on to end subscribers. The opinion criticized this approach as being necessarily self-serving.

“In other words, the contribution amount ultimately derives from the universal service demand projections of private, for-profit telecommunications carriers, all of whom have ‘have financial incentives’ to increase the size of universal service programs,” according to the majority opinion.

The “contributions” that USAC sets amount to a tax that the FCC improperly delegated, the court said, ordering the FCC to revisit its rate-setting.

However, several judges across two dissents said the decision breaks with “three sister circuits” that already addressed constitutional challenges to the FCC’s delegation and found “this program collects administrative fees and not taxes.”

The dissenting judges also noted that “an agency may obtain the assistance of private parties in implementing its mandate under federal law so long as those private parties are subordinate to the agency and subject to the agency’s ‘surveillance’ and guidance.”

In a statement, former FCC official Gigi Sohn warned that the repudiation of the FCC’s system could have “catastrophic consequences for low-income Americans” who rely on government-subsidized internet service—especially after the lapse of a standalone subsidized internet program that Congress created in response to the Covid-19 pandemic.

In a statement, FCC Chairwoman Jessica Rosenworcel called the decision “misguided and wrong,” adding that “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.” She said the agency will “pursue all available avenues for review.”

Telecom industry experts expect the case could be ripe for Supreme Court review next term.

Correction 07/29/24: This piece has been updated to reflect that Gigi Sohn is a former FCC official, not an FCC commissioner.