E-Rate Under E-Valuation

Under the Telecommunications Act of 1996, the Federal Communications Commission (FCC) established the Universal Service Fund (USF) to finance programs to expand access to communications services. The USF’s E-rate program assists schools and libraries with accessing affordable telecommunication and internet services.

Recently, the Fifth Circuit Court of Appeals questioned the USF’s existence, holding that it is financed by an unconstitutional contribution system. Consumers’ Research v Fed Communications Comm, No. 22-60008 (CA 5, July 24, 2024). Although not binding in Michigan, this decision creates a federal circuit court split about the USF that could lead to a U.S. Supreme Court decision.

E-Rate Background

Congress delegated its authority to the FCC to establish “specific, predictable, and sufficient . . . mechanisms to preserve and advance universal service.” The FCC, in turn, created the USF, which enhances nationwide internet connectivity by requiring all service providers to financially contribute to the fund. Service providers may pass contribution costs onto their customers, which is why most phone bills include a “universal service fee.”

The USF provides support for the E-rate program, which requires service providers to subsidize schools and libraries through discounted rates on educational telecommunication and internet services. The FCC reimburses service providers for the subsidized costs.

To administer the USF, the FCC delegated its authority to the Universal Service Administrative Company (USAC), a not-for-profit private corporation. The USAC is responsible for, among other things, reimbursing service providers, billing contributors, disbursing funds, and deciding quarterly contribution amounts.

Fifth Circuit Decision

In the Consumers’ Research decision, the Fifth Circuit concluded that the FCC unlawfully delegated its taxing power to private, self-interested entities without providing sufficient instruction or oversight. The Fifth Circuit accordingly held that the USF contribution system is unconstitutional and remanded the case to the FCC.

Potential Impact

This decision causes a split among the federal circuit courts, as the Sixth Circuit Court of Appeals, whose decisions are binding in Michigan, and the Eleventh Circuit Court of Appeals have recently issued decisions upholding the USF’s funding mechanism. Earlier this week, the Fifth Circuit agreed to halt its ruling, so long as the FCC appeals the decision to the U.S. Supreme Court by September 30, 2024. The circuit court split makes it more likely that the U.S. Supreme Court will review this decision. Alternatively, Congress may act to restructure the USF.

We will advise clients as new developments arise. So long as the FCC appeals by September 30,  it is not anticipated that this decision will affect the E-rate program for the 2024-25 school year. If, however, the FCC fails to appeal the decision or the U.S. Supreme Court upholds it, it could upend USF’s funding mechanisms or lead to significant restructuring of the fund in the future.