Fifth Circuit finds USF mechanism unconstitutional

In detail

Background  

Article I, Section 1 of the US Constitution provides that "[a]ll legislative Powers herein granted shall be vested in a Congress of the United States." Accordingly, the US Supreme Court articulated a nondelegation doctrine that prohibits Congress from transferring its legislative power to another constitutional actor or a private party without supplying an intelligible principle to guide their discretion. The doctrine also applies to sub-delegations of legislative power by agencies to private entities, unless Congress expressly has authorized such sub-delegations.   

The Court has applied a three-part test to determine whether a private delegation is constitutional: (1) the government officials must have final decision-making authority; (2) the agencies must exercise their authority rather than merely affirming the private entities' work product; and (3) the private actors always must remain subject to the "pervasive surveillance and authority" of some person or entity lawfully vested with government power.   

In 1996, Congress enacted the Telecommunications Act, which established a universal service contribution mechanism (USF) that allows consumers in all regions of the country access to telecommunications services. Section 254 of the Act provided that the FCC would establish the USF, require telecommunications carriers to contribute to the fund, and reimburse telecommunications providers for costs of providing subsidized service.   

The FCC adopted regulations and delegated USF administration to a private company, USAC, which bills and collects contributions, determines the quarterly contribution factor based on projections from telecommunications carriers, and distributes funds to recipients.  

Other lawsuits have been filed challenging the constitutionality of the USF mechanism in the Sixth, Eleventh, and D.C. Circuits.   

Challenge to the USF’s funding mechanism  

A group of telecommunications consumers and providers filed a petition for review to the Fifth Circuit, challenging that the USF’s funding mechanism violated the nondelegation doctrine on two grounds: (1) that Congress delegated its taxing power to the FCC without providing an intelligible principle to guide its discretion; and (2) that the FCC impermissibly sub-delegated its taxing power to USAC and private telecommunications carriers with financial incentive to increase the size of universal service programs.  

The FCC argued that the universal service contribution mechanism does not involve a delegation of the taxing power to a private entity because the contributions are fees -- not taxes -- and the FCC retains final authority and oversight over the contribution factor and the USAC.  

Court considers the USF contribution factor a tax  

The Fifth Circuit concluded that the contribution factor was not a fee because it was not incident to a voluntary act, did not bestow a benefit on the payors that was not shared by other members of society, and it was not related to the regulatory costs or services provided by the government. Conversely, the court explained that the power to levy USF “’contributions’ is the power to tax —a quintessentially legislative power” because it was imposed by the legislature on a large segment of society for a public purpose, it raised revenue to support a governmental program, it was not voluntary or proportional to benefits received, and it had no clear limits or intelligible principles to guide its amount.   

FCC’s USF interpretation violated nondelegation doctrine 

The Fifth Circuit held that the FCC's interpretation of Section 254 violated the nondelegation doctrine since Congress did not sufficiently limit FCC's discretion to determine how much revenue to raise.   

Observation: The majority held that Section 254 (1) did not define the concept of universal service, the amount of funding necessary to achieve it, or the criteria for balancing the competing principles and interests involved; (2) insulated the FCC from the appropriations power of Congress; and (3) delegated a core legislative power -- the power to tax -- without providing an intelligible principle.  

The court found that the FCC delegated, without express congressional authorization, the power to determine the USF contribution factor, which directly affects the quarterly contribution rate, to USAC, a private entity, and to private telecommunications carriers, without maintaining final decision-making authority, actual oversight, or pervasive surveillance.   

Observation: The majority noted that FCC regulations allowed USAC's projections of demand and administrative expenses to take legal effect without formal FCC approval, and that FCC rarely exercised its right to set different projections.   

Observation: The majority stated that USAC and the private carriers had financial interests in the size of the USF contribution, the FCC did not monitor or review their compliance with its policies, and this sub-delegation amounted to an unconstitutional de facto abdication of governmental power to private entities.  

Broad delegation of the USF mechanism amounts to a constitutional violation  

The court stated that the combination of Congress’s broad delegation to the FCC, and the FCC’s sub-delegation to private entities involved in the universal service contribution mechanism “is incompatible with our constitutional structure.” The court held the petitioning parties’ USF contribution unconstitutional and remanded to the FCC for further proceedings.  

Observation: In a dissenting opinion, a minority of judges noted that three circuits have held Section 254 constitutional under the intelligible principle test and argued that the majority opinion blurs the distinction between taxes and fees.