Supreme Court Preserves Federal Universal Service Program

The Supreme Court upheld the constitutionality of the federal Universal Service Fund (USF)'s funding regime on the final day for releasing opinions of its 2024 term. In FCC v. Consumers' Research, the Court reversed the U.S. Court of Appeals for the Fifth Circuit's 2024 en banc decision that the combination of Congress' delegation of authority to the FCC to establish the federal USF contribution rate and the FCC's subdelegation of a role in the exercise of that authority to the privately operated Universal Service Administrative Company (USAC) was an unconstitutional violation of the nondelegation doctrine.

With the status quo preserved, focus now shifts to calls for reform of the federal USF contribution system that has been described as unsustainable for much of its existence. While pending legislation would authorize the FCC to require contributions from broadband internet access service providers and large "edge providers," reform has long been elusive. In the meantime, existing telecommunications service providers will continue to shoulder the burden of sustaining the "unsustainable."

The federal USF provides more than $8 billion annually to support subsidies for communications services for schools and libraries (E-rate), low-income consumers (Lifeline), rural healthcare providers, and service providers in high-cost rural areas. Instead of taking the typical path of congressional appropriations, the Telecommunications Act of 1996 directed the FCC to fund these programs through "equitable and nondiscriminatory" assessments on interstate telecommunications providers who, in turn, typically pass the costs of these "contributions" to their customers as surcharges on consumer bills.

The Constitution vests in Congress the authority to tax, and Consumers' Research challenged the constitutionality of Congress delegating the calculation of the size of federal USF programs and its assessments to the FCC (and the FCC's subsequent subdelegation of parts of the process to USAC). Three-judge panels in all three circuits rejected these challenges, but the Fifth Circuit reversed course in a 9-7 en banc rehearing opinion that sided with Consumers' Research. The Supreme Court stayed that decision and granted certiorari to review.

Writing for the 6-3 majority, Justice Kagan reversed the Fifth Circuit's en banc opinion, holding that the federal USF framework satisfied the Court's existing "intelligible principle" standard for lawful delegation because Congress "sufficiently guided and constrained" the FCC. The Court rejected the argument that the FCC had free reign to raise unlimited amounts for unlimited purposes, instead finding that the congressional direction to collect "sufficient" contributions to meet its specified universal service objectives is not only a floor but also a ceiling. The Court held that Congress had provided clear and limiting guidance on the scope of federal USF through the six "principles" enumerated in Section 254 of the Communications Act and its identification of the parties the program is intended to serve. Finally, the Court summarily rejected the claim of unlawful subdelegation to USAC, observing that the FCC "retained all decision-making authority . . . relying on [USAC] only for non-binding advice." 

With the cloud of the Fifth Circuit's decision lifted, some observers hope that Congress or the FCC now will turn attention to reforming universal service funding. The contribution rate has soared from 5% in 2000 to 36% today, primarily attributable to a sharp decline in reported telecommunications revenues. The Lowering Broadband Costs for Consumers Act of 2025 pending in Congress would direct the FCC to adopt new rules expanding the federal USF contribution base to include all broadband service providers, and also all "edge providers" that the FCC finds "transmitted" at least 3% of U.S. internet traffic and have at least $5 billion in annual U.S. revenues (the bill defines edge providers to include providers of digital advertising services, search engines, social media platforms, streaming services, app stores, cloud computing services, messaging services, videoconferencing services, video gaming services, and e-commerce platforms). Because these edge services are diverse and evolving, the FCC would face a greater challenge in assuring assessments are "equitable and nondiscriminatory" (as directed by Congress) compared to the current assessment of only a single, well-defined category of services (end-user interstate telecommunications services).

Other proposals have been made for Congress to directly fund federal USF through annual congressional appropriations. Support for that approach within the communications industry and among federal USF beneficiaries has waned after Congress created the USF-like Affordable Connectivity Program for low-income broadband consumers and then allowed it to terminate only two years later.

The prospects for legislation are uncertain. Taxing internet services has long been considered politically unpopular, and increasing the cost of internet services for consumers could undermine broadband deployment and adoption, especially on the heels of the expiration of the federal ACP Program and the eve of new federal investment in broadband through the recently revamped BEAD program. While some legislators from both parties have expressed support for reform, other members have concerns. If USF contribution reform were easy, it would have happened already.

FCC Chairman Brendan Carr has supported congressional expansion of the federal USF base. He also praised the Court's decision, noting the "benefits that have come with the connections powered by the agency's USF program," and welcomed the "opportunity to turn the FCC's focus towards the types of reforms necessary to ensure that all Americans have a fair shot at next-generation connectivity."

In the meantime, litigation over the existing federal USF regime may continue. Justice Gorsuch noted in his dissent that parties "remain free on remand, or in a future proceeding, to renew their attack on the constitutionality of whatever contributions the FCC demands" for additions to USF programs.

DWT regularly advises clients on both contributions to and participation in the federal USF programs and will continue to monitor litigation developments and proposed legislation affecting federal USF programs and contributions.