En Banc Fifth Circuit Concludes FCC's "Universal Service" Fee Is Unconstitutional

A majority of the judges concludes this fee constitutes a tax, the authority for which is improperly delegated.

Today, in Consumers' Research v. FCC, the en banc U.S. Court of Appeals for the Fifth Circuit concluded that the so-called "Universal Service" fee imposed by the Federal Communications Commission is unconstitutional. Specifically, by a vote of 9-7, the court concludes that this fee is a tax, the authority for which was delegated to the FCC which, in turn, subdelegated authority to set the tax to a private entity (the Universal Service Administrative Company). Whether or not either of these steps alone would create a constitutional problem under the nondelegation doctrine, the court concluded that the combination of the two delegations is unconstitutional.

Judge Oldham wrote for the court, joined by Judges Jones, Smith, Elrod, Willett, Ho Duncan, Englehardt and Wilson. His opinion begins:

In the Telecommunications Act of 1996, Congress delegated its taxing power to the Federal Communications Commission. FCC then subdelegated the taxing power to a private corporation. That private corporation, in turn, relied on for-profit telecommunications companies to determine how much American citizens would be forced to pay for the "universal service" tax that appears on cell phone bills across the Nation. We hold this misbegotten tax violates Article I, § 1 of the Constitution.

After dispensing with various preliminary matters, Judge Oldham outlines the substantive claim.

Petitioners contend the universal service contribution mechanism violates the Legislative Vesting Clause. See U.S. Const. art. I, § 1 ("All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives."). We agree. We (A) explain that the power to levy USF "contributions" is the power to tax—a quintessentially legislative power. Then we (B) explain that Congress through 47 U.S.C. § 254 may have delegated legislative power to FCC because it purported to confer upon FCC the power to tax without supplying an intelligible principle to guide FCC's discretion. Next, we (C) explain that FCC may have impermissibly delegated the taxing power to private entities. Finally, we (D) explain that we need not definitively answer either delegation question because even if § 254 contains an intelligible principle, and even if FCC was permitted to enlist private entities to determine how much universal service tax revenue it should raise, the combination of Congress's broad delegation to FCC and FCC's subdelegation to private entities certainly amounts to a constitutional
violation.

And from later in the opinion:

FCC has not delegated to private entities a trivial, fact-gathering role. It has delegated the power to dictate the amount of money that will be exacted from telecommunications carriers (and American consumers in turn) to promote "universal service." In other words, it has delegated the taxing power. And the delegation is not even "to an official or an official body, presumptively disinterested," but rather to private persons vested with no government power and with interests that "often are adverse" to those whom they are taxing. Carter Coal, 298 U.S. at 311; see also Ass'n of Am. Railroads v. U.S. Dep't of Transp. ("Amtrak III"), 821 F.3d 19, 29 (D.C. Cir. 2016) ("Delegating legislative authority to official bodies is inoffensive because we presume those bodies are disinterested, that their loyalties lie with the public good, not their private gain. But here, the majority producers may be and often are adverse to the interests of others in the same business." (citation and quotation omitted)). We accordingly have serious trouble squaring FCC's subdelegation with Article I, § 1 of the Constitution.

Note that this is not a full catalog of the problems here. Judge Oldham continues:

Even if the Constitution does not categorically forbid FCC's delegation to USAC and private telecommunications carriers, 47 U.S.C. § 254 does not authorize it. And there is no precedent establishing that federal agencies may subdelegate powers in the absence of statutory authorization. To the contrary, the only Supreme Court cases blessing private delegations involved explicit statutory authorizations.

And so he summarizes:

Even if the Constitution does not categorically forbid FCC's delegation to USAC and private telecommunications carriers, 47 U.S.C. § 254 does not authorize it. And there is no precedent establishing that federal agencies may subdelegate powers in the absence of statutory authorization. To the contrary, the only Supreme Court cases blessing private delegations involved explicit statutory authorizations. . . .

We are highly skeptical that the contribution factor before us comports with the bar on congressional delegations of legislative power. And we are similarly skeptical that it comports with the general rule that private entities may not wield governmental power, especially not without express and unambiguous congressional authorization. But we need not resolve either question in this case. That is because the combination of Congress's sweeping delegation to FCC and FCC's unauthorized subdelegation to USAC violates the Legislative Vesting Clause in Article I, § 1.

And he concludes:

American telecommunications consumers are subject to a multibillion-dollar tax nobody voted for. The size of that tax is de facto determined by a trade group staffed by industry insiders with no semblance of accountability to the public. And the trade group in turn relies on projections made by its private, for-profit constituent companies, all of which stand to profit from every single tax increase. This combination of delegations, subdelegations, and obfuscations of the USF Tax mechanism offends Article I, § 1 of the Constitution.

Judge Elrod wrote a concurring opinion, joined by Judges Ho and Engelhardt, and Judge Ho wrote a concurring opinion for himself.

Judge Stewart wrote the principal dissent, joined by Judges Richman, Southwick, Haynes, Graves, Higginson, and Douglas. It begins:

I dissent because the Universal Service Fund ("USF") is not unconstitutional. Section 254 of the Telecommunications Act of 1996 provides an intelligible principle and the Federal Communications Commission ("FCC") maintains control over the Universal Service Administrative Company ("USAC"), the private entity entrusted to aid its administration of the USF. The majority's exhaustive exegesis about policy, history, and assorted doctrines does not eclipse the consistent holding of three sister circuits that have addressed constitutional challenges to Section 254. All have held it constitutional under the intelligible principle test. The majority has created a split in a sweeping opinion that (1) crafts an amorphous new standard to analyze delegations, (2) overturns—without much fanfare— circuit precedent holding that this program collects administrative fees and not taxes, (3) blurs the distinction between taxes and fees, and (4) rejects established administrative law principles and all evidence to the contrary to create a private nondelegation doctrine violation.

Judge Higginson also wrote a separate dissent, joined by Judges Stewart, Southwick, Graves, and Douglas.

A petition for certiorari will almost certainly be filed by the federal government, and certiorari will very likely be granted.