D.C. Circuit Ruling Further Insulates FCC from Legal Challenges Related to USAC’s Administration of USF Program

July 3, 2013

On July 2, 2013, the United States Court of Appeals for the D.C. Circuit (“D.C. Circuit”) issued a decision missing in part and denying in part The Conference Group, LLC’s (“TCG”) petition for review of (1) the Federal Communications Commission’s (“FCC” or “Commission”) 2008 Order upholding the Universal Service Administrative Company’s (“USAC”) classification of the audio bridging services of InterCall, Inc. and “similarly situated providers” as Universal Service Fund (“USF”) eligible telecommunications services (“InterCall Order”) and (2) the FCC’s 2012 Order denying petitions for reconsideration of the InterCall Order filed by Global Conference Partners and a group of audio bridging providers including TCG (“Orders”).

TCG, joined by intervenor Cisco WebEx, argued that the Orders “improperly converted an unlawful, USAC determination into an industry-wide legislative rule without adequate notice or comment in violation of section 553 of the APA [Administrative Procedure Act]” and that the InterCall Order was “arbitrary and capricious because it ignored uncontroverted facts and prior legal precedent.” The D.C. Circuit ruled that while TCG had standing to challenge the Orders as an unlawful rulemaking, the Commission’s decision was a proper adjudication because it involved statutory interpretation. Because the decision was an adjudication, TCG lacks standing under Article III of the Constitution to challenge the merits of the decision since it was not a party to the adjudication. The court was not persuaded by TCG’s claim that because it qualified as a “similarly situated provider” under InterCall, it met the injury-in-fact requirement to confer Article III standing on TCG because all precedents apply to third parties other than the participants in the adjudication. The court noted that if the FCC applies the decision adopted in InterCall to TCG, TCG can argue the merits of that decision through its own adjudication.

In effect, the ruling prevented TCG from presenting the merits of its challenge to the FCC's InterCall Order. TCG (and WebEx) believed InterCall Order "changed the rules" in a manner that affected the entire industry and, hence, should have been made in a Rulemaking, not an Adjudication. The D.C. Circuit agreed and gave substantial deference to the FCC to decide whether to "move the goal posts" via the adjudicatory or rulemaking process.

Q: WHAT DOES THE COURT'S DECISION MEAN FOR YOU?

A: IT MEANS YOU MAY CONFRONT A HOBSON'S CHOICE (OR MANY SUCH CHOICES) RELATED TO USF REPORTING PRACTICES IN THE FUTURE

The decision highlights the Court’s role in what has become what many now refer to as an "administrative shell game" where the FCC uses adjudications arising from USAC audit proceedings as its preferred method of "making new rules," moving the goal posts of industry expectations, and otherwise changing the rules of the road. The D.C. Circuit has now plainly stated that it will not be easily persuaded to address the harms caused by the FCC’s continued abuse of USAC audits and adjudicatory processes whenever it seeks to create new law or upset long-established precedents. The FCC has mastered the game and may now be emboldened by the Court's ruling to increase its use of adjudicatory proceedings to make new rules and regulations and stretching (if not completely turning its back on) precedents along the way; all with the intention of shifting the goal posts to facilitate a larger revenue base to support the USF. The D.C. Circuit's decision gives the FCC very little incentive to conduct rulemakings and, with them, endure the publicity and political backlash that frequently accompanies rulemaking proceedings.

The recent decision should also be seen as "fair warning" to the industry, particularly smaller companies. It is entirely possible the Commission will now increase its focus on smaller companies that cannot afford to litigate and appeal an aggressive extension of the law, prior FCC rules, or precedent. Why? Because the D.C. Circuit's ruling establishes that only if your company is directly injured in fact by an adjudication do you have the right to appeal. Yet, the legal precedent established in the adjudication can still be relied upon as precedent by the FCC (and, by extension, by USAC in the audit context). In summary, unless YOU are directly targeted, YOU can't appeal. But YOU must still comply or be faced with the following Hobson's Choice:

  1. Follow the "new" FCC rules adopted through adjudication involving a 3rd Party, even if you believe the "new rules" violate precedent or underlying law or
  2. Rely upon your view of the underlying law and precedent, but in doing so expose yourself to the risk of USAC audit, FCC enforcement and the resulting adjudication to argue your case, knowing full well that adjudications and appeals are costly and time-consuming.

Compliance with the FCC's rules governing the Universal Service Fund program has never been simple and risk-free. The D.C. Circuit's decision does nothing to assuage this situation and, indeed, further complicates compliance because it signals to the FCC the Court's willingness to provide the FCC with great flexibility and freedom to "re-interpret" rules in order to evolve the rules to address technological changes that might otherwise jeopardize the USF program.

Clients are advised to thoroughly consider all decisions related to USF collection and remittance and to consult with the Attorney assigned to their accounts regularly regarding these issues.