A US federal appeals court has ruled that the Federal Communications Commission (FCC) exceeded its legal authority when it established the administrative company responsible for collecting contributions to a multibillion-dollar telecommunications subsidy programme, raising fresh questions about the legal framework supporting affordable internet and phone services for millions of Americans.
The US Court of Appeals for the Fifth Circuit ruled on Thursday that the FCC lacked congressional authorization to establish the Universal Service Administrative Co. (USAC) in 1997. The company collects contributions from telecommunications carriers and determines the rates used to finance the Universal Service Fund, which supports communications services in rural and low-income communities.
Writing for a three-judge panel, Judge Edith Brown Clement said the FCC had violated the Government Corporation Control Act by creating the company without specific authorization from Congress.
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“Because Congress never specifically authorized the FCC to establish USAC, we hold that the agency violated the Government Corporation Control Act,” Clement wrote.
The decision challenges the institutional structure used to administer a programme that distributes billions of dollars annually to expand access to telecommunications services. The fund collects approximately $9 billion a year, with most telecommunications companies passing their contributions on to customers.
However, the immediate consequences remain uncertain. The FCC said it was considering its available options and noted that the court’s order would not take effect for at least two months.
“While the court takes issue today with an FCC decision made almost 30 years ago, the court’s order would not go into effect until two months from now, at the earliest,” an FCC spokesperson said.
The ruling places the fund’s administrative arrangements under renewed legal scrutiny, although it does not by itself establish that all existing subsidies must stop. The eventual impact will depend on how the decision is implemented and whether the agency pursues further legal or administrative action.
The Universal Service Fund is designed to extend communications access to communities and institutions that may otherwise face high costs or limited infrastructure. Its beneficiaries include low-income households, rural communities, Native American tribal lands, schools, libraries, and rural healthcare facilities.
The programme has become an important source of funding for broadband deployment in areas where commercial providers may find infrastructure investment less attractive because of low population density or high construction costs.
In 2024, the programme supported 7.5 million low-income households and provided telecommunications companies with $4.2 billion to deliver high-speed internet services in hard-to-serve rural areas.
The fund also allocated $7 billion over a three-year period to 118,000 schools and libraries, supporting internet access for approximately 54 million students.
Those figures illustrate the potential reach of any disruption to the programme. Telecommunications providers receive billions of dollars in support, while households and public institutions depend on subsidized services to access education, healthcare and other essential online resources.
The court’s decision therefore raises two related issues: whether the FCC followed the legal requirements governing the creation of USAC and how the government can maintain the programme’s operations within the limits of its statutory authority.
The ruling focuses on the legality of the administrative company’s establishment, rather than simply rejecting the objective of expanding communications access. Nevertheless, uncertainty over the fund’s operating structure could have implications for providers that rely on its payments to finance network deployment and subsidized services.
The continuity of funding is considered timely for rural telecommunications operators. Building broadband networks requires substantial upfront investment, often in areas where providers cannot recover costs through customer revenue alone. Subsidies help bridge that gap, making the programme’s legal and administrative stability relevant to future investment decisions.
Legal Challenge Follows Earlier Supreme Court Ruling
The latest decision comes after a separate dispute over the Universal Service Fund’s financing mechanism reached the US Supreme Court.
In June 2025, the Supreme Court upheld the way the FCC funds the programme, reversing an earlier Fifth Circuit ruling that had challenged the agency’s use of mandatory contributions from telecommunications companies.
The earlier decision characterized the funding mechanism as a “misbegotten tax” on consumers. The Supreme Court’s subsequent ruling endorsed the FCC’s approach to financing the programme, providing support for the mechanism through which the agency raises money from telecom carriers.
Thursday’s ruling addresses a different legal question: had Congress authorized the FCC to establish USAC to administer the collection process and set contribution rates.
The legality of a funding mechanism and the legality of the entity administering it are separate issues. A court can uphold the underlying method of collecting contributions while finding that the agency lacked authority to create the organization responsible for carrying out certain administrative functions.
The latest decision therefore reopens a legal dispute around the programme without necessarily overturning the Supreme Court’s earlier conclusion on its financing structure.
The FCC was established as an independent federal agency in 1934 and operates under congressional oversight. Its authority to regulate telecommunications and administer programmes remains subject to the powers Congress has granted it through legislation.
The Fifth Circuit’s ruling centers on that boundary, finding that the agency’s establishment of USAC went beyond the authority provided by Congress under the Government Corporation Control Act.
However, the financial implications of the decision could extend across the telecommunications industry because the fund operates through contributions from carriers and payments to providers delivering subsidized services.
Telecommunications companies generally pass most of their contribution costs on to customers. As a result, the fund’s structure affects both the providers financing it and the consumers who ultimately bear much of the cost. At the same time, providers receive billions of dollars from the programme to support broadband deployment and affordable communications services. Any changes to its administration could therefore affect the flow of money through the sector, depending on the legal and regulatory response.
The court’s order is not due to take effect for at least two months, according to the FCC, leaving time for the agency to consider its options. The available information does not establish whether the government will appeal, seek congressional authorization, or pursue another approach to preserve the programme’s operations.
Congressional action could become an important consideration if the ruling ultimately requires explicit statutory authority for the administrative company.