E-Rate Legal Challenge

Background

E-Rate is a federal program that provides discounts to eligible K-12 public and private schools and public libraries in order to obtain affordable internet access and telecommunications services (such as internal connections, managed broadband, and basic maintenance of equipment). Discounts are weighted by poverty (based on free and reduced lunch data) and rural/urban designation. In order to receive E-Rate discounts, schools and libraries must submit annual forms and competitively bid out services, generally 6-12 months in advance.

E-Rate is one of four programs funded by the Universal Services Fund (the other three are High-Cost, Rural Health, and Low-Income). The Universal Services Fund ( USF) is primarily supported by telecommunications companies. USF contributions are determined using a quarterly contribution factor that is determined by USAC. The Commission’s rules permit providers to pass through the contributions to their end-users in their rates or in the form of a line item on consumers’ bills.

Acronyms:

• FCC: Federal Communications Commission
  • The FCC regulates interstate and international communications by radio, television, wire, satellite, and cable in all 50 states, the District of Columbia and U.S. territories. An independent U.S. government agency overseen by Congress, the Commission is the federal agency responsible for implementing and enforcing America’s communications law and regulations.
• USAC: Universal Service Administrative Company
  • An independent not-for-profit corporation created by the FCC to administer its universal service programs (like e-rate). All applications are managed via USAC and USAC determines the USF fees.
• USF: Universal Services Fund
  • The funding mechanism for universal service provisions; telecommunications companies pay fees into this fund in order to be passed through to programs such as e-rate.

Legal Challenges

Consumers’ Research v. FCC

There is a current case (Consumers’ Research v. FCC) working its way through the system that is challenging the basis of the e-rate funding, the USF. The crux of the case is whether or not these USF contributions are considered fees or taxes. The 5th circuit has held that these contributions are taxes; the 6th and 11th circuits have ruled that the contributions are fees. As the 5th circuit has deemed the contributions taxes, the Court ruled that the tax was inappropriately being levied by a nonprofit unauthorized to levy a tax (as only Congress has that power).
The Supreme Court agreed to hear the case and briefs on both sides were filed in mid-January. On March 26, the U.S. Supreme Court will hear oral arguments in FCC v. Consumers’ Research with a decision still expected in June 2025. In the meantime, E-Rate and the other three USF programs are operating and will continue, “business as usual.” (Even if the Court rules against the FCC, it is most likely that the Court will give the FCC/Congress a stay in order to modify the mechanism rather than remove it entirely.)
(Note: Universal service is a core mandate of the Communications Act of 1934; what is in question is the funding mechanism.)

Federal Funding Freeze

As of February 3, the federal funding freeze is under a temporary restraining order.

It is important to know, however, that the Universal Services fund was one of the federal initiatives specifically named in the January 28, 2025 OMB 52-page memo. It is unknown whether this is due to the Consumers’ Research case or another policy initiative.