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1999 Term, Number 16 / June 5, 2000

Today the Supreme Court granted certiorari in one case of potential interest to the business community. Amicus briefs in support of the petitioner are due on Thursday, July 20, 2000, and amicus briefs in support of the respondents are due on Monday, August 21, 2000. Any questions about this case should be directed to Donald Falk (202-263-3245) or Eileen Penner (202-263-3242) in our Washington office.

1. Telecommunications Law — Subsidies to Carriers for Providing Universal Service. Telecommunications laws have long required communications carriers to make telephone service universally available nation-wide. Such universal service is achieved through a system of subsidies designed to compensate carriers for the high costs of providing service to certain customers, such as rural-area residents. Today, the Supreme Court granted certiorari in GTE Service Corp. v. FCC, No. 99-1244, to decide whether the Fifth Circuit erred in upholding a decision by the Federal Communications Commission ("FCC") to subsidize carriers’ service to high-cost subscribers based upon the projected costs that a hypothetical, most-efficient carrier would incur in providing such service, rather than upon the actual, historical costs of such service. Specifically, the Supreme Court will be asked to decide whether (1) the Telecommunications Act of 1996 ("the 1996 Act") authorized the FCC to adopt the new cost model; (2) the FCC’s decision was entitled to Chevron deference, even though it implicated serious constitutional questions; and (3) the new model works a taking without just compensation.

Historically, universal service had been achieved through a system of explicit and implicit subsidies. Implicit subsidies were created through a regulated rate system in which the losses that carriers accrued by providing below cost service to some consumers were offset by the rates they charged to others. Recognizing that such a system would no longer be workable in the more competitive environment created by the 1996 Act, Congress directed the FCC to replace the existing funding system with one that would be "sufficient" and "explicit," 47 U.S.C. § 254(e), and that would require all telecommunications carriers to make an "equitable and nondiscriminatory contribution to the preservation" of universal service. 47 U.S.C. § 254(b)(4). The FCC decided to begin reimbursing carriers based on the projected costs that an efficient carrier would incur in providing service to high-cost customers, rather than on carriers’ actual, historical costs of providing such service. In Re Federal-State Joint Board on Universal Service, Report and Order, 12 F.C.C.R. 8776, 8899 (1997).

On petitions for review filed by GTE and others, the Fifth Circuit affirmed the FCC’s interpretation of the 1996 Act to authorize subsidies based upon a forward-looking cost model. 183 F.3d 393. The court reasoned that, because the language of the 1996 Act that the FCC was interpreting was "ambiguous" as to what methodology was permitted (id. at 411), the more deferential step-two level of review set forth in Chevron USA Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), should be applied. The court concluded that the FCC’s forward-looking cost model was a reasonable interpretation of the statutory language. Ibid. It also found that the FCC’s actions in adopting that model were not "arbitrary and capricious" in violation of the Administrative Procedure Act (APA). Id. at 413. Finally, the court held that use of the forward-looking cost model did not constitute an unconstitutional taking. Id. at 413 n.14.

This case is of obvious importance to the telecommunications industry and to regulated industries generally. Affirmance of the decision below may force many local carriers to bear significant costs of providing universal service to high-cost subscribers. In addition, all regulated industries have a strong interest in an articulation of the circumstances under which a rate methodology change constitutes a taking without just compensation under the Fifth Amendment. Finally, many businesses would be affected by a holding that federal courts should not accord Chevron deference to agency decisions that implicate constitutional issues.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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