Fifth Circuit Rules the FCC Lacked Authority to Create USAC. Here’s What It Means for E-rate.

On October 15, 2026, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit ruled that the FCC lacked statutory authority to create the Universal Service Administrative Company (USAC), the nonprofit that administers E-rate and the other Universal Service Fund programs. Because the FCC relied on USAC’s projections when setting the quarterly contribution factor, the court concluded that the factor was adopted without lawful authority. The court vacated the 38.1 percent contribution factor for the fourth quarter of 2025 and sent the matter back to the FCC. Nothing changes for E-rate applicants today, but the decision deserves careful attention because the court’s reasoning could affect more than a single quarter.

How the court reached its decision

Although the case challenged the FCC’s fourth-quarter 2025 contribution factor, the court’s decision turned on a more fundamental question: Did Congress authorize the FCC to create USAC? In Consumers’ Research v. FCC, No. 25-60535, the panel concluded that it did not. Judge Edith Brown Clement wrote the opinion, joined by Chief Judge Jennifer Walker Elrod and Judge Andrew Oldham.

The ruling turns on the Government Corporation Control Act of 1945. That law allows a federal agency to create a corporation to act as an agency only when Congress specifically authorizes it. The FCC directed the National Exchange Carrier Association to form USAC in 1997. The court found that USAC acts as an instrumentality of the FCC and that Congress never specifically authorized its creation.

The court rejected each source of authority offered by the FCC and its supporters, including the agency’s general powers under the Communications Act, the 1996 Act’s Lifeline provision, and Congress’s use of USAC to administer two temporary pandemic programs: the Emergency Connectivity Fund and the Affordable Connectivity Program.

For the quarter at issue, the FCC adopted USAC’s projections with one change: it applied $100 million in unused E-rate funds against $628.68 million in projected E-rate demand.

The court did not reach the petitioners’ other claims. One of those claims argues that the Section 254 provisions supporting E-rate and Rural Health Care improperly delegate power to the FCC, an issue the Supreme Court left open in 2025.

What the ruling does and doesn’t change 

The decision isn’t in effect yet. An FCC spokesperson told Broadband Breakfast that the court’s order “would not go into effect until two months from now, at the earliest,” and that the agency “is considering all options available to it.” In that time, the FCC can ask the full Fifth Circuit to rehear the case. 

The order itself is narrow. It vacates one quarter’s factor, for October through December 2025, and orders no refunds. It doesn’t strike down Section 254 of the Communications Act. Joey Wender, executive director of the SHLB Coalition, which intervened to defend the fund, said, “Today’s decision only addresses issues surrounding USAC authority.” 

The opinion doesn’t direct USAC to stop reviewing applications, issuing Funding Commitment Decision Letters, or paying invoices. As of October 20, 2026, USAC had committed $2.17 billion in FY2026 funding, according to E-rate Manager. We don’t see anything in the opinion that should change your FY2026 invoicing or your FY2027 plans. 

The fund’s structure survived the Supreme Court in 2025 

In July 2024, the full Fifth Circuit held the fund’s contribution mechanism unconstitutional. On June 27, 2025, the Supreme Court reversed that decision 6-3 in FCC v. Consumers’ Research, holding that the FCC may rely on USAC’s assistance as long as the FCC retains final decision-making authority. The new panel decision addresses a different statutory question: whether Congress authorized the FCC to create USAC. The panel concluded that it did not.

The FCC is weighing its options 

The reasoning may matter beyond one quarter because the FCC sets a new contribution factor every three months using USAC’s projections. The same petitioners filed another petition for review with the Fifth Circuit in late September, No. 26-60863.

Beyond seeking rehearing, the FCC could ask the Supreme Court to review the decision. Congress could also resolve the issue by directly authorizing USAC. Broadband Breakfast reports that lawmakers are drafting legislation to modernize the fund.

The court’s objection is to how USAC was created in 1997, not to how it reviews applications or disburses funds. In our 2026 E-rate Trends Report survey, 90.8 percent of respondents said their organizations can depend on E-rate funding every year, up from 64.9 percent in 2016. 

For now, applicants should keep their FY2027 work on schedule. The EPC Administrative Window opens Wednesday, October 21. Funds For Learning will continue monitoring FCC filings and USAC guidance. If you have questions about what this means for your school or library, contact your E-rate Guide. 

About the Author:  Verlyne Jolley is a Director at Funds For Learning with more than 20 years of experience helping schools and libraries navigate the E-rate program. Her work focuses on regulatory compliance, program administration, and helping applicants understand and adapt to evolving FCC and USAC requirements.