The Federal Communications Commission (FCC) recently weighed in on three pending disputes in the Universal Service Contribution Methodology docket.  These cases are helpful in understanding the FCC’s approach when considering appeals of USAC decisions.  In the series of decisions, the FCC (1) clarified how it views evidence used to support geographic allocations; (2) commented on the reach of corporate liability for acts of associated entities; and (3) remanded a case that is instructive on the burdens to small businesses of the appeals process.

Evidence Supporting Geographic Allocations

In the first case, the FCC denied an appeal by Critical Alert Systems (CAS) of a 2009 audit decision made by USAC.  CAS will now be required to contribute to the Universal Service Fund (USF) based on 12 percent of its 2009 revenues.

The source of the disagreement between USAC and CAS was the manner in which CAS allocated its revenues between interstate and intrastate sources.  Carriers are only required to contribute to the USF based on interstate revenues.  The FCC provides a safe-harbor percentage to assist carriers in distinguishing their interstate revenues from intrastate revenues.  As an example, in this case CAS, a provider of paging services, was able to take advantage of a 12 percent interstate revenue safe-harbor applicable to paging services offered in 2009.

But CAS did not use the safe harbor.  Instead, it relied on FCC rules that permit carriers to use traffic studies or their books and records to reduce the interstate percentage.  CAS determined that its interstate revenues were less than 10 percent.  As a result, CAS decided that it did not have to directly contribute to USF based on the de minimis rule, which says that carriers are not required to contribute to the USF based on interstate revenues if those revenues are less than 10 percent (i.e. “de minimis”).

In reviewing CAS’s appeal, the FCC disagreed that CAS had provided sufficient evidence that its interstate revenues were indeed less than 10 percent.  Specifically:

• CAS provided customer surveys indicating that customers used its services within the state.  However, the surveys were (1) not statistically valid; (2) were not supported by independent, verifiable documentation; and (3) were conducted in 2011, not in 2009.
• CAS provided testimony of officers and employees indicating that service usage was primarily intrastate.  But the FCC made clear it does not accept “anecdotal information” and “broad general statements” to support geographic allocations.
• Finally, the FCC points out that CAS “did not attempt to determine the accurate allocation of revenues when reporting to USAC,” including by determining whether its interstate allocation was correct specifically for 2009.  CAS did not conduct a 2009-specific traffic study or base its interstate calculation on 2009-specific data.

The FCC’s decision in CAS underscores the need for carriers to plan their allocation calculations in advance, especially considering the significant burdens involved in re-examining and substantiating past revenue allocation decisions.

Clarification of Rules on Piercing the Corporate Veil

The next case recently decided by the FCC grants an appeal by Cablevision in an action to collect on past due contributions from a now-defunct entity, Cleveland PCS.  In Cablevision’s 2014 appeal to the FCC, the company explained that USAC was trying to collect on USF debt from Cablevision even though Cablevision merely held a “minority, indirect ownership interest in Cleveland PCS.”  The two companies were “headquartered in different states, with separate directors, separate operations, separate corporate records, and different owners.”

In its recent action granting Cablevision’s request, the FCC agreed, explaining that the FCC “may hold one entity or individual liable for the acts or omissions of a different related entity” only if the following are true:

• Where there is a common identity of officers, directors, or shareholders;
• Where there is common control between the entities; and
• When it is necessary to preserve the integrity of the Communications Act to prevent the entities from defeating the purpose of statutory provisions.

Finding none of these applied to the Cablevision case, the FCC granted the appeal request effectively dismissing USAC’s collection action.

A Lesson on the Appeals Process

In the final noteworthy decision, the FCC returned a case to USAC with instructions to consider evidence that Global IT Communications was not required to contribute to the USF because its wholesale providers had already done so.  Global IT Communications had essentially asked the FCC for that kind of intervention to avoid double charges for required contributions:  “We can provide all carrier invoices that demonstrate our contributions for 2015. We have submitted a dispute with USAC but were told that they were unable to reverse the charges.”  The FCC went no further, however, including resolving the double charges the company alleges.

In its petition to the FCC, the company admitted that it had misunderstood USAC’s process for determining USF contributions:  “On the form, we included sales from 2015 not knowing that we would be retroactively charged for 2015 USF contributions.”  The FCC did not address this statement, instead remanding the case to USAC for further action.

The case is an example of the often frustrating appeals process.  The appeal was filed in September 2016, and now, seven months later, the case returns to USAC.  The entire episode started, as the company admits, with a misunderstanding, but the FCC and USAC appear to be unwilling to end the frustration and uncertainty for this company.  The case is yet another confirmation to the industry that the appeals process at the FCC is difficult, expensive, and time consuming.

If you have any questions about the FCC’s decisions in these USAC appeals, or for questions about your own contribution requirements or options in the case of an audit, please contact Jonathan Marashlian at jsm@commlawgroup.com.