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Huawei’s Battle Against FCC’s Subsidy Ban Faces Long Odds

Dec. 18, 2019, 11:01 AM

Huawei Technologies Co.'s Fifth Circuit challenge to a Federal Communications Commission ban against carriers using federal subsidies to buy its equipment is unlikely to succeed, attorneys and academics watching the case say.

The Chinese company filed a lawsuit in the U.S. Court of Appeals for the Fifth Circuit claiming the commission violated its rights by barring telecommunications providers from using Universal Service Funds for its hardware. But the agency has broad authority under federal communications law to regulate how USF subsidies are distributed, and courts tend to defer to the agency’s interpretation of statutes.

The Communications Act gives the FCC near “plenary authority” over how it disperses more than $4 billion in subsidies aimed at furthering universal access to internet and telephone services, Philip Verveer, who served as senior counselor to former Democratic FCC Chairman Tom Wheeler, said. The subsidies generally go to rural carriers to expand services in remote areas.

“I think at the end of this it’s very likely that the FCC prevails,” Verveer said.

Huawei will also have to overcome broad U.S. suspicion that the company is susceptible to Chinese government influence, and that its equipment may be used for espionage.

Huawei didn’t respond to a request for comment. FCC Chairman Ajit Pai declined to comment on the pending lawsuit.

Due Process

Huawei argues that the FCC has unfairly singled it out and violated its rights to due process under the U.S. Constitution, which protects people and corporations from having their life, liberty, or property taken away arbitrarily.

That’s a tough sell, Adam Candeub, a communications law professor at Michigan State University, said. The court is unlikely to overturn the subsidy ban over potential violations of Huawei’s due process rights, given U.S. fears that the company may be tied to the Chinese government. The Trump administration, citing national security concerns, blacklisted Huawei and has tried to get U.S. allies to avoid the company’s 5G gear. The FCC also has banned telecom carriers from using USF subsidies to buy equipment made by ZTE Corp., another Chinese supplier.

“What they’re trying to claim is that the FCC can’t just go after these two corporations,” Candeub said. “But in the national security setting I can’t imagine a court would be so concerned about the constitutional rights of these corporations that are essentially masks for the Chinese governments.”

Huawei also claims the order is “arbitrary and capricious” because the FCC failed to address some legal arguments that the company and rural carriers made during the comment period before it took effect.

But that argument is also unlikely to sway the court because the FCC sought comment on the proposal for more than a year, Candeub said. The FCC said in its order that it gave Huawei “notice and an opportunity to be heard” on the subsidy ban—and made clear it was considering prohibiting the funds from being spent on its products.

Even if the court is unsatisfied with the FCC’s notice-and-comment period, it’s more likely to remand the order and direct the agency to fix issues where it didn’t seek appropriate public comment, than to throw out the entire order, Verveer said.

“If there is some technical defect it can certainly go back and correct that,” said Verveer, referring to the FCC.

Huawei has denied that the Chinese government uses it for espionage and says the U.S., despite imposing a range of restrictions and sanctions on the company, has never offered any proof to back up its suspicions or actions.

“The US government has never presented real evidence to show that Huawei is a national security threat,” Huawei Chief Legal Officer Song Liuping said during a press conference announcing the suit. “That’s because this evidence does not exist.”

Huawei filed the case Dec. 5. The telecom giant has retained a legal team that includes Jones Day’s Glen Nager, who has argued 13 cases before the U.S. Supreme Court.

“That indicates that Huawei plans to pursue the litigation aggressively,” Andrew Jay Schwartzman, a lecturer at Georgetown Law who specializes in telecom policy, said about the company’s legal team in an email.

‘Plenary Authority’

The five-member commission voted unanimously in November to approve the order prohibiting USF subsidies from being spent on equipment manufactured by Huawei or ZTE.

The four national U.S. carriers don’t use equipment from Huawei or ZTE. But the companies’ equipment is popular among many U.S. rural carriers that receive USF subsidies and operate on tight budgets. The subsidy ban effectively wipes out the U.S. market for the Chinese companies’ equipment.

Huawei says the FCC lacks the statutory authority to make decisions based on national security concerns, in addition to failing to follow federal notice and comment rules, and violating its due process rights.

“Nothing in the Universal Service provisions of the Communications Act authorizes the Commission to make national security judgments or to restrict use of USF funds based on such judgments,” Nager said in a press conference announcing the lawsuit.

The FCC argues in its order that ensuring secure networks is an important consideration when evaluating what’s in the public interest.

Agency’s Leeway

One factor possibly in the FCC’s favor is that courts have given it substantial leeway to make changes to USF programs without explicit direction from Congress.

It’s “well-established” that the agency has authority “to place reasonable public-interest conditions on the use of USF funds,” the agency said in its order.

The FCC in 2014 prevailed in a legal challenge to an order that revamped the rural telecom subsidies from supporting landline phone services to supporting broadband internet.

Dozens of rural carriers and some state utilities commissions argued that the FCC lacked authority under the Communications Act to condition the funding on providing broadband internet services, without a specific mandate from Congress.

The U.S. Court of Appeals for the Tenth Circuit, however, sided with the FCC, which argued that Congress left it to the agency to determine how the funds be used.

The Tenth Circuit case, In Re: FCC 11-161, which the FCC cited in its order, is likely to help the agency prevail against Huawei, Candeub said.

“The FCC completely transformed it from a program to support cheap local service for old fashioned telephones to a broadband support mechanism and this was upheld by the courts,” he said.

The case is: Huawei Technologies USA, Inc. v. FCC, 5th Cir., No. 19-60896, petition for review 12/5/19

To contact the reporter on this story: Jon Reid in Washington at jreid@bloomberglaw.com

To contact the editors responsible for this story: Melissa Robinson at mrobinson@bloomberglaw.com; Keith Perine at kperine@bloomberglaw.com

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