Court Rejects Huawei Appeal of FCC Order Barring U.S. Companies Receiving Subsidies from Buying Its Equipment

July 8, 2021 | by Andrew Regitsky

Court Rejects Huawei Appeal of FCC Order Barring U.S. Companies Receiving Subsidies from Buying Its Equipment

On June 18, 2021, a three-judge panel at the Fifth Circuit Court of Appeals in New Orleans rejected a challenge of the FCC’s Order in Docket 18-89 barring the use of U.S. telecommunications companies using universal service funds (USF) to buy equipment from companies designated security risks to communications networks. Here is the background that led to the Court’s Opinion.

In a November 26. 2019 Order, the FCC took its first steps to protect U.S. networks from the threat of foreign telecommunications when it prohibited prospective use of universal service funds for the purchase of equipment or services from any company that posed a national security threat to the integrity of U.S. communications networks or the communications supply chain.  Specifically, the Order targeted rural American telephone companies that obtain universal service support and are using or planning on purchasing relatively cheap equipment from the Chinese companies Huawei and ZTE for their 5G networks. The Order also established a process to ban other companies.

The Commission followed up in a June 30, 2020, Order in Docket 19-351 when it found that Huawei is a national security threat to the United States.  Huawei filed an Application for Review of this Order and claimed that the FCC did not have the legal authority to make this designation.  It also argued that the Order violated the Administrative Procedures Act (APA) and was unconstitutional.

[The FCC] violated the Administrative Procedure Act by: (1) relying on unsupported evidence to issue the designation; (2) singling out Huawei for a designation the Bureau violated the Administrative Procedure Act when other situated identified entities have not been designated as national security threats; (3) failing to consider Huawei’s counterevidence that it is not an instrument of the Chinese government, military, or Chinese intelligence, but an autonomous private entity; and (4) failing to follow Commission precedent. Additionally, Huawei argues that the Final Designation Order was unconstitutional because: (1) the decision to designate Huawei was issued due to congressional pressure; (2) Commissioners’ statements demonstrated prejudice; and (3) Huawei’s constitutionally protected due process rights have been violated. (Docket 19-351, Memorandum Opinion and Order, released December 11, 2020, at para. 10).

The FCC disagreed, and in a December 11, 2020, Order, found that Huawei was unquestionably controlled by the Chinese government, was indeed a security threat and USF funds could not be used to buy Huawei equipment.

Huawei is susceptible to Chinese government pressure to participate in espionage activities, and Huawei’s close ties to the Chinese military present significant risk.  Furthermore, reports of vulnerabilities in Huawei equipment have led other countries to bar the use of such equipment.  As a result of today’s order, money from the FCC’s $8.3 billion a year Universal Service Fund may not be used to purchase, obtain, maintain, improve, modify, or otherwise support any equipment or services produced or provided by Huawei. (FCC December 10, 2020, Public Notice).

After losing at the FCC, Huawei initially appealed both Order’s to the Fifth Circuit Court of Appeals.  However, it ultimately made it clear to the Court its appeal involved the USF ban only.  Huawei made many of the same arguments it used in its Application for Review claiming the USF Order (1) exceeded the FCC’s statutory authority; (2) was arbitrary, capricious, and an abuse of discretion under the APA; (3) was adopted in violation of the notice-and-comment requirements of the Commission’s rules; (4) was void for vagueness and retroactive in violation of the Constitution and the APA; (5) violated the Constitution’s Appointments Clause and statutory and constitutional due process protections; and (6) was otherwise contrary to law.

The Court disagreed and, in its Opinion, found that:

[Huawei’s] most troubling challenge is that the rule illegally arrogates to the FCC the power to make judgments about national security that lie outside the agency’s authority and expertise.  That claim gives us pause. The FCC deals with national communications, not foreign relations.  It is not the Department of Defense, or the National Security Agency, or the President.  If we were convinced that the FCC is here acting as “a sort of junior-varsity [State Department],” Mistretta v. United States, 488 U.S. 361, 427 (1989) (Scalia, J., dissenting), we would set the rule aside. But no such skullduggery is afoot. Assessing security risks to telecom networks falls in the FCC’s wheelhouse.  And the agency’s judgments about national security receive robust input from other expert agencies and officials.  We are therefore persuaded that, in crafting the rule, the agency reasonably acted within the broad authority Congress gave it to regulate communications.  Additionally, having carefully considered the companies’ other challenges under the Administrative Procedure Act and the Constitution, we find those unavailing as well.  We therefore deny the petition for review.  (June 18, 2021, Opinion of the Fifth Circuit Court in Case No. 19-60896, at p. 2).

Going forward, unless Huawei appeals this decision to the Supreme Court, it is not going to be a part of any U.S. telecommunications network.  Moreover, with the High Court dominated by conservatives, it will have little chance of succeeding there.