USAC Owes $10M for Eligible E-Rate Services in 2001, ISP Alleges

The Universal Service Administrative Co. owes Data Research Corp. (DRC) $9.9 million, plus interest, for broadband services it provided more than 20 years ago to the Puerto Rico Department of Education (PRDOE) under the federal E-rate program, DRC's complaint Wednesday alleges (docket 3:24-cv-01211) in U.S. District Court for Puerto Rico in San Juan.

DRC is demanding nearly $106 million, including for discounted eligible services comprising internet access and broadband T1 transport services it provided to more than 700 schools owned and operated by PRDOE in FY 2001 under the schools and libraries universal service support mechanism created by Section 254 of the Communications Act, said the complaint.

DRC also seeks $25.6 million in economic damages it sustained from the Feb. 15, 2002, cancelation of its contract with PRDOE caused by USAC's actions, which allegedly eliminated DRC's opportunity to provide services under the E-rate program to PRDOE's schools from March 1, 2002, to June 30, 2004, the complaint said. In addition, it seeks $70 million, representing the full value of its operating business, which TAG Venture Partners “intended to acquire” for $62 million-$79 million before USAC and its employees “caused the cancellation of DRC's contracts with PRDOE and a substantial decrease in the value of DRC's business,” it said.

From July 1, 2001-June 30, 2002, DRC provided eligible internet and broadband transport service to more than 700 Phase II PRDOE schools, said the complaint. Under the E-rate program, USAC was obligated to pay DRC for the services, but USAC, as administrator of the USF programs for the FCC, has “refused” in the 23 years since DRC provided the service, it said.

After DRC began pursuing payment in December 2003, and continuing through USAC’s “slow-moving internal administrative or extrajudicial process,” the defendant “finally denied funding,” and DRC is still owed nearly $10 million, plus interest, for the services it provided, the complaint said.

PRDOE used the Service Provider Invoice (SPI) method, to pay for the internet access and broadband T1 transport services DRC provided, and it requested that DRC bill the services directly to USAC, said the complaint. That gives DRC standing to make the claim directly against USAC, “and USAC has an obligation to disburse directly to DRC” the $9,958,916.67 owed, plus interest, the complaint said.

Service providers file FCC Form 474 when they have provided discounted eligible services and seek reimbursement for the discounted portion of the eligible services from USAC, the complaint said. USAC then disburses funds directly to the service provider associated with each funding request number, it said. Before a service provider can file a Form 474, it must submit a receipt of service confirmation form (486), notifying USAC it has received the service “in the relevant funding year,” said the complaint. Form 486 can’t be filed before receipt of a funding commitment decision letter (FCDL) from USAC, it said.

FCC rules prevented DRC from filing form 474, and PRDOE from filing Form 486, until USAC issued a FCDL either approving or denying PRDOE’s funding request for FY 2001, “which USAC improperly failed to do for 22 years, until May 15, 2023," said the complaint.

In 2001, USAC relied on a “flawed” Arthur Andersen report on PRDOE’s alleged noncompliance with E-rate program rules for lack of desktop computers, said the complaint. USAC suspended disbursements of E-Rate funds to the school district’s service providers for fiscal years 1998, 1999 and 2000, and it placed 2001 and 2002 applications on hold, said the complaint. USAC requested that PRDOE “provide information about its ability to meet ‘its responsibility to make effective use of the services’ for which USAC provided discounts," it said.

In January 2003, USAC’s report addressing the findings of the Andersen audit found certain observations Andersen noted weren’t E-rate program violations, the complaint said. USAC should have concluded from those comments that PRDOE's delay in the purchase of 100,000 desktop computers due to a bid protest that wasn't resolved until March 2001 didn't constitute a violation of the E-rate program rules because PRDOE teachers were provided with 40,000 laptop computers instead that enabled them to access the internet, said the complaint. USAC management didn’t send a copy of the report to PRDOE or DRC, and “continued to allege that PRDOE had violated the rules,” while doing nothing to reinstate PRDOE into the E-rate program, it said.

The FCC released an order in February 2003, directing USAC to hire an independent auditor for two audits: one for 2001 and 2002 and the other for the prior years in question, the complaint said. On Dec. 28, 2003, DRC filed a petition for reconsideration and request for a hearing to present evidence, “starting what became a 23-year administrative or extrajudicial process to try to obtain payment for the services it provided” to PRDOE's Phase II schools, it said.

In an “intent to deny” letter, dated May 15, 2023, USAC denied PRDOE’s FY 2001 funding request based on the school district’s alleged failure to comply with the FCC’s FY 2001 necessary resources requirements, despite findings of an independent audit that PRDOE “complied with all the FYs 2001 and 2002 funding (or necessary resources) requirements,” said the complaint.

“After waiting 23 years for payment, DRC has no alternative but to file and prosecute this case," the complaint said. With its 23-year delay in payment, USAC "waived any argument in favor of continuing to prosecute this case administratively,” it said. The DRC seeks judgment in its favor and against USAC in the sum of $9,958,916 dollars, plus interest, in payment for the discounted eligible services it provided, plus $25.6 million in damages for a canceled contract and $70 million in lost value of its business. USAC didn't comment Thursday.