Hill v. Federal Communications Commission

Case: 12-60070 Document: 00512044023 Page: 1 Date Filed: 11/06/2012

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit

FILED
November 6, 2012
No. 12-60070
Lyle W. Cayce
Clerk
JOSEPH M. HILL, Trustee in Bankruptcy for Lakehills Consulting, L.P.,

Petitioner,

v.

FEDERAL COMMUNICATIONS COMMISSION; UNITED STATES OF
AMERICA,

Respondents.

Petition for Review of an Order of the
Federal Communications Commission

Before STEWART, Chief Judge, GARZA, and ELROD, Circuit Judges.
PER CURIAM:*
Joseph M. Hill, Trustee in Bankruptcy for Lakehills Consulting, L.P.
(“Lakehills”), seeks review of the Federal Communications Commission (“FCC”)
Order issued in response to Lakehills’ appeal of the decision by the Universal
Service Administrative Company (“USAC”) to rescind funding for projects
performed by Lakehills for the Houston Independent School District (“HISD”).
We reject the arguments advanced by Lakehills, and therefore, deny the petition
for review.

*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
 Case: 12-60070 Document: 00512044023 Page: 2 Date Filed: 11/06/2012

No. 12-60070

I.
A.
As part of the Telecommunications Act of 1996 (“the Act”), Congress
amended the Communications Act of 1934 by adding Section 254. See Pub. L.
No. 104-104, § 254, 110 Stat. 56, 71 (1996) (codified at 47 U.S.C. § 254). Section
254 expanded the scope of “universal service”1 by, in part, creating a program
to ensure that elementary schools, secondary schools, and libraries would have
affordable access to modern communication services. See 47 U.S.C. § 254(h);
H.R. Rep. No. 104-458, at 17 (1996) (Conf. Rep.), reprinted in 1996 U.S.C.C.A.N.
124, 133. The statutory language of Section 254 contains a congressional
directive for the FCC to “establish competitively neutral rules . . . to enhance,
to the extent technically feasible and economically reasonable, access to
advanced telecommunications and information services for all public and
nonprofit elementary and secondary school classrooms . . . .” § 254(h)(2)(A).
Pursuant to this directive, the FCC established the E-rate program which
provides eligible schools and libraries with discounts2 on eligible
telecommunications equipment and services. 47 C.F.R. §§ 54.500–.523. The
FCC appointed USAC, a not-for-profit corporation, to administer the federal
universal service support mechanisms, including the E-rate program. See
generally §§ 54.701–.702.
The FCC, at the inception of the E-rate program, adopted competitive
bidding rules to ensure eligible schools and libraries would be informed of all
available choices for services and prices would remain as low as possible,

1
The longstanding goal of federal telecommunications law that reasonably priced
telecommunications services should be available in all parts of the nation is referred to as
“universal service.” See 47 U.S.C. § 151.
2
Under the E-rate program, schools and libraries are eligible for funding
support—ranging from 20% to 90% depending on the school district’s student poverty
level—on the cost of eligible telecommunications equipment and services. 47 C.F.R. § 54.505.

2
 Case: 12-60070 Document: 00512044023 Page: 3 Date Filed: 11/06/2012

No. 12-60070

allowing for greater participation rates among eligible schools and libraries,
given the limited availability of funds. 12 FCC Rcd. 8776 ¶ 480 (1997). These
competitive bidding rules mandate that applicants for discounted services
comply with a series of procedural requirements in order to be eligible for
funding. See 47 C.F.R. §§ 54.504, 54.511 (2001).
In 1999, the FCC issued two companion orders addressing the recovery
of funds disbursed pursuant to the E-rate program. See 15 FCC Rcd. 7197
(1999) (hereinafter Waiver Order); 17 Comm. Reg. (P&F) 1192 (1999)
(hereinafter Adjustment Order). In the Adjustment Order, the FCC, relying on
Office of Personnel Management v. Richmond, 496 U.S. 414 (1990),3 explained
that funds disbursed in violation of the Act were required to be recovered by
USAC. See Adjustment Order, at ¶ 7. In the Waiver Order, the FCC granted
a limited waiver of several FCC rules, including violations of the competitive
bidding rules, for the first funding year of the E-rate program. 15 FCC Rcd.
7197 ¶ 1. The FCC emphasized the distinction between violations of the Act,
which the FCC lacked discretion to waive, and violations of FCC rules, which
the FCC retained discretion to waive for good cause. Id. at ¶ 6, ¶ 11 n.2.
Although it agreed that limited waivers were appropriate in the first year of the
program, the FCC explained that “each applicant and service provider in
[future] funding years . . . is on notice that funding commitments and
disbursements, if in violation of federal statutes, [FCC] regulations, or USAC
procedures, will be subject to adjustment.” Id. at ¶ 8.
In 2004, the FCC issued an order “set[ting] forth a framework regarding
what amounts should be recovered by [USAC] and the [FCC] when funds have
been disbursed in violation of specific statutory provisions and [FCC] rules.”

3
In Richmond, the Supreme Court explained that under the Appropriations Clause of
the United States Constitution, “[m]oney may be paid out only through an appropriation made
by law; in other words, the payment of money from the Treasury must be authorized by
statute.” 496 U.S. at 424.

3
 Case: 12-60070 Document: 00512044023 Page: 4 Date Filed: 11/06/2012

No. 12-60070

19 FCC Rcd. 15808 ¶ 1 (2004) (hereinafter Fifth Report and Order).4 The FCC
set forth the general principle that “[a]mounts disbursed in violation of the
statute or a rule that implements the statute or a substantive program goal
must be recovered in full.” Id. at ¶ 20. The FCC, however, explained that full
recovery “may not be appropriate for violation of all [FCC] rules regardless of
the reason for their codification.”5 Id. at ¶ 19. Accordingly, the FCC provided
examples of violations that would result in full recovery. Id. at ¶ 20.
Specifically, the FCC concluded that it “should recover the full amount
disbursed for any funding requests in which the beneficiary failed to comply
with the [FCC]’s competitive bidding requirements . . . .” Id. at ¶ 21. The FCC
explained that this conclusion “is based on our position that the competitive
bidding process is a key component of the [E-rate] program, ensuring that funds
support services that satisfy the precise needs of an applicant and that services
are provided at the lowest possible rates.” Id.
B.
Lakehills’ petition for review involves contracts for eligible services that
HISD awarded Lakehills pursuant to the E-rate program in funding years 2002,
2003, and 2004. In each funding year, HISD awarded contracts to co-signors
Analytical Computer Services (“ACS”)6 and Micro Systems Engineering
(“MSE”). ACS and MSE completed various projects pursuant to these contracts
and received payments from USAC and HISD for services performed. In
January 2007, a newspaper article was published raising concerns about

4
The FCC explained that this framework was an affirmation and clarification of the
companion orders issued in 1999. Id. at ¶¶ 15–17.
5
The FCC emphasized, however, that it was without authority to waive statutory
violations. ¶ 29.
6
In early 2004, ACS was acquired by Southwest Analytical Computer Services
(“SWACS”). For the sake of clarity, because this acquisition is not relevant to the disposition
of this case, we will continue to refer to ACS even when discussing events that postdated
SWACS’s acquisition of ACS.

4
 Case: 12-60070 Document: 00512044023 Page: 5 Date Filed: 11/06/2012

No. 12-60070

HISD’s selection of ACS for contracts under the E-rate program. Specifically,
the article reported that ACS’s co-signor, MSE, was the subject of a federal
investigation into corruption and fraud arising out of MSE’s selection as a
service provider for the Dallas Independent School District. The article also
reported that Hewlett Packard (“HP”) severed its relationship with ACS and
MSE based on alleged violations of HP’s ethics rules by MSE.
A few days after the article was published, Lakehills acquired all of the
limited and general partnership interests in ACS. Following Lakehills’
acquisition of ACS, HISD agreed to assign its E-rate program contracts with
ACS to Lakehills. Lakehills then requested that USAC consolidate all of ACS’s
Service Provider Identification Numbers (“SPINs”)7 into Lakehills’ SPIN.
USAC agreed to this request in March 2007. A few weeks later, USAC sent a
letter to Frank Trifilio (“Trifilio”), the former owner and president of ACS, and
a minority owner of Lakehills, inquiring about ACS’s: (1) business ties to MSE;
(2) involvement in HISD’s competitive bidding process; and (3) alleged
violations of HP’s ethics rules. Trifilio responded to USAC in a letter denying
any wrongdoing and explaining that HP did not provide a specific reason for
severing ties with ACS.
No action was immediately taken by USAC following the receipt of
Trifilio’s response. Around this time, Lakehills sent invoices to USAC for work
performed pursuant to the contracts with HISD for the 2002, 2003, and 2004
funding years. Payments pursuant to these invoices were delayed and
Lakehills, after inquiring as to the source of the delay, was allegedly informed
by USAC that internal administrative issues were causing the delays. During
the summer of 2007, HISD requested that Lakehills complete a switch project
by the beginning of the 2007-2008 school year. Lakehills accommodated this

7
Once a service provider has been selected to complete an approved project, it is issued
a SPIN by USAC which allows the service provider to receive payment following the
completion of the E-rate project.

5
 Case: 12-60070 Document: 00512044023 Page: 6 Date Filed: 11/06/2012

No. 12-60070

request and was able to complete the $17 million switch project between May
and September 2007.
On September 27, 2007, USAC informed Lakehills that it would hold E-
rate program payments to Lakehills because of ACS’s business ties with MSE.
In this letter, USAC requested information from Lakehills regarding MSE’s
involvement with ACS’s contracts and Lakehills’ employment of former ACS
employees. Lakehills responded shortly thereafter confirming that all ACS
employees became employees of Lakehills and that HISD required MSE to be
part of ACS’s contracts. In November 2007, USAC issued a letter informing
Lakehills that it would continue to hold payments to Lakehills because of the
ties between ACS, Lakehills, and MSE.
In June 2009, Lakehills filed a petition for liquidation under Chapter 7
of the Bankruptcy Code, claiming the withheld E-Rate program funds as
assets.8 The United States government filed a proof of claim for $225,182,370,
which represents the sum of E-rate program funding paid to ACS for the 2002,
2003, and 2004 funding years, trebled pursuant to the False Claims Act.
Lakehills filed an objection to this claim and litigation relating to this objection
has been stayed pending resolution of this petition for review.
In March 2011, USAC rescinded E-rate program funding committed to
HISD for funding years 2002, 2003, and 2004.9 USAC’s decision was based on
its findings that there were extensive violations of the competitive bidding rules
during the relevant funding years. For instance, in funding year 2002, USAC
found that HISD selected ACS and MSE prior to concluding its competitive

8
Lakehills claims that USAC’s failure to make payments for E-rate program contracts
was the primary cause for its filing.
9
HISD, which was being investigated for violations of the competitive bidding rules,
entered into a settlement agreement with the United States government in 2010, agreeing to
pay $850,000 to the United States and relinquish all rights to funding requests for funding
years 2002, 2003, and 2004.

6
 Case: 12-60070 Document: 00512044023 Page: 7 Date Filed: 11/06/2012

No. 12-60070

bidding process, failed to obtain signed contracts prior to submitting its forms
to USAC, and accepted numerous impermissible gifts from ACS and MSE. For
funding years 2003 and 2004, USAC similarly found that HISD awarded the
contracts to ACS and MSE prior to completion of its competitive bidding process
and that significant impermissible gifts were provided to HISD by ACS and
MSE. USAC concluded, that for each funding year in question, it was required
to rescind the funding commitments and recover any improperly disbursed
funds.
In May 2011, Lakehills filed an administrative appeal with the FCC. In
November 2011, the FCC released its Order affirming USAC’s decision to
rescind the funding commitments made to HISD during the relevant funding
years. See 26 FCC Rcd. 16586 (2011) (hereinafter Order). In its Order, the FCC
concluded that ACS violated the competitive bidding rules for each of the
funding years in question. Id. at ¶¶ 20–21. The FCC rejected Lakehills’
argument that the FCC could not recover funds disbursed in violation of FCC
rules, explaining that the competitive bidding rules are substantive agency
regulations that have the force and effect of law and must be adhered to. Id. at
¶¶ 22–24. The FCC also rejected Lakehills’ argument that the value of services
Lakehills provided to HISD should offset any recovery of funds disbursed. Id.
at ¶¶ 25–28. The FCC determined that because the contracts at issue were
awarded outside of the required competitive bidding process, HISD and
Lakehills were not entitled to any E-rate funding. Id. at ¶ 25. The FCC also
explained that the government did not receive any cognizable benefit from
Lakehills’ performance of services under the contract, rather, any benefit was
received by HISD. Id. at ¶ 26. Finally, the FCC declined Lakehills’ request for
a waiver, reasoning that the public interest would not be served by waiving its
rules where the record contained evidence of waste, fraud, and abuse. Id. at ¶¶
29–30. Lakehills filed a timely petition for review with this court.

7
 Case: 12-60070 Document: 00512044023 Page: 8 Date Filed: 11/06/2012

No. 12-60070

II.
Lakehills advances two narrow challenges to the FCC’s Order in its
petition for review. First, Lakehills argues that the FCC’s rule—that funds
disbursed in violation of the competitive bidding rules should be recovered in
full (hereinafter “full recovery rule”)—is not in accordance with law. Second,
Lakehills argues that even if the full recovery rule is valid, the FCC abused its
discretion by denying Lakehills’ request for a waiver from the full recovery rule
here. We will address each argument in turn.
A.
We first address Lakehills’ contention that the FCC’s full recovery rule,
and the FCC’s adherence to the full recovery rule in its Order, is not in
accordance with law. Under the Administrative Procedure Act, agency action
is reviewed solely to determine whether it is “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.” See 5 U.S.C. § 706. Our
review under the “arbitrary and capricious” standard is narrow and we cannot
substitute our judgment for that of the agency. See, e.g., Motor Vehicle Mfrs.
Ass’n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).
The Supreme Court has explained that:
[A]n agency rule would be arbitrary and capricious if the agency
has relied on factors which Congress has not intended it to
consider, entirely failed to consider an important aspect of the
problem, offered an explanation for its decision that runs counter
to the evidence before the agency, or is so implausible that it could
not be ascribed to a difference in view or the product of agency
expertise.
Id.
Lakehills’ briefing in this case has clarified the scope of its first argument.
First, Lakehills does not challenge the validity of the competitive bidding rules
issued by the FCC. Second, Lakehills does not challenge the FCC’s factual
findings that its predecessor, ACS, violated the competitive bidding rules in

8
 Case: 12-60070 Document: 00512044023 Page: 9 Date Filed: 11/06/2012

No. 12-60070

funding years 2002, 2003, and 2004. Third, Lakehills does not dispute that the
FCC has the ability to issue rules governing the recovery of E-rate program
funding commitments where violations of FCC rules occur.10 Lakehills’ sole
argument is that the FCC’s full recovery rule is not in accordance with law
because the FCC allegedly failed to engage in sufficient legal analysis for the
rule because the FCC afforded the Supreme Court’s holding in Richmond
dispositive weight.11
Lakehills’ contention that the sole basis for the full recovery rule was an
erroneous reliance on Richmond is simply incorrect. In two orders the FCC
issued on October 8, 1999, the FCC clearly noted the distinction between funds
disbursed in violation of the Act and funds disbursed in violation of FCC rules.
In fact, the FCC waived competitive bidding rule violations for the first year of
the E-rate program—clearly acknowledging that recovery of funds disbursed in
violation of FCC rules, as opposed to the Act itself, was not mandatory under
Richmond. See Waiver Order ¶ 1.

10
Lakehills, in its reply brief, acknowledges that “violations of regulation[s] sometimes
are appropriate legal bars to eligibility for payments of funds under programs created by
Congress.” Lakehills argues, however, that the competitive bidding rules are “not such
regulations” because the Act does not contain any language conditioning eligibility for receipt
of funds on competitive bidding conduct. This distinction is not persuasive. In this case,
Congress expressly delegated to the FCC the task of “establishing competitively neutral rules
. . . to enhance . . . access to advanced telecommunications and information services for all
public and nonprofit elementary and secondary school classrooms . . . .” See 47 U.S.C.
§ 254(h)(2). Pursuant to this directive, the FCC established the E-rate program and adopted
the competitive bidding rules as requirements for E-rate funding eligibility. Lakehills does
not challenge the validity of the competitive bidding rules or ACS’s violation of those rules.
Accordingly, we do not find error with the FCC’s rejection of Lakehills’ argument that the FCC
is prohibited from recovering funds when violations of the FCC rules, as opposed to violations
of the Act, have occurred. See Order, at ¶¶ 22–23.
11
Lakehills, in its reply brief, explained that “[t]he gravamen of Lakehills’ petition . . .
is that the FCC never engaged in such an analysis because it misinterpreted [Richmond].”
Lakehills further described the FCC’s error as stemming from “the erroneous assumption that
[Richmond] established a legal bar to payment, regardless of the circumstances, [thus] it was
unnecessary for the FCC to seriously consider the Telecom [sic] Act and its Universal Service
Principles.”

9
 Case: 12-60070 Document: 00512044023 Page: 10 Date Filed: 11/06/2012

No. 12-60070

In 2004, the FCC once again acknowledged the distinction between
amounts disbursed in violation of the Act, which it lacked authority to waive,
and amounts disbursed in violation of FCC rules. See Fifth Report and Order,
¶ 29. Although the FCC acknowledged its ability to waive violations of FCC
rules, it nevertheless concluded that it “should recover the full amount
disbursed for any funding requests in which the beneficiary failed to comply
with the [FCC]’s competitive bidding requirements . . . .” Id. at ¶ 21. Contrary
to Lakehills’ argument that the FCC afforded Richmond dispositive weight, the
FCC made no reference to Richmond when reaching this conclusion. Instead,
the FCC explained that the full recovery rule was “based on our position that
the competitive bidding process is a key component of the [E-rate] program,
ensuring that funds support services that satisfy the precise needs of an
applicant and that services are provided at the lowest possible rates.” Id. We
conclude that Lakehills’ argument that the FCC’s full recovery rule is arbitrary
and capricious because the FCC afforded Richmond dispositive weight fails.
We turn to Lakehills’ argument that the FCC’s conclusion—that the full
recovery rule was appropriate—failed to give sufficient weight to the Act and
its universal service principles. We have explained that “a party must afford
the [FCC] an opportunity to pass on the arguments the party presents for
judicial review.” Comsat Corp. v. FCC, 250 F.3d 931, 937 (5th Cir. 2001) (citing
47 U.S.C. § 405). Lakehills, although it argued that the FCC adopted the full
recovery rule based on a misreading of Richmond, did not argue before the FCC
that the FCC failed to consider the universal service principles when adopting
the full recovery rule. Accordingly, Lakehills’ failure to raise this particular
argument before the FCC precludes our review.
Even if Lakehills’ argument was properly raised, we would be
unpersuaded. Section 254(b) provides that the FCC “shall base policies for the
preservation and advancement of universal service” on seven enumerated

10
 Case: 12-60070 Document: 00512044023 Page: 11 Date Filed: 11/06/2012

No. 12-60070

principles, including: (1) that quality services should be available at just,
reasonable, and affordable rates; (2) elementary and secondary schools and
classrooms should have access to advanced telecommunications services; and
(3) other principles the FCC determines are necessary and appropriate for the
protection of the public interest, convenience, and necessity. See 47 U.S.C.
§ 254. Lakehills argues that by adopting the full recovery rule, and applying
the rule in this case, the FCC failed to adequately consider these principles.
Specifically, Lakehills explains that the FCC should have considered whether
quality services were provided and whether the cost charged for the services
was too high. Lakehills also hypothesizes that the failure to consider the value
of completed services will ultimately decrease the availability of E-rate funding
because creditors will “have little incentive to participate in any E-rate
program.”
Lakehills’ arguments fail to demonstrate that the FCC’s decision to adopt
the full recovery rule or application of the rule in this case were arbitrary and
capricious. The FCC has explained that the competitive bidding rules ensure
that available funds are used to satisfy the needs of schools at the lowest
possible price, and disbursing funds to service providers who violate the
competitive bidding rules reduces the amount available for compliant
applicants. This rationale directly considers the universal service principles.
Moreover, it is likely that a strict rule denying or recovering funding when
violations of the competitive bidding rules occur greatly encourages strict
compliance with the rules, ultimately leading to increased competition, better
quality of services, and lower prices. It is unclear how providing funding to
service providers who violate the competitive bidding rules for services
completed—even if those services are done well—would advance the overall
goal of universal service. Certainly, allowing exceptions would benefit the
service provider, and any stakeholder of the service provider such as its

11
 Case: 12-60070 Document: 00512044023 Page: 12 Date Filed: 11/06/2012

No. 12-60070

creditors; however the FCC was directed to base its E-rate program policies on
the preservation of universal service—not on the interests of service providers.12
We conclude that the FCC’s decisions adopting the full recovery rule and strictly
applying the rule in its Order were not arbitrary and capricious.
B.
Lakehills’ second argument is that the FCC’s decision denying its request
for a waiver of the full recovery rule was an abuse of discretion. Our review of
an agency’s denial of a waiver is extremely limited and results in reversal only
when “the agency’s reasons are so insubstantial as to render that denial an
abuse of discretion.” BDPCS, Inc. v. FCC, 351 F.3d 1177, 1181–82 (D.C. Cir.
2003) (citation omitted); see also People of N.Y. v. FCC, 267 F.3d 91, 107 (2d Cir.
2001) (“Challenging the denial of a waiver is . . . not an easy task because an
applicant for waiver bears the heavy burden on appeal to show that the [FCC’s]
reasons for declining to grant the waiver were so insubstantial as to render that
denial an abuse of discretion.” (quoting BellSouth Corp. v. FCC, 162 F.3d 1215,
1222 (D.C. Cir. 1999)). FCC rules provide that it may grant a request for
waiver of its rules upon a showing of good cause. See 47 C.F.R. § 1.3. “The FCC
may exercise its discretion to waive a rule where particular facts would make
strict compliance inconsistent with the public interest.” Ne. Cellular Tel. Co. v.
FCC, 897 F.2d 1164, 1166 (D.C. Cir. 1990) (citing WAIT Radio v. FCC, 418 F.2d
1153, 1159 (D.C. Cir. 1969)).
Here, the FCC concluded that the reasons Lakehills provided in support
of a waiver were inadequate. The FCC noted that it had only waived its
competitive bidding rules in circumstances where the applicant had committed

12
Although it is not dispositive to our analysis, we are also unpersuaded by Lakehills’
contention that the full recovery rule will lead to a decrease in the availability of credit for
service providers. Service providers, as well as entities extending credit to service providers,
are aware that payment for E-rate projects will be received if the competitive bidding rules are
complied with. It is unclear why a service provider who ensures that it complies with the
competitive bidding rules would have any trouble obtaining credit to finance E-rate projects.

12
 Case: 12-60070 Document: 00512044023 Page: 13 Date Filed: 11/06/2012

No. 12-60070

a minor error in completing the application, but that it had not found waiver to
be appropriate in instances where the competitive bidding process was not fair
and open. It relied heavily on its conclusion that the public interest would not
be served by waiver of its rules where waste, fraud, and abuse was evident in
the record.
The FCC also replied directly to several arguments advanced by
Lakehills—arguments Lakehills now argues were “not considered” or
“discounted” by the FCC. First, responding to Lakehills’ argument that USAC’s
conduct encouraged Lakehills to undertake the 2007 switch project, the FCC
explained that USAC had no obligation to inform Lakehills of the ongoing
investigation, and therefore USAC’s silence during the investigation did not
justify a waiver.13 Second, the FCC acknowledged the services Lakehills
provided to HISD, but concluded that they did not justify a waiver. Specifically,
the FCC explained that any value from the 2007 switch project benefitted
HISD, not the United States, rejecting Lakehills’ argument that intangible
benefits, such as a “more technologically savvy and educated citizenry,” were
sufficient to justify a waiver.14
Overall, the FCC’s evaluation of Lakehills’ request for a waiver was rigid.

13
Lakehills also argued that granting its request for the SPIN consolidation constituted
affirmative conduct by USAC that facilitated Lakehills taking on the new work during the
summer of 2007. This argument is unconvincing because (1) the SPIN consolidation was
merely an accounting procedure taken in response to Lakehills’ request, and (2) USAC sent
a letter to Trifilio in late March 2007 inquiring into potential improprieties by ACS in relation
to the HISD contracts. Lakehills’ alleged belief that its contracts with HISD were no longer
under suspicion was not encouraged by USAC’s conduct. Lakehills should have been aware
of the possibility that an investigation was ongoing, and its decision to take on new work with
the hope of receiving payment from the E-rate program was a risk. See BDPCS, Inc., 351 F.3d
at 1182 (rejecting a request for a waiver where the appellant proceeded despite its knowledge
that it was likely to suffer a penalty, but nevertheless, “gambled and lost”).
14
In United States v. Rogan, the Seventh Circuit utilized similar reasoning rejecting
an argument that the value of service provided should mitigate recovery of funds disbursed,
explaining that a doctor “did not furnish any medical service to the United States. The
government offers a subsidy . . . with conditions. When the conditions are not satisfied,
nothing is due.” 517 F.3d 449, 453 (7th Cir. 2008).

13
 Case: 12-60070 Document: 00512044023 Page: 14 Date Filed: 11/06/2012

No. 12-60070

Arguably strong justifications, such as the significant value provided to HISD
from the completion of the 2007 switch project, were not afforded the weight
that Lakehills hoped they might receive. This rigidity, by itself, does not
necessarily constitute an abuse of discretion. In BellSouth, the court explained
that “strict adherence to a general rule may be justified by the gain in certainty
and administrative ease, even if it appears to result in some hardship in
individual cases. Rigid and consistent adherence to a policy will be upheld if it
is valid.” BellSouth, 162 F.3d at 1225. As discussed supra, the FCC’s policy of
seeking full recovery for violations of the competitive bidding rules is valid
because it was based on the FCC’s reasonable conclusion that such a rule
ensures that E-rate funds support services satisfying the precise needs of the
applicant and are provided at the lowest possible costs, increasing participation
rates among eligible schools and libraries. Therefore, the FCC’s strict
adherence to the full recovery rule does not constitute an abuse of discretion,
despite the hardship suffered by Lakehills.
Courts have explained, however, that an abuse of discretion may be found
when an agency arbitrarily waives a requirement in one case but not in
another. See, e.g., Mountain Solutions, Ltd. v. FCC, 197 F.3d 512, 517 (D.C.
Cir. 1999). In Mountain Solutions, the court concluded that the FCC did not
abuse its discretion in denying a waiver request where the FCC (1) explained
its reasoning in denying the request, (2) acted consistently, and (3) gave fair
notice of the importance of the particular rules in question. Id. at 522. This
case falls directly in line with Mountain Solutions. Here, the FCC: (1) explained
that the public interest would not be served by waiving its rules when there was
evidence of waste, fraud, and abuse; (2) consistently has found that waiver is
not appropriate if the competitive bidding process was not fair and open; and
(3) as early as 1999, provided fair notice that violations of the competitive
bidding rules would potentially result in the recession of funding commitments.

14
 Case: 12-60070 Document: 00512044023 Page: 15 Date Filed: 11/06/2012

No. 12-60070

Accordingly, there is no evidence that the FCC has arbitrarily waives its full
recovery rule in other cases but declined to do so in its Order denying Lakehills’
waiver request.
Undisputedly, Lakehills has suffered hardship from the FCC’s strict
adherence to its full recovery rule for violations of its competitive bidding rules.
We nevertheless conclude that Lakehills has failed to meet its high burden to
demonstrate that the FCC’s reasons for denying the waiver—primarily that the
public interest would not be served where the underlying contracts were
obtained in clear violation of the competitive bidding rules—were so
insubstantial as to render that denial an abuse of discretion.
III.
The FCC’s decision applying the full recovery rule in its Order was not
arbitrary and capricious because the FCC (1) did not afford dispositive weight
to Richmond and (2) adequately considered the universal service principles.
Furthermore, the FCC’s reasons for denying Lakehills’ waiver request were not
so insubstantial that denial was an abuse of discretion. Accordingly, we DENY
Lakehills’ petition for review.

15