Commission Document

Federal Communications Commission

FCC 12-8

Before the

Federal Communications Commission

Washington, DC 20554

In the Matter of
)
)
Request for Review of a Decision of the
)
Universal Service Administrator by
)
)
Integrity Communications, Ltd.
)
Corpus Christi, TX
)
)
Schools and Libraries Universal Service
)
CC Docket No. 02-6
Support Mechanism
)

ORDER

Adopted: January 9, 2012

Released: January 10, 2012

By the Commission:

I.

INTRODUCTION

1.
In this Order, we dismiss in part and deny in part an Application for Review1 filed by
Integrity Communications, Ltd. (Integrity or Petitioner) of a Wireline Competition Bureau order,2
denying Integrity’s request for review3 of an audit letter4 issued by the Universal Service Administrative
Company (USAC) under the schools and libraries universal service support mechanism, also known as
the E-rate program. We conclude that USAC’s actions followed established procedures and did not
violate Petitioner’s due process rights. Furthermore, we find that USAC was entitled to take the time
necessary to appropriately process Integrity’s funding requests. We therefore affirm the Bureau’s
decision and deny Integrity’s AFR.

II.

BACKGROUND

A.

E-rate Rules

2.
Under the E-rate program, eligible schools, libraries, and consortia that include eligible
schools and libraries, may apply for discounts for eligible telecommunications services, Internet access,


1 Application for Review by Integrity Communications, Ltd., CC Docket No. 02-6 (filed Jul. 30, 2010) (AFR).
2 Request for Review by Integrity Communications, Ltd., Schools and Libraries Universal Service Support
Mechanism, CC Docket No. 02-6, Order, 24 FCC Rcd 11186 (Wireline Comp. Bur. 2009) (Bureau Order),
reconsideration denied, 25 FCC Rcd 8484 (Wireline Comp. Bur. 2010) (Order on Reconsideration).
3 See Request for Expedited Review by Integrity Communications, Ltd., CC Docket No. 02-6 (filed Dec. 26, 2007)
(Request for Review) (appealing USAC’s audit letter decisions to the Commission).
4 See Letter from Schools and Libraries Division, Audit Response, USAC, to Stewart Burleigh, Integrity (dated
Oct. 24, 2007) (Audit Letter).

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and internal connections.5 The level of discount, which ranges from 20 percent to 90 percent, is
determined primarily by the level of economic disadvantage, with some schools and libraries located in
rural areas receiving an additional discount of up to 10 percent.6 An eligible school or library must pay
the non-discount portion of services or products purchased with E-rate discounts.
3.
After delivery of the eligible services, the applicant determines which payment method
to use to secure reimbursement from USAC for the services rendered under the E-rate program.7 If the
applicant pays the full cost of the services, then the applicant must submit an FCC Form 472, Billed
Entity Application for Reimbursement (BEAR) form, to secure reimbursement from USAC.8 If the
applicant pays only the reduced cost of the services, then the service provider must file an FCC Form
474, Service Provider Invoice (SPI) form, to receive its reimbursement.9 Based on information provided
on the FCC Form 472 or the FCC Form 474, USAC remits the E-rate support payments to the service
provider.10 Prior to remitting support in some cases, USAC may ask the service provider to have the
applicant certify that the services covered in the submitted invoice were delivered and installed.11 In the
Schools and Libraries Fifth Report and Order, the Commission stated that “failure [of the applicant] to
pay more than 90 days after completion of service…presumptively violates our rule that the Beneficiary
must pay its share.”12 The Commission stated that “[a]llowing schools and libraries to delay for an
extended time their payment for services would subvert the intent of our rules that the beneficiary must
pay, at a minimum, ten percent of the cost of supported services.”13
4.
In general, the applicant must use the funded services within the E-rate funding year,14
except that the Commission’s rules give applicants three additional months (until September 30


5 See 47 C.F.R. §§ 54.501-54.503.
6 See 47 C.F.R. § 54.505(c). The maximum discount given to any eligible entity is 90 %. See id. § 54.505 (b).
7 See Schools and Libraries Universal Service Support Mechanism, CC Docket No. 02-6, Second Report and Order
and Further Notice of Proposed Rulemaking, 18 FCC Rcd 9202, 9217-19, paras. 44-50 (2003) (Schools and
Libraries Second Report and Order); see also USAC website, Form 472 BEAR Filing Guidance,
http://www.sl.universalservice.org/reference/8bear.asp (last visited Jan. 10, 2012); USAC website, Invoice Filing
Information USAC, http://www.universalservice.org/sl/applicants/step11 (last visited Jan. 10, 2012). Beginning
July 1, 2004, the Commission’s rules required the service provider to allow the applicant to select the payment
method governing the payment for services rendered in accordance with the E-rate program. See 47 C.F.R.
§54.514 (a).
8 FCC Form 472, Billed Entity Applicant Reimbursement (BEAR) Form, available at
http://www.universalservice.org/_res/documents/sl/pdf/472.pdf (last visited Jan. 10, 2012).
9 FCC Form 474, Service Provider Invoice (SPI) Form, available at
http://www.universalservice.org/_res/documents/sl/pdf/474.pdf (last visited Jan. 10, 2012).
10 See Schools and Libraries Universal Service Support Mechanism, CC Docket No. 02-6, Notice of Proposed
Rulemaking, 17 FCC Rcd 1914, 1919, para. 9 (2002); see also Schools and Libraries Second Report and Order, 18
FCC Rcd at 9217, para. 42.
11 See USAC website, http://www.usac.org/sl/providers/step09/payment-process-and-status.aspx (last visited Jan.
12, 2012).
12 Schools and Libraries Universal Service Support Mechanism, CC Docket No. 02-6, Fifth Report and Order, 19
FCC Rcd 15808, 15816, para. 24 (2004) (Schools and Libraries Fifth Report and Order).
13 Id.
14 The E-rate funding year starts on July 1 and ends on June 30 of the next calendar year. See 47 C.F.R. §
54.507(b).
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FCC 12-8

following the close of the funding year) to install one-time services known as non-recurring services.15
In addition, an applicant may request an extension of this deadline if it satisfies one of several criteria.16
5.
According to Commission mandate, USAC is required to take action to prevent waste,
fraud, and abuse in the E-rate program.17 In the Schools and Libraries Fifth Report and Order, the
Commission directed USAC to submit to the Commission for review a list summarizing all current
USAC administrative procedures, including “those procedures that serve to protect against waste, fraud,
and abuse.”18 In accordance with such directions, USAC files a list of its administrative procedures each
year, including a description of each procedure, the rules each procedure furthers, and how each
procedure furthers program integrity.19 As directed, USAC’s filing contains procedures to protect
against waste, fraud, and abuse, including a procedure for dealing with applicants and service providers
who USAC determines to be non-compliant with Commission rules after undergoing an audit.20

B.

USAC’s Audit Letter to Integrity

6.
Under consideration in this appeal is the Audit Letter issued by USAC in October 2007
to Integrity, a service provider. In the Audit Letter, USAC found that Integrity violated the E-rate rules in
connection with its billing for services provided to the San Benito Independent School District (San
Benito). The Audit Letter also informed Integrity that USAC would hold the processing of all funding
requests involving Integrity until Integrity filed an appropriate compliance plan to avoid future
violations.21 Consistent with USAC’s procedures, USAC sent copies of the Audit Letter to all of the
school districts affected by the funding hold.
7.
The Audit Letter stemmed from USAC’s finding that Integrity billed San Benito for
progress payments on its service contract, notwithstanding a provision in San Benito’s request for
proposal (RFP) prohibiting progress payments.22 Between June 23, 2004, and August 10, 2005, Integrity


15 See id. § 54.507(d); see also Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and
Order, 16 FCC Rcd 13510, 13512, para. 7 (2001) (Permanent Extension Order).
16 See 47 C.F.R. § 54.507(d); Permanent Extension Order, 16 FCC Rcd at 13513, para. 12.
17 See, e.g., 47 C.F.R. § 54.702(g) (requiring USAC to file information annually regarding “administrative action
intended to prevent waste, fraud, and abuse”); Federal-State Joint Board on Universal Service, Petition of the
Puerto Rico Department of Education to Release Funds Associated with the Schools and Libraries Universal
Service Support Mechanism for Years 2001 and 2002, CC Docket No. 02-6, Order, 18 FCC Rcd 25417, 25422,
para. 15 (2003) (stating that, to guard against waste, fraud, and abuse, it is reasonable for USAC generally to defer
action on applications upon receiving evidence of potential program violations); Schools and Libraries Second
Report and Order, 18 FCC Rcd at 9224, para. 65 (discussing generally USAC’s authority to combat waste, fraud,
and abuse); Request for Review of a Decision of the Universal Service Administrator by United Talmudical
Academy, Federal-State Joint Board on Universal Service, Changes to the Board of Directors of the National
Exchange Carrier Association, CC Docket Nos. 96-45, 97-21, SLD No. 105791, Order, 15 FCC Rcd 423, 428,
para. 9 (2000) (discussing the Commission’s mandate that USAC take steps to prevent waste, fraud, and abuse in
the E-rate program).
18 Schools and Libraries Fifth Report and Order, 19 FCC Rcd at 15835, para. 80; 47 C.F.R. § 54.702(g).
19 See, e.g., Universal Service Administrative Company, Schools and Libraries Division, Administrative
Procedures (filed Oct. 29, 2010) (USAC Administrative Procedures).
20 Id. at 52.
21 See Audit Letter at 2-3.
22See San Benito Request for Proposal, December 2001 at 10 para. XXVI (stating inter alia that “[n]o progress or
advance payments [would]…be made” and payment would be remitted at the completion of the entire project).
(continued...)
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submitted five “progress invoices” to San Benito.23 Each progress invoice stated that payment was “due
on receipt.”24 Consistent with the terms of the contract, San Benito did not make payments to Integrity
for any of the progress invoices.25 Between June 22, 2004, and August 10, 2005, however, Integrity
submitted FCC Forms 474 to USAC requesting payment for the five invoices.26 For each FCC Form 474,
San Benito completed a service certification form stating that the services described in Integrity’s
invoices were delivered and installed.27 In two instances, San Benito’s service certification form stated
that the applicant intended to pay its non-discounted share on November 15, 2005, and November 30,
2005, respectively.28 On November 20, 2006, Integrity issued the “final invoice” to San Benito, and San
Benito paid the entire non-discounted portion owed to Integrity in one check on December 4, 2006.29
8.
On November 29, 2006, on behalf of USAC, KPMG LLP (KPMG) initiated an E-rate
compliance audit of San Benito for funding year 2002.30 On December 11, 2006, San Benito informed
Integrity of the audit and requested assistance in responding to some of the audit questions.31 Integrity
provided the information to San Benito but was otherwise not involved in the KPMG examination.32
9.
On January 19, 2007, KPMG issued its Independent Accountant’s Report, concluding
that San Benito was not compliant with E-rate program rules regarding the payment of its non-
discounted share of the price of the services.33 The Audit Report stated that San Benito did not pay the
five progress invoices when Integrity issued them, but instead paid one check for the full amount on
December 4, 2006, after receiving the final invoice.34 The Audit Report concluded that this was a
violation of the Commission’s Schools and Libraries Fifth Report and Order, which stated that “failure
to pay more than 90 days after completion of service…presumptively violates our rule that the
Beneficiary must pay its share.”35 In response, among other things, San Benito stated that Integrity had
billed San Benito in violation of the agreement that there would be no advance or progress payments to
(…continued from previous page)


Subsequently, San Benito and Integrity entered into a legally binding agreement that incorporated the payment
terms of the RFP. See Request for Review at 5. The service delivery dates and contract dates were extended
several times, causing the project completion date to be moved to September 30, 2006. See id. at 8.
23 See Request for Review at 7-8.
24 See, e.g., Integrity Invoice No. 881726-062304 (dated Jun. 23, 2004).
25 See, e.g., Request for Review at 17 (stating that “Integrity was not paid by SBISD [San Benito] until December
4, 2006, after all of the contemplated work was completed”).
26 See id. at 7-8.
27 See id.
28 See San Benito Service Certifications dated August 18, 2005, and October 18, 2005.
29 See Request for Review at 9.
30 See id. at 9.
31 See id. at 10.
32 See id.
33 See id. at Attachment, KPMG Independent Accountant’s Report at 1 (Audit Report).
34 See id. at 4.
35 See id. (citing Schools and Libraries Fifth Report and Order, 19 FCC Rcd at 15816, para. 24).
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the service provider and that San Benito had reminded Integrity of this in writing.36 In its Management
Response to the Audit Report, USAC stated:
Since the Beneficiary stated in the RFP that there would be no advance or progress
payments, they were not required to pay their non-discounted portion until completion
of the project. USAC does agree, however, that the service provider should not have
billed USAC for the progress payments if their contract with the applicant did not allow
for such payments…. USAC will not seek recovery from the applicant. However,
USAC will take appropriate steps to ensure that in the future the service provider does
not prematurely invoice USAC.37
10.
On October 24, 2007, USAC sent the Audit Letter to Integrity, informing Integrity that a
beneficiary audit had revealed that Integrity was not in compliance with Commission rules because it
had prematurely billed USAC for services and equipment.38 Specifically, the Audit Letter stated that
Integrity had billed the beneficiary and USAC prior to completion of the project, thereby violating the
terms of the RFP, which stated that there would be no advance payments to the service provider before
completion of the project.39 In addition, USAC stated that Integrity’s actions “indicate that you failed to
comply with one or more of the certifications that you made on program forms and/or that your entity
has otherwise failed to comply with program requirements.”40 USAC required Integrity to file within six
months a plan to ensure that, when it filed for future reimbursements from USAC, Integrity would have
provided the services or equipment to the applicant, and that Integrity’s receipt of any progress or
advance payments was included in the relevant contract between Integrity and the applicant.41 USAC
informed Integrity that USAC would take no action on funding requests involving Integrity until it
reviewed Integrity’s plan and determined that it adequately addressed the non-compliance issue.42
USAC also stated that it would send a copy of the Audit Letter to all applicants with pending E-rate
funding commitments involving Integrity, so that such applicants “may make informed decisions about
how to proceed….”43
11.
Shortly before USAC sent the Audit Letter to Integrity, the Texas Education Agency
released a report alleging that the Donna School District in Texas had violated state purchasing laws
when it awarded a $6.6 million contract to Integrity without opening the bidding to outside bidders.44 In
September 2007, the Donna School District interim superintendent stated that the Department of Justice
and the Federal Communications Commission were conducting an investigation of the Donna School
District.45 According to news reports, the suspended superintendent at Donna School District who


36 See id. at 5.
37 See Universal Service Administrative Company, Management Response to Improper Payment Information Act
Audit of the Schools and Libraries Program at San Benito Consolidated Independent School District (dated July 30,
2007).
38 See Audit Letter at 2.
39 Id.
40 Id. at 1.
41 Id.
42 Id. at 2-3.
43 Id. at 2.
44 See Feds Investigating Donna Schools for Use of E-rate Funds, Education Week, Sept. 21, 2007.
45 Id.
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entered into the contract with Integrity had previously been at the San Benito school district in 2003,
when Integrity had a $2.1 million contract to install a new digital phone system.46
12.
Rather than file the compliance plan as required by the Audit Letter, Integrity instead
contested the validity of the Audit Letter’s finding that Integrity violated applicable E-rate rules. 47
Integrity’s November 21, 2007 filing with USAC asserted that there was “no basis for requiring Integrity
to put in place any plan….”48
13.
On December 26, 2007, Integrity sought review by the Wireline Competition Bureau of
USAC’s decisions to require a compliance plan, to take no action on applications for which Integrity was
the service provider, and to send letters to all applicants using Integrity.49 Integrity argued that USAC
had no authority to take action against Integrity based on an audit of San Benito, and that Integrity had
not violated the Commission’s rules.50 Further, Integrity argued that its due process rights were violated
because USAC did not provide it with an opportunity to respond to the Audit Letter prior to
distribution.51 Finally, Integrity requested that the Commission direct USAC to restore processing of its
funding requests within 2 days of the Commission’s order.52 On April 23, 2009 – nearly 18 months after
receiving the Audit Letter – Integrity submitted a compliance plan to the Commission describing its
invoicing procedures.53

C.

The Bureau Order

14.
Upon review of Integrity’s Request for Review, the Bureau concluded that Integrity’s
actions were inconsistent with the E-rate rules and that USAC, based on information in the Audit Report,
appropriately required Integrity to file a compliance plan to assure USAC that Integrity had established
sufficient internal controls to avoid repeating the violation in the future.54 The Bureau reviewed the
compliance plan filed by Integrity, and concluded that it did not sufficiently address the audit findings.55
The Bureau gave Integrity 15 days from the date of the Order to file an acceptable amended compliance
plan, and gave USAC seven days after submission of the revised compliance plan to determine whether
the revised plan was sufficient.56


46 Id.
47 Letter from Cynthia B. Schultz and Paul C. Besozzi, Counsel to Integrity, to USAC (dated Nov. 21, 2007)
(Integrity Response Letter).
48 Id. at 4.
49 See Request for Review. Section 54.719(c) of the Commission’s rules provides that any person aggrieved by an
action taken by a division of USAC may seek review from the Commission. 47 C.F.R. § 54.719(c). The Wireline
Competition Bureau considers requests for review from USAC decisions under delegated authority. See 47 C.F.R.
§ 0.291(i).
50 See Request for Review at 16.
51 See id. at 22-24.
52 See id. at 25-26.
53 See Letter from Paul C. Besozzi, Counsel for Integrity, to Jennifer McKee, FCC, CC Docket No. 02-6, Attach.
(filed Apr. 23, 2009) (Integrity Compliance Plan).
54 See Bureau Order, 24 FCC Rcd at 11191, para. 12.
55 See id. at 11193-94, para. 17.
56 See id.
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15.
With respect to USAC’s hold on the processing of disbursements and funding requests,
and the sending of the Audit Letter to other parties affected by the processing hold, the Bureau found
that USAC followed its existing procedures as set forth in its 2004 Proposed Audit Resolution Plan for
Schools and Libraries Support Mechanism Auditees (2004 Audit Resolution Plan).57 Those procedures
specified that:
the auditee (or service provider if the service provider is determined to be at fault for the non-
compliance) is informed that as a result of its noncompliance, no pending or future funding
commitments will be made until the auditee (or service provider) is able to provide SLD with
assurances that the findings that resulted in the non-compliance have been adequately addressed.
The letter proposes a 6-month time frame that can be extended if the auditee provides a
reasonable explanation of the need for a longer time period. If the auditee (or service provider)
fails to respond, or responds inadequately, USAC will deny pending funding requests. All
affected parties including applicants and service providers will receive a copy of the relevant
letter(s).58
16.
In addition, the Bureau noted that USAC’s processing hold was in accord with
established USAC procedures in light of the publicly acknowledged investigation by the Department of
Justice and the Commission’s Office of Inspector General of Integrity’s actions in the Donna School
District.59

D.

The Bureau’s Order on Reconsideration

17.
Integrity sought reconsideration of the Bureau Order.60 Integrity argued that the
Bureau’s restatement of the 2004 Audit Resolution Plan did not support the Bureau’s conclusion that


57 See id. at 11195, para. 21. USAC’s proposed procedures were attached to: Public Notice, Wireline Competition
Bureau Seeks Comment on the Universal Service Administrative Company’s Audit Resolution Plan, CC Docket
No. 02-6, Public Notice, 20 FCC Rcd 1064 (Wireline Comp. Bur. 2004) (2004 Audit Resolution Plan).
58 See 2004 Audit Resolution Plan, 20 FCC Rcd at Attachment.
59 See Bureau Order, 24 FCC Rcd at 11194-95, para. 20; see also Feds Investigating Donna Schools for Use of E-
rate Funds, Education Week, Sept. 21, 2007.
60 See Petition for Reconsideration by Integrity Communications, Ltd., CC Docket No. 02-6 (filed Sept. 28, 2009)
(Petition for Reconsideration). The United States Telecom Association also filed a Petition expressing concern that
the Bureau Order allowed USAC to make a finding against a service provider in the course of an audit of a school
district or other E-rate beneficiary, without first affording the service provider a meaningful opportunity to dispute
and respond to those findings. See Petition for Clarification or, in the Alternative, Partial Reconsideration of the
United States Telecom Association, Schools and Libraries Universal Service Support Mechanism, CC Docket No.
02-6 (filed Sept. 28, 2009) (USTelecom Petition). In response, the Bureau sought comments on both the Integrity
Petition for Reconsideration and USTelecom Petition. See Comment Sought on Integrity Communications, Ltd.
Petition for Reconsideration and United States Telecom Association Petition for Clarification, or in the
Alternative, Partial Reconsideration of the Wireline Competition Bureau’s Order Denying Integrity
Communications’ Request for Review of a Decision of the Universal Service Administrative Company, CC Docket
No. 02-6, Public Notice, 24 FCC Rcd 12741 (Wireline Comp. Bur. 2009). No responding commenter other than
Integrity addressed USAC’s decision to send letters to other school districts or asserted that USAC’s action was
inconsistent with USAC’s established procedures stated in the Bureau Order. See CC Docket No; 02-6 –
Comments of AT&T, Inc. (filed Nov. 20, 2009); Comments of Education Networks of America, Inc./ENA
Services, LLC (filed Nov. 20, 2009); Reply Comments of Achieve Telecom Network of MA, LLC (filed Dec. 7,
2009); Reply Comments of Verizon Communications, Inc. (filed Dec. 7, 2009); Comments of C.P. McClure, (filed
Nov. 19, 2009); Comments of G. Lyons (filed Nov. 20, 2009); Comments of C. Smith (filed Nov. 20, 2009);
Comments of L.M. Shores (filed Nov. 20, 2009); Comments of J. J. Vera (filed Nov. 20, 2009).
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USAC acted in accordance with established procedures when it distributed copies of the Audit Letter to
other school districts that had contracts with Integrity.61 Integrity claimed again that USAC should have
provided it with an opportunity to respond prior to such distribution.62 Further, Integrity argued that the
funding freeze was effectively a suspension or debarment of Integrity in violation of the Commission’s
rules governing suspension and debarment.63 Finally, Integrity asked that the Commission require USAC
to act on all pending invoices by October 15, 2009, and process all applications by November 30, 2009.64
18.
In its Order on Reconsideration, the Bureau reaffirmed its conclusion that USAC had
acted in accordance with its established policies and denied Integrity’s Petition.65 First, the Bureau
clarified its description of USAC’s procedures.66 Upon the mailing of an audit letter to a service provider,
USAC can immediately send copies of such letter to affected school districts. USAC does not have to
wait until it receives a response from a service provider prior to mailing copies of its audit letter.67 The
Bureau noted that USAC’s actions were consistent with this procedure even though the procedure may
have been insufficiently summarized in the original Bureau Order.68 Next, the Bureau rejected Integrity’s
argument that the processing hold initiated by the Audit Letter effectively “suspended” and “debarred”
Integrity from the E-rate program without the benefit of Commission procedures.69 The Bureau noted
that, under the Commission’s rules, “suspension” and “debarment” have specific definitions –
“debarment” is an action to exclude a person from activities related to the E-rate program, and
“suspension is an immediate exclusion for a temporary period pending completion of a debarment
proceeding.”70 The Bureau found that neither definition applied to USAC’s action in the Audit Letter
because the only action in the Audit Letter was a temporary hold on processing of funding requests
related to Integrity, not a permanent or temporary exclusion of Integrity (or any other entity) from the E-
rate program.71 Accordingly, the Bureau denied Integrity’s Petition for Reconsideration.72

E.

Integrity’s Application for Review

19.
Integrity ultimately contested the Bureau’s decision by filing an application for review
with the Commission. In its application for review, Integrity asserts that (1) USAC’s actions were not
in compliance with the 2006 and 2007 published summaries of USAC’s audit procedures, which
Integrity claims superseded the 2004 Audit Resolution Plan cited by the Bureau; (2) USAC’s procedures
violated “due process” principles in failing to give Integrity an opportunity to respond to the Audit Letter
before USAC initiated the funding hold and sent the Audit Letter to other affected school districts; and


61See Petition for Reconsideration at 4.
62 See id. at 2-6.
63 Id. at 4-5.
64 See id. at 3.
65 Order on Reconsideration, 25 FCC Rcd at 8487, para. 9.
66 See id. at 8487-88, paras. 8-9.
67 See id. at 8488 para. 10.
68 See id.
69 See id. at 8488, para. 11.
70 See id., citing section 54.8 of the Commission’s rules, 47 C.F.R. § 54.8.
71 See id.
72 See id. at 8488, para. 11.
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(3) the Bureau erred in failing to impose a time limit on USAC to process pending invoices and funding
requests after acceptance of the compliance plan.73

III.

DISCUSSION

20.
For the reasons set forth below, we reject as procedurally barred Integrity’s argument
that USAC’s actions were not in compliance with the 2006 and 2007 published summaries of USAC’s
audit procedures, which Integrity claims superseded the 2004 Audit Resolution Plan cited by the Bureau.
In the alternative, we deny this claim on the merits as discussed below in more detail. We also deny on
the merits Integrity’s claim that USAC’s procedures violated “due process” in failing to give Integrity an
opportunity to respond to the Audit Letter before USAC initiated the funding hold and sent the Audit
Letter to other affected school districts. Finally, we find that the Bureau did not err in failing to impose a
time limit on USAC to process pending funding requests involving Integrity after accepting Integrity’s
compliance plan.74
21.

Integrity’s Claim that USAC’s Actions Did Not Comply With Established USAC

Procedures.

Integrity raises for the first time in its AFR the claim that USAC’s 2004 Audit Resolution
Plan, cited in the Bureau Order, was superseded in 2006 and 2007 by procedures that did not include
sending a copy of the Audit Letter to other parties affected by the processing hold.75 Likewise, Integrity
asserts for the first time that, even if the 2004 procedures remained effective, they did not authorize an
immediate processing hold and distribution of letters related to that hold prior to any response by
Integrity.76 Section 1.115(c) of the Commission’s Rules provides that “[n]o application for review will
be granted if it relies on questions of fact or law upon which the designated authority has been afforded
no opportunity to pass.” 77 Because these arguments, which rely on new facts, were not first addressed to
the Bureau, they are not properly before the Commission.78 Accordingly, we reject these arguments as
procedurally barred.79
22.
We also reject this claim on the alternative and independent ground that it fails on the
merits. The Bureau found that USAC’s actions with respect to the Integrity Audit Letter complied with
the existing USAC procedure in place pursuant to the 2004 Audit Resolution Plan.80 To support its
claim that these 2004 procedures were superseded in 2006 and 2007, Integrity cites summaries of
USAC’s procedures published in 2006 and 2007, noting that these summaries do not expressly state that
USAC will send copies of the audit letter to other affected parties. From that omission alone, Integrity
assumes that USAC’s procedures changed in 2006 and 2007 and that USAC’s action in sending copies
of the Integrity Audit Letter to other school districts affected by the processing hold was therefore


73 See AFR at 4-5 (listing the “Issues for Review”)
74 See id.
75 See id. at 5-7.
76 See id. at 7.
77 47 C.F..R. § 1.115(c).
78 See generally id. § 1.106 (setting forth procedures for filing petitions for reconsideration that rely on facts not
previously presented under certain circumstances).
79 See e.g., Tama Radio Licenses of Tampa Florida, Inc., 25 FCC Rcd 7588, 7589 (2010); North County
Communications Corp. v. MetroPCS California, L.L.C., 24 FCC Rcd 14036, 14043 n.67 (2009); Courtesy
Communications, Inc., 14 FCC Rcd 4198, 4202-4203 (1999); Kevin Johnson, 9 FCC Rcd 2471, 2473 (1993).
80 See 24 FCC Rcd at 11195, para. 21& n.82.
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inconsistent with USAC procedures in place at the time in October 2007. Contrary to Integrity’s
assertion, however, USAC’s 2004 procedures remained in place throughout the relevant period and were
not superseded by the 2006 and 2007 summaries. The summaries, which were required to be published
by the Commission’s Schools and Libraries Fifth Report and Order, had no precedential value and did
not constitute an administrative policy or directive.81 Necessarily, USAC truncated and eliminated
certain procedural details. The audit procedures used in the Integrity matter were the same procedures
followed by USAC throughout the relevant period between 2004 and 2007, during which more than 100
audit letters were issued, and in each case copies of the audit letter were sent to other parties affected by
the temporary processing freeze. Accordingly, there is no basis for Integrity’s argument that USAC
acted contrary to its established procedures in this matter.
23.
Integrity also argues that, even if USAC’s 2004 audit procedures remained in place,
those procedures did not authorize USAC to freeze funding and send copies of the letter to other school
districts unless USAC determined that Integrity had failed to respond adequately to the Audit Letter.82
Integrity misreads the 2004 procedures. The procedures clearly provide for a freeze on funding until an
auditee files a compliance plan,83 and further provide for immediate notification of the processing hold to
the affected school boards.84 The procedures further provide that USAC will deny a frozen funding
request if there is not a timely and adequate response to the associated audit letter.85 In other words, the
audit procedures contemplate two separate but related actions – an immediate hold on processing
(pending a receipt of a compliance plan) and a potential denial of funding requests if the response to the
audit letter is not adequate. The procedures also require USAC to send letters to notify affected school
boards (referring to “letter(s)”).86 USAC’s action with respect to Integrity was consistent with the 2004
Audit Resolution Plan, and we therefore affirm the Bureau’s decision approving USAC’s actions and
established procedures in this case.87
24.

Due Process Claim

. Integrity further asserts that USAC’s audit procedure, and the
Bureau’s affirming order, violated Integrity’s right to due process under the Fifth and Fourteenth


81 See Schools and Libraries Fifth Report and Order, 19 FCC Rcd at 15835, para. 80; 47 C.F.R. § 54.702(g).
82 See AFR at 7.
83 See 2004 Audit Resolution Plan, 20 FCC at Attachment (“[T]he auditee (or service provider if the service
provider is determined to be at fault for the non-compliance) is informed that as a result of its noncompliance, no
pending or future funding commitments will be made until the auditee (or service provider) is able to provide SLD
[USAC’s Schools and Libraries Division] with assurances that the findings that resulted in the non-compliance
have been adequately addressed . . .”) (emphasis added).
84 See id., (“All affected parties including applicants and service providers will receive a copy of the relevant
letters(s).”) (emphasis added).
85 See id. (“If the auditee (or service provider) fails to respond, or responds inadequately, USAC will deny pending
funding requests.”).
86 See id. (“All affected parties including applicants and service providers will receive a copy of the relevant
letter(s).”).
87 We also affirm the Bureau’s instructions to USAC that “on a going-forward basis, USAC should not send an
audit letter to or hold funding for schools or service providers unless it has evidence and a reasonable basis to
believe that the service provider or school is engaged in a violation of the Commission’s rules with respect to that
specific school district.” Bureau Order, 24 FCC Rcd at 11195, para. 21. The Bureau, exercising its delegated
responsibility for overseeing USAC’s procedures acted within its authority and discretion requiring USAC to
modify its rules and to make that modification prospective only.
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Amendments to the Constitution88 because USAC did not give Integrity an opportunity to be heard on
the findings summarized in the Audit Letter before USAC issued the Audit Letter and before sending the
Audit Letter to other affected school districts.89 As in its submission to the Bureau,90 Integrity in its AFR
fails to specify with particularity the factual and legal basis for its constitutional claim, including such
matters as how it suffered any cognizable deprivation of “property” under the Fifth and Fourteenth
Amendments and why its right to be heard after receipt of the Audit Letter provides insufficient process
under the Constitution.91 Nevertheless, to resolve any doubt regarding this issue, we address this claim
on the merits.
25.
Under the Fifth and Fourteenth Amendments, only action by the federal or state
government is subject to the Due Process Clause.92 Under the Due Process Clause, we inquire as to
whether the plaintiff has been deprived of a protected interest in ‘liberty’ or ‘property.’ If we find a
deprivation of liberty or property, we then look to see if the government’s procedures comport with due
process under the standard set out in Mathews v. Eldridge.”93 We need not consider whether USAC’s
audit letter process constitutes “government action” because Integrity’s claim clearly fails for two
independent reasons: First, USAC’s actions in connection with the Audit Letter did not deprive Integrity
of “property” within the meaning of the Due Process Clause; and second, even if it is assumed that due
process requirements do apply, the process accorded to Integrity under USAC procedures and
Commission’s rules was adequate under the Fifth Amendment.94
26.
In order for there to be a cognizable property right subject to the Due Process Clause,
there must be “a legitimate claim of entitlement created by law, not a unilateral expectation.”95 Benefits


88 U.S. CONST. amend. V: “No person shall be . . deprived of life, liberty, or property, without due process of law .
. . .” Id. amend. XIV: “No State shall . . . deprive any person of life, liberty, or property, without due process of law
. . . .”
89 See AFR at 8.
90 See Request for Review at 22-24; see also Petition for Reconsideration at 2-6.
91 Red Hot Radio, Inc., 19 FCC Rcd 6737, 6745 n. 63 (2004) (“the burden is on the Applicant to set forth fully its
argument and all underlying relevant facts in the application for review”). Cf. Kramer v. Banc of America
Securities, LLC, 355 F.3d 961, 964 n.1 (7th Cir. 2004) (absence of any supporting authority or development of an
argument in appellate brief constitutes a waver of argument on appeal, even where the arguments purport to raise
constitutional claims); L & A Contracting Co. v. Southern Concrete Servs., 17 F.3d 106, 113 (5th Cir. 1994) (Issue
raised on appeal in one-page document without citation of authority was “inadequately briefed” and therefore
deemed abandoned); see also APS Sports Collectibles, Inc. v. Sports Time, Inc., 299 F.3d 624, 631 (7th Cir. 2002)
(it is not the court’s responsibility to research and construct parties’ arguments, and conclusory analysis will be
construed as a waiver).
92 See e.g., Reno v. Flores, 507 U.S. 292, 301-302 (1993).
93 Gen, Elec. Co. v. Jackson, 610 F.3d 110, 117 (D.C. Cir. 2010), citing Mathews v. Eldridge, 424 U.S. 319, 335
(1976); see also Reno, 507 U.S. at 302 (due process analysis must start with a “careful description of the asserted
right”); Am. Manuf. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 59 (1999); Sargeant v. Dixon, 130 F.3d 1067, 1070
(D.C.Cir.1997) (“Absent an underlying property or liberty interest, therefore, one has no entitlement to procedural
due process and hence no ‘right to be heard.’”).
94 See infra paras 26-32.
95 Town of Castle Rock v. Gonzales, 545 U.S. 748, 756 (2005); see also Board of Regents v. Roth, 408 U.S. 564,
577 (1972) (“To have a property interest in a benefit, a person clearly must have more than an abstract need or
desire for it. He must have more than a unilateral expectation of it. He must, instead, have a legitimate claim of
entitlement to it.”).
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are not considered protected entitlements “if government officials may grant or deny [them] in their
discretion.”96 Presumably, Integrity asserts a property interest in payments under its existing school
district contracts and the right to funding for future contracts. However, Integrity has neither the
absolute right to payment under its existing contracts, nor the right to funding for future requests.
Rather, USAC retained the right to grant or deny payment requests based on established criteria.97 Thus,
at the time of the Audit Letter, Integrity did not possess the property and had only a unilateral
expectation of payment, but not a legitimate claim of entitlement to it.98 Indeed, once USAC
commenced processing the payment requests after Integrity filed its compliance plan, USAC denied
many of the payment requests.99 In these circumstances, we find that Integrity does not have a
cognizable property interest in the expectation of receiving payments.
27.
Even if we assume that a cognizable property interest existed, however, the Audit Letter
did not “deprive” Integrity of property within the meaning of the Due Process Clause. The Audit Letter
imposed merely a temporary “hold” on the processing of Integrity’s requests for payments for current
contracts and for future funding requests until Integrity filed a compliance plan to remediate the rule
violation found in the Audit Letter.100 Because the Audit-Letter hold does not deprive Integrity of any of
its claimed property rights, we find that it is not within the purview of the Due Process Clause.101 All
Integrity had to do to remove the hold was file an acceptable compliance plan demonstrating its control
over future billing. Integrity could have done so immediately upon receipt of the Audit Letter or at any
time thereafter. But rather than take that simple step, Integrity waited more than 18 months to file the


96 Town of Castle Rock, 545 U.S. at 756.
97 Applicants’ receipt of funding commitments is contingent on their compliance with all statutory, regulatory and
procedural requirements of the Schools and Libraries Program. Applicants who have received funding
commitments continue to be subject to audits and other reviews that USAC and/or the FCC may undertake
periodically to assure that the funds committed are being used in accordance with all such requirements. USAC
may be required to reduce or cancel funding commitments that were not issued in accordance with such
requirements, whether due to action or inaction, including but not limited to that by USAC, the applicant, or the
service provider. USAC, and other appropriate authorities (including but not limited to the FCC), may pursue
enforcement actions and other means of recourse to collect improperly disbursed funds. The timing of payment of
invoices may also be affected by the availability of funds based on the amount of funds collected from contributing
telecommunications companies.
98 See, e.g. Petition for Waiver by Sprint Corporation, Order, 22 FCC Rcd 5353, 5355 (Wireline Comp. Bur. 2007)
(stating that “the E-rate program is funded on a year-to-year basis and, thus, an applicant has no guarantee that a
multi-year contract will continue to be funded for the duration of the contract.”). See also Clark County School
District, et al, Order, 24 FCC Rcd 12710,12713 (Wireline Comp. Bur., Telecom. Access Policy Div. 2009)
99 See, e.g., Letter from USAC to Jorge Montes, III, Zapata Independent School District, copy to Integrity
Communications (November 10, 2010) (Zapata Funding Year (FY) 2005 Commitment Adjustment Letter).
100 See Audit Letter.
101 See United States v. Register, 182 F.3d 820, 837 (11th Cir.1999) (a lis pendens filed pursuant to state statute
does not constitute a seizure and does not affect property interests to an extent significant enough to implicate the
Due Process Clause); Aronson v. City of Akron, 116 F.3d 804, 812 (6th Cir.1997) (filing of a lien notice pursuant to
the state RICO statute, while it may impair the owner’s ability to sell and taint his credit rating, it does not
represent the type of loss which would require prior notice and opportunity to be heard); URI Student Senate v.
Town of Narragansett, 707 F.Supp.2d 282 (D.R.I. 2010) (town ordinance requiring posting of an orange sticker on
a residence when police have responded to a disturbance did not impair a property right within the scope of the Due
Process Clause).
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its compliance plan, and even that plan was inadequate.102 When Integrity finally filed an amended plan,
USAC lifted the processing hold.103 Thus, the delay was not a consequence of USAC’s audit-letter
process, but rather was primarily attributable to Integrity’s decision not to file a timely and adequate
compliance plan upon receiving the Audit Letter. Integrity carried the keys to its prison in its own
pocket.104
28.
Finally, Integrity claims that USAC violated its right to due process by sending the
Audit Letter to other school districts doing business with Integrity.105 If Integrity means to suggest that
its business was injured by the dissemination of the Audit Letter, that allegation fails to state a due
process claim. Claimed lost business is not a protected property interest.106 The Due Process Clause
protects against only direct governmental action, not the indirect consequences of third-party actions
taken in response to governmental action.107 Therefore, claimed injuries to Integrity’s future business
caused by the Audit Letter are not within the interests protected by the Due Process Clause.108 Indeed,
we note that Integrity’s AFR does not even attempt to establish a direct causal connection between the
dissemination of the Audit Letter and any alleged business-related losses. Integrity fails to demonstrate,
for example, that any injury to its reputation and any reluctance of other school boards to engage
Integrity stemmed from the Audit Letter, rather than from the public knowledge that Integrity’s Donna
contract was the subject of a federal investigation by the United States Department of Justice and the
Commission’s Office of the Inspector General.109


102 See Bureau Order, 24 FCC Rcd at 11193, para. 17 (explaining the inadequacies of the initial compliance plan
filed by Integrity on April 10, 2009 and instructing Integrity to file a revised plan within 15 days of the Order).
103 See id. (directing USAC to review the revised compliance plan within seven (7) days of receipt, and instructing
USAC to resume processing of Integrity’s funding requests, consistent with its procedures, including any inquires
to confirm that no violations of the Commission’s rules occurred, and to ensure that no waste, fraud or abuse of the
E-rate funds exist).
104 See Gompers v. Buck’s Stove & Range Co., 221 U.S. 418, 442 (1911) (in cases where a party is imprisoned for
refusing to comply with a court order to perform an act, such as turn over property or pay alimony, the party can
end the contempt by coming into compliance with the Court’s command and thus, “carries the keys of his prison in
his own pocket.”).
105 AFR at 8.
106 See, e.g., URAI Student Senate, 707 F.Supp.2d at 301 (finding that “lost rents do not on their own give rise to a
due process claim”).
107 See Nuclear Transp. & Storage v. United States, 890 F.2d 1348, 1354 (6th Cir. 1989) (“commercial detriment”
was “an indirect injury resulting from government action,” not a property interest entitled to protection); General
Electric Co.,. 610 F.3d at 119-23 (alleged injuries to GE’s stock price, brand value and increased financing costs
resulting from an EPA cleanup order under CERCLA, are not within the protections of the Due Process Clause);
Wells Fargo Armored Serv. Corp. v. Georgia P.U.C., 547 F.2d 938, 940-941 (5th Cir. 1977) (damage to plaintiffs’
business prospects “incidentally” caused by State’s issuance of operating permit to competitor was not cognizable
injury).
108 See Paul v. Davis, 424 U.S. 693, 712 (1976) (holding “that the interest in reputation asserted in this case is
neither ‘liberty’ nor ‘property’” and is therefore not protected by the Due Process Clause); Asbestec Constr. Servs.,
Inc. v. EPA, 849 F.2d 765, 768-69 (2d Cir. 1988) (rejecting Due Process claim where plaintiff alleged that the
“taint” of an order under the Clean Air Act would “diminish its competitiveness”); Mosrie v. Barry, 718 F.2d 1151,
1158, 1161 (D.C. Cir. 1983) (holding that financial harm caused by a government imposed stigma dose not
transform an interest in reputation into a liberty interest).
109 Because, as discussed supra, Integrity had no property interest in the payments under the existing and future
potential contracts, and because, as discussed infra, Integrity was afforded adequate post-deprivation hearing rights,
Integrity does not meet the criteria for a “stigma plus” due process claim. See DiBlasio v. Novello, 344 F.3d 292,
(continued...)
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29.
Even if Integrity could show that the Audit Letter impaired a cognizable property
interest under the Due Process Clause, the procedural rights afforded Integrity after issuance of the Audit
Letter are more than sufficient to meet the procedural due process requirements set forth in Mathews v.
Eldridge.110 Mathews does not require a hearing or other procedural safeguards in every instance prior to
administrative action that will affect a private interest. Rather, under Mathews, the courts balance three
factors to determine whether the particular administrative procedures at issue are constitutionally
adequate: “(1) the private interest affected by the official actions; (2) the risk of an erroneous deprivation
of the interest and the value, if any, of additional or substitute procedural safeguards; and (3) the
government’s interest, including the fiscal and administrative burdens the additional or substitute
procedural requirements would impose.”111
30.
Applying these criteria, it is clear that the USAC and FCC procedures available to
Integrity adequately protected its due process rights without an opportunity to contest audit findings
before the transmittal of the Audit Letter. Regarding the first Mathews element – the nature of the
impairment of the property rights – even if the impairment caused by the Audit Letter rose to a
constitutional level at all, the Audit Letter did not impose a substantial burden on Integrity’s property
rights. The Audit Letter did not have the effect of seizing Integrity’s property, nor did it abrogate any
pending or future contracts.112 Integrity’s applications for payment and future funding remained pending
and USAC resumed its processing of them once Integrity filed an adequate compliance plan. Moreover,
any delay in the processing of its applications was effectively under Integrity’s control; Integrity could
have filed its compliance plan earlier and chose not to do so.
31.
The second Mathews element addresses the risk that the Audit Letter would be sent in
error. USAC’s audit letters are based on the reports of professional independent auditors who have
received special training in USAC procedures and the Commission’s rules. Each report is the product of
a team effort, typically involving multiple layers of review. USAC employees review the audit reports
for accuracy regarding the application of USAC procedures and the Commission’s rules and orders.113
Following this review, the Schools and Libraries Committee and Audit Committee of USAC’s Board of
Directors conducts their own reviews of the reports prior to final approval and action.114 These elaborate
procedures provided a significant internal check on potential error in connection with the Audit Letter.
32.
The third Mathews element concerns the government’s interest, including the
administrative burdens associated with a pre-deprivation hearing additional procedural requirements.115
The primary goal of the audit program is to identify and prevent waste, fraud, and abuse in the programs
(…continued from previous page)


302 (2nd Cir. 2003)(“Stigma plus’ refers to a claim brought for injury to one’s reputation (the stigma) coupled with
the deprivation of some ‘tangible interest’ . . . (the plus), without adequate process.”).
110 424 U.S. at 335.
111 Id.
112 In contrast, the courts have ruled that pre-judgment garnishments, replivins, and certain liens require a pre-
deprivation hearing because those actions seize property from the claimant. See Peralta v. Heights Med. Ctr., 485
U.S. 80, 85 (1988) (lien), Reardon v. United States, 947 F.2d 1509 (1st Cir. 1991) (lien), Fuentes v. Shevin, 407
U.S. 67 (1972) (writ of replevin); Sniadach v. Family Fin. Corp. of Bay View, 395 U.S. 337 (1969) (wage
garnishment).
113 See 2004 Audit Resolution Plan, 20 FCC Rcd at 1065.
114 See id.
115 See Mathews, 424 U.S. at 335, 347-348.
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administered by USAC.116 Audit letters, including the one issued here, provide USAC with essential
tools to combat waste, fraud, and abuse. Under USAC’s procedures and the Commission’s rules, upon
receiving the Audit Letter, Integrity had a right to seek review by the Wireline Competition Bureau,117
the full Commission,118 and by a court of appeals under Section 402(a) of the Communications Act.119
These substantial procedural rights for review are ample under the Due Process Clause, particularly
when coupled with the fact that Integrity could have resolved the Audit-Letter hold by simultaneously
filing a compliance plan and pursuing its appeal rights. In light of the above, affording auditees an
opportunity to contest audit findings before USAC issues an audit letter or halts processing of payment
requests would unduly burden USAC in its efforts to swiftly and effectively root out waste, fraud, and
abuse. Accordingly, even assuming that the Due Process Clause applies here, we find that the Audit
Letter and USAC’s audit procedures did not deprive Integrity of due process, and we deny Integrity’s
claim on the merits.
33.

Integrity’s Claim that the Bureau Should Have Limited USAC’s Time for Processing

Integrity’s Funding Requests

. Integrity’s final claim on review asserts that the Bureau erred in failing
to set a specific time limit on USAC’s review of pending funding applications once the funding hold was
lifted by the filing of the compliance plan.120 We find no error in the Bureau’s decision. As directed by
the Bureau, USAC required time to review Integrity’s compliance plan for adequacy, perform necessary
reviews of the pending funding requests and perform its mandate to avoid fraud, waste and abuse in the
E-rate program, while being cognizant of the Department of Justice investigation of alleged competitive
bidding violations.121 We find that USAC acted reasonably in processing the pending applications and
we find no error in the Bureau leaving this administrative task to USAC and we therefore deny this
element of Integrity’s AFR.

IV.

ORDERING CLAUSES

34.
ACCORDINGLY, IT IS ORDERED, pursuant to the authority contained in sections 1-4
and 254 of the Communications Act of 1934, as amended, 47 U.S.C. §§ 151-154 and 254, and sections
1.115 of the Commission’s rules, 47 C.F.R. §1.115, that the Application for Review filed by Integrity
Communications Ltd on July 30, 2010, is DISMISSED in part and DENIED, as discussed herein.
FEDERAL COMMUNICATIONS COMMISSION
Marlene H. Dortch
Secretary


116 See Schools and Libraries Fifth Report and Order, 19 FCC Rcd at 15816, para. 24.
117 See 47 C.F.R. § 54.722.
118 See 47 C.F.R. §§ 54.1.115 (a), 54.719(c).
119 See 47 U.S.C. § 402(a).
120 See AFR at 11. In its previous filings, Integrity asked the Bureau to set specific time limits on USAC’s review.
See, e.g., Request for Review at 25-26; Petition for Reconsideration at 3.
121 See supra para. 11.
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