Federal Circuit Dismisses Hawaiian Telecom’s $27M Subsidy Dispute

Last Thursday, the Federal Circuit ruled on a challenge brought by Sandwich Isles Communications Inc. (SIC) against the federal government over its request that SIC pay back tens of millions of dollars in subsidies received from aid pools. The court found, as the U.S. Court of Federal Claims previously had, that the tribunal lacked subject matter jurisdiction over the case.

The opinion explained that SIC was formed in the mid-1990s to provide telecommunications services to native Hawaiians. In 1997, SIC received a federal designation to do so and served rural communities in Hawaii by leasing capacity on an existing undersea cable. For certain leasing expenses, SIC sought and received millions of dollars in subsidies from the National Exchange Carrier Association (NECA) pool, a fund intended to support providers in high-cost areas.

Later, SIC entered into an exclusive, 20-year lease of a newly constructed cable owned by Paniolo LLC, a different corporate vehicle of SIC’s parent company. Though SIC’s subscriber base was relatively small, the Paniolo cable it leased was both expensive and “‘massive, with the capacity to provide broadband service to the entire state of Hawaii.’” The variable lease reportedly began at $15 million per year and rose to $24 million annually by 2018.

In addition, as a service provider in a high-cost area, SIC received Universal Service Fund (USF) assistance on a per-line basis. In 2011, the Federal Communications Commission (FCC) reforms substantially cut the amount of funding SIC received from the USF and eventually suspended those payments.

According to the opinion, after SIC’s founder was convicted of tax fraud in July 2015, SIC itself was the subject of an investigation. In late 2016, the FCC issued an order finding that SIC improperly received “excessive” payments from the federal high-cost support mechanisms totaling about $27.27 million between 2002 and 2015. SIC challenged the decision as an improper taking by the federal government under the Tucker Act and sought $200 million in damages. 

In its analysis, the Federal Circuit panel adjudged whether the Communications Act of 1934 withdraws Tucker Act jurisdiction over takings claims, finding that it does. The court reasoned that because SIC challenged FCC actions and orders governed by the judicial review provision of the Communications Act, the claims court’s Tucker Act jurisdiction was displaced entirely.

The panel noted the proper procedure under the Communication Act’s “comprehensive statutory scheme.” The opinion stated that SIC could have raised a constitutional takings claim to the FCC, and if the FCC denied the waiver, SIC could appeal that decision to the full commission and then to a federal appellate court. 

SIC is represented by Kobayashi Sugita & Goda LLP and the federal government by the United States Department of Justice.