Category: Constitutional Law

What Does the End of Chevron Deference Mean for Federal Health Care Programs?

On June 28, 2024, the Supreme Court rejected the doctrine of Chevron deference in the closely watched case of Loper Bright Enterprises v. Raimondo.[1] In a 6-3 decision, the Court held that Chevron’s rule that courts must defer to federal agencies’ interpretation of ambiguous statutes gave the executive branch interpretive authority that properly belonged with the courts. Moreover, the Court concluded that Chevron deference was inconsistent with the Administrative Procedure Act (APA), holding that the APA requires courts to exercise independent judgment when deciding legal issues in the review of agency action.

Loper will have significant and immediate implications for the U.S. Department of Health and Human Services (HHS), the federal agency charged with the administration of the federal health care programs, including Medicare and Medicaid. As detailed below, the Court’s decision sets a more exacting standard for courts to apply when reviewing HHS’s regulations and legal positions.

What Was Chevron Deference?

The doctrine of Chevron deference was established in 1984 by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.[2] In that case, the Court held when a “statute is silent or ambiguous with respect to the specific issue” raised regarding a statute that the agency administers, “the question for the court is whether the agency’s answer is based on a permissible construction of the statute.”[3]

Although scholars have debated Chevron’s rationale at length, it generally was read to require deference based upon agencies’ presumed subject matter expertise and an assumption that Congress delegated authority to agencies—rather than courts—to fill in gaps in statutory schemes. Notably, the Supreme Court had not itself invoked Chevron deference since 2016, although lower courts have continued to rely on it regularly.[4]

What Did Loper Decide?

Loper involved two New England fishing companies appealing the D.C. Circuit’s ruling that applied Chevron deference to uphold the National Marine Fisheries Service’s interpretation of the Federal Magnuson-Stevens Act (the “Act”) as requiring fishermen to pay for the use of compliance monitors on certain fishing boats, even though the federal law is silent on who must pay. Petitioners used the case as a vehicle to present a broader challenge to Chevron,arguing that the doctrine has led to excessive deference to federal agencies, resulting in overregulation, the abdication of judicial responsibility to interpret statutes, and the unwarranted imposition of regulatory enforcement costs.

The Loper majority firmly rejected Chevron and held that the APA requires courts to exercise their independent judgment in deciding legal questions that arise in reviewing agency action. As the majority held, “courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.”[5]

Importantly, however, Loper noted that deference may still be afforded agencies in certain instances. First, the Court observed that the APA expressly mandates a deferential standard of review for agency policy-making and fact-finding.[6] Second, Loper explained that some statutes are best read to “delegate[] discretionary authority to an agency,” in which case a court’s role is to merely ensure the agency “engaged in ‘reasoned decisionmaking’” within that authority.[7] Lastly, Loper reaffirmed that an agency’s “expertise” remains “one of the factors” that may make an agency’s interpretation persuasive.[8]

How Will Loper Impact Federal Health Care Programs?

Loper’s directive that courts should construe statutes independently and not defer to agencies’ positions has enormous implications for providers and suppliers that participate in federal health care programs. Much of today’s health care landscape is governed by HHS’ regulations, impacting many Americans and much of the federal budget. For example, Medicare currently covers more than 67 million beneficiaries, and Medicare spending comprised 12% of the federal budget in 2022 and 21% of national health care spending in 2021.[9]

Federal health care programs like Medicare and Medicaid are established by statutes that set forth myriad requirements regarding the coverage of items and services, and how, when, and by whom those items and services may be furnished.[10] HHS’s various components—most notably the Centers for Medicare and Medicaid Services (CMS)—have issued numerous, detailed regulations to implement these statutes. HHS’s components also include FDA, CDC, HRSA, AHRQ, OCR, NIH, and many others that intersect with health care providers and suppliers regularly.

Going forward under Loper, future challenges to agency regulations will take place upon a much different playing field. This has several important implications:

  • More Legal Challenges: We expect to see more legal challenges brought against HHS’s regulations as they are issued. Loper expressly stated that it “does not call into question prior cases that relied on the Chevron framework,” so prior decisions affirming regulations should be stable.[11] But going forward, Loper means that courts have no “thumb on the scale” in favor of HHS’s legal positions, and so litigants may view Loper as increasing their odds of success. At the same time, this may create more uncertainty for providers and suppliers who must determine how to comply with new regulations under challenge.
  • Less Ability for HHS to Create New Programs or Impose New Requirements: Especially where HHS imposes new substantive requirements that are not clearly authorized by statute, HHS’s regulations may be vulnerable. For example, the challengers to CMS’s minimum-staffing requirements for nursing homes are sure to cite Loper.[12] Likewise, when HHS creates new programs or initiatives by regulation based on broad statutory language (e.g., HHS’s recent creation of rural emergency hospital regulations[13]), the regulations may be more vulnerable to challenges. As another example, legal challenges to FDA’s new rule on Laboratory Developed Tests are pending and will likely invoke Loper.[14]
  • More Incentive to Challenge Reimbursement Rules: Legal challenges are frequently brought to CMS’s rules governing reimbursement, which often have complicated statutory formulas subject to differing interpretations. Whereas in the past, courts often deferred to CMS’s interpretations,[15] Loper now creates more potential for providers and suppliers to seek more favorable legal interpretations to enhance reimbursement.
  • Slower and More Cautious Rulemaking: As HHS promulgates new regulations, it will now have to consider the enhanced litigation risk that Loper creates. This may lead to agencies slowing and proceeding more cautiously in rulemaking as agencies seek to craft defensible regulations.
  • Inconsistent Decisions by Courts: Because Loper directs courts to exercise independent judgment rather than defer to HHS’s interpretations, we expect that courts in different areas of the country may reach differing conclusions regarding HHS regulations. This may make certain geographic locations more advantageous for provider and supplier operations or expansions.

Conclusion

Going forward, courts will be more amenable than ever to siding with challenges to HHS regulations. This creates both challenges and opportunities for providers and suppliers who should carefully assess the legal basis for all new regulations.

The authors acknowledge the contributions of Callie Ericksen, a student at the University of California Davis Law School and 2024 summer associate at Foley & Lardner LLP.

[1] Loper Bright Enterprises v. Raimondo, No. 22-451 (June 28, 2024), together with Relentless, Inc. v. Department of Commerce, No. 22-1219, available here.

[2] 467 U.S. 837 (1984).

[3] Id. at 843 (emphasis added).

[4] See Am. Hosp. Ass’n (“AHA”) v. Becerra, 142 S. Ct. 1896, 1904 (2022) (determining that HHS’s preclusion of judicial review “lacks any textual basis,” remaining silent with respect to Chevron); Becerra v. Empire Health Found., 142 S. Ct. 2354, 2362 (2022) (illustrating that HHS’s reading aligns with the statute’s “text, context, and structure” in calculating the Medicare fraction for purposes of Medicare Part A benefits, without any mention of Chevron); Vanda Pharms., Inc. v. Ctrs. for Medicare & Medicaid Servs.,98 F.4th 483 (2024) (holding that CMS’s definitions of “line-extension” and “new formulation” did not conflict with the Medicaid statute).

[5] Loper Bright Enterprises v. Raimondo, No. 22-451, slip op. 35 (June 28, 2024).

[6] Id. at slip. op. 14 (citing 5 U.S.C. §§ 706(2)(A), (E)).

[7] Id. at slip op. 18.

[8] Id. at slip op. 25 (citing Skidmore v. Swift & Co., 323 U.S. 134 (1944).

[9] See KFF, Medicare 101 (published May 28, 2024), available here.

[10] See 42 U.S.C. §§ 1395–1395lll.

[11] Loper Bright Enterprises v. Raimondo, No. 22-451, slip op. 34 (June 28, 2024).

[12] See Am. Health Care Ass’n v. Becerra, No. 24-cv-114 (N.D. Tex) (challenging the rule issued at 89 Fed. Reg. 40876 (May 10, 2024).

[13] Conditions of Participation, 42 C.F.R. §§ 485.500-485.546 (Subpart E), and Payments, §§ 419.90-419.95 (Subpart J), 87 Fed. Reg. 71748, 72292-93 (Nov. 23, 2022),

[14] 21 C.F.R. § 809, 89 Fed. Reg. 37286 (May 6, 2024).

[15] See, e.g., Baptist Mem’l Hosp. – Golden Triangle, Inc. v. Azar, 956 F.3d 689 (5th Cir. 2020) (deferring to CMS’s rule addressing “costs incurred” for calculating Medicaid Disproportionate Share Hospital payments).

© 2024 Foley & Lardner LLP
For more news on Supreme Court Health Care Decisions, visit the NLR Health Law & Managed Care section.

Supreme Court Issues Landmark Decision Upending Deference to Federal Agencies

On June 28, 2024, the Supreme Court of the United States upended the 40-year-old doctrine whereby federal courts gave deference to administrative agencies’ reasonable interpretations of federal statutes. The ruling stands to have significant implications for federal agencies’ rulemaking and enforcement of federal labor and employment laws.

Quick Hits

  • The Supreme Court held that courts must exercise their independent judgment in deciding whether an agency acted within its statutory authority and may not defer to an agency’s interpretation when a law is ambiguous.
  • The decision overruled the four-decades-old doctrine known as Chevron deference, in which courts had deferred to agencies’ reasonable interpretations of ambiguous statutes.
  • The ruling will have a major impact on federal agencies’ rulemaking authority.

The Supreme Court decision in Loper Bright Enterprises v. Raimondo held that courts must exercise independent judgment in deciding whether an agency acted within its statutory authority and may not simply defer to the agency’s interpretation of ambiguities in the law.

The decision overrules the longstanding doctrine known as Chevron deference, under which courts would defer to a federal agency’s reasonable interpretation of an ambiguous law that the agency administers. The deference had provided the rules of such administrative agencies with the force of law, but that authority will, at a minimum, be weakened, along with the corresponding power of the agencies.

In the opinion of the Court, Chief Justice John Roberts wrote that Chevron deference “defies the command of the” Administrative Procedure Act (APA) that courts “not the agency whose action it reviews … ‘decide all relevant questions of law’ and interpret … statutory provisions.” Chevron deference “requires a court to ignore, not follow, ‘the reading the court would have reached’ had it exercised its independent judgment as required by the APA,” (Emphasis in original).

The Court, in its majority, rejected the presumption that ambiguities in federal statutes are implicit delegations of authority to agencies, stating the “presumption is misguided because agencies have no special competence in resolving statutory ambiguities.”

The ruling will have significant implications for the multiple federal agencies that regulate employers, including the U.S. Department of Labor (DOL), the U.S. Equal Employment Opportunity Community Commission (EEOC), the Federal Trade Commission (FTC), the National Labor Relations Board (NLRB), Occupational Safety and Health Administration (OSHA), and the Office of Federal Contract Compliance Programs (OFCCP), among others.

Chevron Deference

Under the two-step Chevron deference framework, the court would first determine whether a statute in question was clear and unambiguous regarding an issue. If the statute was clear, then the court would give effect to it. If, however, the court found the statute was ambiguous or silent on the issue, then the court would proceed to step two. At that step, the court would determine whether the agency’s interpretation was a permissible or reasonable construction of the statute. If so, the court would uphold the agency’s interpretation.

The deference had allowed federal agencies leeway to act, allowing them interpret ambiguities and fill gaps in the laws they enforce. However, the doctrine has been criticized in recent years as unconstitutionally allowing the Executive Branch’s policy positions to be advanced by federal agencies outside the democratic process and for taking power away from federal courts to interpret laws.

Background

The issue over Chevron deference came before the Supreme Court in two cases challenging a National Marine Fisheries Service (NMFS) rule that required fishing vessels to pay the salaries of federal observers that vessels are required to “carry” under the Magnus-Stevenson Act (MSA). The MSA is silent as to whether the fishing industry is responsible for paying the costs for the observers. Given concerns about funding, the NMFS rule required the vessels carrying the observers to pay the costs despite objections from the fishing industry over its negative economic impact on the livelihoods of commercial fishermen.

In Loper Bright Enterprises, four family-owned and –operated fishing companies, argued that the NMFS cannot force vessels to pay for the observers because the MSA did not clearly give the agency power to do so. However, the D.C. Circuit Court of Appeals ruled in favor of the agency, finding that the law’s silence on the issue created an ambiguity that required deference to the agency.

Supreme Court Justice Ketanji Brown Jackson recused herself from the Loper Bright case as she had sat on the D.C. Circuit panel that had ruled in the case. The Court then added Relentless, Inc. v. Department of Commerce, in which the owner of fishing vessels raised a similar challenge to the NMFS rule. The challengers argued that since the MSA provides for observers to be paid in at least three other contexts, the NMFS did not have the authority to require fishing vessels to pay for them. But the First Circuit Court of Appeals affirmed a district court finding that “the rule is a permissible exercise of the agency’s authority and is otherwise lawful.”

At the Supreme Court, the challengers in Loper Bright Enterprises argued that the Court should “either abandon Chevron for good or at least substantially cabin its scope” because it has “proved unworkable” and has “seriously distorted how the political branches operate.” They argued that stare decisis does not bar the court from abandoning the framework since the Court would not have to change the outcome of the case in which the deference was established but merely alter the interpretative methodologies used. Similarly, the challengers in Relentless argued that the deference is unconstitutional because it “compromise[es] judges’ independence when interpreting the law,” which is a power vested in the federal courts under Article III of the U.S. Constitution.

Decision

In deciding Loper Bright, the Supreme Court stated that courts simply “do not throw up their hands because ‘Congress’s instructions have’ supposedly ‘run out.’” “Courts instead understand that such statutes, no matter how impenetrable, do—in fact, must—have a single, best meaning. … So instead of declaring a particular party’s reading ‘permissible’ in such a case, courts use every tool at their disposal to determine the best reading of the statute and resolve the ambiguity,” the Court stated.

The Supreme Court further stated that agencies do not have any special ability to interpret ambiguities, “even when an ambiguity happens to implicate a technical matter” as “Congress expects courts to handle technical statutory questions.” However, the Court stated that courts do not decide cases “blindly” and instead, rely on arguments from the parties and amici, noting that an agency’s interpretation “may be especially informative.”

“The better presumption is therefore that Congress expects courts to do their ordinary job of interpreting statutes, with due respect for the views of the Executive Branch,” the court stated. “And to the extent that Congress and the Executive Branch may disagree with how the courts have performed that job in a particular case, they are of course always free to act by revising the statute.”

However, the Court noted that the decision does “not call into question prior cases that relied on the Chevron framework,” as cases upholding specific agency actions “are still subject to statutory stare decisis despite our change in interpretative methodologies.

Justice Elena Kagan and Justice Sonia Sotomayor dissented and were joined by Justice Jackson to the extent it applied to the Relentless case. In the dissenting opinion authored by Justice Kagan, the justices argued that Chevron deference “has formed the backdrop against which Congress, courts, and agencies—as well as regulated parties and the public—all have operated for decades” and “has been applied in thousands of judicial decisions.”

They argued that Chevron deference is “right” and the “obvious choice” to resolve ambiguities because “[a]gencies have expertise” that “courts do not.” Further, agencies report to the president, “who in turn answers to the public for his policy calls; courts have no such accountability and no proper basis for making policy.” Moreover, “Congress has conferred on that expert, experienced, and politically accountable agency the authority to administer—to make rules about and otherwise implement—the statute giving rise to the ambiguity or gap,” Justice Kagan wrote.

Next Steps

The Supreme Court’s latest decision is likely to shift power dynamics by weakening agency authority to interpret ambiguous statutes and increasing judicial scrutiny. At a minimum, agencies may need to provide stronger justifications on the merits for their interpretations, and overall, they may be less likely to issue rulemaking in areas where statutory authority is not clear.

The decision is also likely to increase litigation and legal uncertainty, as it potentially opens the floodgates to a wave of legal challenges to overturn all sorts of existing agency rules that have been upheld citing Chevron deference and legal challenges to new agency rules moving forward. For example, this decision likely will have significant impact on the litigation challenging the Federal Trade Commission’s (FTC) rule purporting to ban noncompetes nationally.

© 2024, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.
For more on Chevron, visit the NLR Litigation Trial Practice section.

Navigating the Nuances of LGBTQ+ Divorce in California

The end of a marriage is always challenging for the couple involved, and the impact on family members can be significant. Those in LGBTQ+ marriages are no different. Issues around child custody, property division, spousal support, and the enforcement of prenuptial agreements all apply to same-sex couples.

In California, there is no common-law marriage. In some cases, the LGBTQ+ couple may not have been married long at the time of the divorce, but they may have been together for much longer than the marriage itself. Whether they were registered as a domestic partnership will make a difference. In such cases, the couple will have similar rights and obligations as those married for the same length of time.

For example, in California, if the couple were married four years ago, spousal support—in most cases—would only be for approximately two years. However, if they were registered as domestic partners for 20 years and then had a four-year marriage, spousal support could be until either party’s death or the recipient spouse’s remarriage.

The Unique Challenges Around Parental Rights

Dealing with parental rights is difficult regardless of the orientation of the couple involved. When I advise clients, I try my best to have them focus on the best interests of their children. Divorce is typically the most challenging for the children.

Nuanced complications can arise depending on how the children came into the family. Was it by adoption, surrogacy, or assisted reproductive technology? For LGBTQ+ couples, it is essential that everything is done legally and correctly and that both parents are included in legally binding contracts. In the case of surrogacy or assisted reproductive technology (also known as IVF), mainly when sperm or eggs are donated from someone outside the relationship, it is critically important that the sperm or egg donor has no rights or obligations. Otherwise, things can get murky in a legal sense.

The bottom line is that couples need to secure an excellent lawyer to protect their interests and those of their children. Putting the children first should always be the priority.

Additional Considerations

I have been told that in the LGBTQ+ community, particularly amongst those who identify as men, there can be a preponderance of open relationships. I have been asked if that can complicate a potential divorce. Because California is a no-fault state regarding divorce, it does not matter who sleeps with whom. The only issue is if one person spends community dollars on another person outside the marriage. A relevant factor would be if it were an open marriage and what the understanding of that meant financially and otherwise. Ideally, a couple would document these nuances with their lawyer. Without pre- or post-nuptial agreements addressing such relationship guidelines, spending outside the marriage on another relationship can become a problem during divorce proceedings.

Another question I am often asked is if same-sex couples should seek divorce attorneys who identify as similar to themselves. I can easily see how that might be a comfortable choice. And I do not advocate against it. The most important criterion is the attorney’s skill and if you can relate to them. I know for myself, I am confident I can help my clients, whether they are gay, non-binary, or fluid. My commitment and level of advocacy are always going to be the same.

Concerns over the Future Loom Large

In the past, same-sex couples who married in other states faced the risk that their marriages would not be recognized in another state. The U.S. Supreme Court’s landmark Obergefell v. Hodges decision in 2015 required that all states, including California, recognize same-sex marriages performed in other jurisdictions. For those married in California, we are fortunate that LGBTQ+ rights have long been progressive. On the other hand, recent rumbling from the U.S. Supreme Court suggests those protections may be in jeopardy.

I am personally troubled by what some Justices have indicated in dissenting opinions. I remember life before Roe v. Wade and life before Obergfell. I have always been concerned about subsequent elections and the future makeup of our nation’s highest court. Personally, I would hate to see our country go backward on marriage equality.

I have always believed in the institution of marriage. And I am a realist who recognizes that marriages can and do end for a multitude of reasons. It might be surprising to hear a divorce attorney say this, but I would prefer to see couples work things out. But when they cannot, I will be the best advocate for my clients, regardless of how they identify. In the end, divorce is a tricky thing to go through, and whether you are part of a same-sex couple or opposite-sex makes little difference.

© 2024 Blank Rome LLP
For more news on LGBTQ+ Family Law, visit the NLR Family Law / Divorce / Custody section.

Dictionaries and the Law – Hunting, Poaching, and the Right to Food

The Law Court’s recent decision in Parker v. Department of Inland Fisheries & Wildlife is fascinating—it is a rare instance when the Court has been called upon to interpret and apply a new constitutional provision. The Maine Constitution has had relatively few amendments, but in 2021 Maine voters approved a “Right to Food Amendment.” Parker involved a challenge to Maine’s Sunday hunting law prohibition under the new amendment.

As is relevant here, the amendment provides that “[a]ll individuals have a natural, inherent and unalienable right to food, including the right to … grow, raise, harvest, produce and consume the food of their own choosing” for certain purposes, including nourishment. It then enumerates limitations on this right, conditioning the right on the requirement that the individual not commit “trespassing, theft, poaching or other abuses of private property rights, public lands or natural resources.”

The question in the case was whether the Maine law banning hunting on Sundays infringes on this right. In an interesting ruling, the Law Court said it did not. After reaching the straightforward conclusion that the plaintiffs could present a justiciable claim given the State’s denial of their request for a Sunday hunting permit, the Court took up the merits—and in so doing, raised some intriguing questions.

First, the Court accorded the Sunday hunting statute a presumption of constitutionality—even though the statute predated the constitutional amendment. But why? Normally the presumption accords the Legislature credit for seeking to act in accordance with existing constitutional limits. That rationale, the Court acknowledged, did not apply. The Court instead suggested that there are other reasons for according this presumption, but relied on cases stating that facial constitutional challenges are disfavored because they lack robust factual records and pose the risk of overbroad rulings. Those concerns seem to go to the particular vehicle for the challenge, not the presumed validity of the enactment itself. Isn’t the right answer, then, to apply the appropriate standard for facial challenges rather than apply a presumption? That point is at least debatable.

Second, the Court’s analysis of the amendment’s language raises interesting interpretive questions. The Court concluded that the term “harvest” includes hunting. The Court buttressed this conclusion by citing several authorities, including dictionary definitions, its own prior precedent, and statutory definitions. Based on these authorities, the Court reasoned, the amendment does include a right to hunt. The Court then observed that this right is subject to express limitations, including that the right does not include engaging in “poaching.” Citing dictionary definitions only, the Court then reasoned that the term “poaching” includes any illegal hunting. Thus, the Court held that the right to hunt does not include the right to hunt on Sundays, because the Legislature has made hunting on Sundays illegal.

One could imagine a potential criticism—does the reasoning in Parker render the right to hunt under the amendment meaningless? If the amendment is meant to protect the right to hunt, but does not circumscribe any law that renders hunting illegal, does the amendment protect hunting at all?

There are arguable critiques of the Court’s reliance on dictionary definitions. Two definitions cited, from Merriam Webster’s Collegiate Dictionary and Webster’s II New College Dictionary, suggest a broad definition of the term that includes any illegal taking of game. But query whether that is the ordinary understanding of the term. Various dictionaries, including Merriam Webster and Cambridge, suggest a primary meaning of “poaching” that relates to illegality in the manner in which the game is taken—i.e., taking game while encroaching on the land of another. Indeed, the Court’s citation to Black’s Law Dictionary, which defines poaching as the illegal taking of game “on another’s land,” supports this ordinary reading. At the very least, the availability of a narrower common meaning suggests the need for careful reliance on dictionaries, including analysis of primary definitions and the word’s context.

As Justice Scalia and Brian Garner note in Reading Law, the availability of multiple meanings for common words places great importance on evaluating not just to dictionary definitions but also the word’s context to determine its most likely meaning. Here, there are multiple hints at the word’s meaning to be found in the amendment’s context. The amendment itself references poaching and “other abuses of private property rights, public lands or natural resources.” The reference to “other abuses of private property” renders a definition of “poaching” that requires some sort of trespass more likely. And broader context might suggest the same; as mentioned above, a reading of “poaching” that includes any law rendering hunting illegal seems (at first blush) to render the amendment circular, and thus meaningless at least in part—a result that is generally discouraged. Of course, there may be rejoinders, but Parker does not provide them.

As Parker illustrates, constitutional and statutory interpretation requires careful, contextual analysis, and it is incumbent on attorneys to equip the Court with thorough arguments. That’s what a good appellate brief—whether by a party or by an interested party filing an amicus—is for. But for now, Parker answers a narrow question under the Right to Food amendment, while leaving many other questions about its scope and application open.

©2024 Pierce Atwood LLP. All rights reserved.
For more news on State Constitution Interpretation, visit the NLR Constitutional Law section.

Court Finds Corporate Transparency Act Unconstitutional and Unenforceable as to NSBA Members

On March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled that the Corporate Transparency Act (“CTA”) is unconstitutional.[1] The CTA requires many U.S. entities to disclose their individual beneficial owners in a report filed with the U.S. Treasury. The CTA statute was enacted in 2021.[2] Its implementing regulations require many entities formed in 2024 to report beneficial ownership information within 90 days of formation.[3] The CTA requires many entities formed prior to 2024 to report beneficial ownership information by January 1, 2025.[4]

The federal court’s ruling arose in the context of a constitutional challenge by plaintiffs the National Small Business Association (“NSBA”) and one of its individual members, Isaac Winkles. In granting summary judgment for the plaintiffs, the court held that:

  • the Commerce Clause, the Necessary and Proper clause, the taxing power, and the U.S. government’s authority over foreign affairs and national security do not provide sufficient authority for the Corporate Transparency Act (“CTA”), and the CTA is unconstitutional as a result; and
  • the U.S. government is enjoined from enforcing the CTA as to the NSBA and Isaac Winkles.

The court did not issue a nationwide injunction barring the U.S. government from enforcing the law against other entities within the scope of the CTA’s reporting requirements.

On March 11, 2024, the U.S. Government filed a notice of appeal of the court’s ruling.[5]  The same day, the Financial Crimes Enforcement Network (“FinCEN”), which is the U.S. Treasury bureau that administers the CTA, stated that it will continue to implement the CTA while complying with the court’s order.[6]

FinCEN clarified that it is not currently enforcing the CTA against two categories of persons:

  • individual plaintiff Isaac Winkles and reporting companies for which he is a beneficial owner; and
  • the NSBA and its members as of March 1, 2024.

FinCEN stated, “[o]ther than the particular individuals and entities subject to the court’s injunction [. . .] reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.”[7]

[1] https://www.govinfo.gov/content/pkg/USCOURTS-alnd-5_22-cv-01448/pdf/USCOURTS-alnd-5_22-cv-01448-0.pdf.

[2] National Defense Authorization Act for Fiscal Year 2021, Pub. L. 116-283, div. F, title LXIV, § 6403 (adding 31 § U.S.C. 5336), available at: https://www.govinfo.gov/content/pkg/PLAW-116publ283/pdf/PLAW-116publ283.pdf.

[3] 31 C.F.R. § 1010.380.

[4] Id.

[5] https://fincen.gov/sites/default/files/shared/54_Notice_of_Appeal.pdf

[6] https://fincen.gov/news/news-releases/updated-notice-regarding-national-small-business-united-v-yellen-no-522-cv-01448

[7] Id.

© Copyright 2024 Cadwalader, Wickersham & Taft LLP
For more news on the Constitutionality of the CTA, visit the NLR Corporate & Business Organizations section.

Federal Court Strikes Down the Corporate Transparency Act as Unconstitutional

On March 1, 2024, the federal judge presiding over the lone case testing the validity of the Corporate Transparency Act (CTA) struck down the CTA as unconstitutional. As we have explained, through the CTA, Congress imposed mandatory reporting obligations on certain companies operating in the United States, in an effort to enhance corporate transparency and combat financial crime. Specifically, the CTA, which took effect on January 1, 2024, requires a wide range of companies to provide personal information about their beneficial owners and company applicants to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). More than 32.5 million existing entities are expected to be subject to the CTA, and approximately 5 million new entities are expected to join that number each year. By mid-February, approximately a half million reports had been filed under the CTA according to FinCEN.

The CTA’s enforceability is now in doubt. In National Small Business United d/b/a National Small Business Association v. Yellen, the Honorable Liles C. Burke of the United States District Court for the Northern District of Alabama held that the CTA exceeded Congress’s authority to regulate interstate commerce, and that the CTA was not necessary to the proper exercise of Congress’ power to regulate foreign affairs or its taxing power. The Court issued a declaratory judgment—stating that the CTA is unconstitutional—and enjoined the federal government from enforcing the CTA’s reporting requirements against the plaintiffs in that litigation. A nationwide injunction, which would have raised its own enforceability concerns, was not included in the Court’s ruling.

The Court focused on three aspects of the CTA. First, the Court highlighted that the CTA imposes requirements on corporate formation, which is traditionally left to state governments as matters of internal state law. Second, the Court observed that the CTA applies to corporate entities even if the entity conducts purely intrastate commercial activities or no commercial activities at all. Third, the Court concluded that the CTA’s disclosure requirements could not be justified as a data-collection tool for tax officials as that would raise the specter of “unfettered legislative power.”

What the Decision Means for Entities Subject to the CTA

The Court’s decision creates uncertainty on entities’ ongoing obligations under the CTA. Although the Court purported to limit its injunction to the parties in the litigation before it, the lead plaintiff in the suit is the National Small Business Association (NSBA). In its opinion, the Court held that the NSBA had associational standing to sue on behalf of its members. Based on precedent, this means the Court’s injunction likely benefits all of the NSBA’s over 65,000 members. If so, the government is prevented from enforcing the CTA’s reporting requirements against any entity that is a member of the NSBA.

Regardless of membership in the NSBA, however, the Court’s declaratory judgment that the CTA is unconstitutional also raises serious doubts about the government’s ability to enforce the CTA’s reporting requirements. This could amount to a de facto moratorium on CTA enforcement, depending on the government’s view of the decision.

What Happens Next

The government will likely appeal this decision, but the Court’s injunction and declaration will remain in effect unless a stay is granted. To receive a stay, the government will first likely need to file a motion in the district court, which will consider (1) how likely it is that the government will succeed on appeal; (2) whether the government will be irreparably harmed without a stay; (3) whether a stay will injure other parties interested in the litigation; and (4) whether a stay would benefit the public interest. If the district court denies a stay, the government will be able to seek a stay from the Atlanta-based United States Court of Appeals for the Eleventh Circuit.

The government has 60 days to appeal, though it will likely file its appeal sooner given the grant of an injunction and decision’s far-reaching consequences. The grant or denial of stay should be resolved in the coming weeks, but the timing of any final decision from the Court of Appeals is uncertain. In 2023, the median time for the Eleventh Circuit to resolve a case was over 9 months. However, the key deadline by which tens of millions of companies otherwise must file their initial report under the CTA is January 1, 2025.

© 2024 Varnum LLP
For more news on the Constitutionality of the Corporate Transparency Act, visit the NLR Corporate & Business Organizations section.

As Foretold, California’s New Forced Speech Laws Are Being Challenged

Last year, I commented on the likely unconstitutionality of two California laws compelling forced speech:

The California legislature has of late adopted the tactic of driving behavior by compelling speech. SB 253 (Wiener), for example, compels disclosure of greenhouse gas emissions and SB 261 (Stern) requires disclosure of climate-related financial risks. Both of these requirements clearly compel speech arguably in contravention of the First Amendment to the U.S. Constitution. Rumsfeld v. Forum for Academic and Institutional Rights, Inc., 547 U.S. 47, 61 (2006) (“Some of this Court’s leading First Amendment precedents have established the principle that freedom of speech prohibits the government from telling people what they must say.”).

I had previously noted that SB 253 was very similar to an earlier bill that did not make it into law.

Yesterday, the Chamber of Commerce of the United States of America and several others filed suit in the Central District Court challenging these laws. In its complaint, the plaintiffs allege that the “State’s plan for compelling speech to combat climate change is unconstitutional – twice over.” The plaintiffs urge the court to apply “strict scrutiny” to both laws because they compel speech about a controversial subject – climate change. If the court applies strict scrutiny, the bills would be presumptively unconstitutional and may be upheld only by proof that they are narrowly tailored to serve compelling state interests. That is an exceedingly high hill to climb.

Because both bills quite obviously violate basic free speech rights, the question arises whether the authors knew or were grossly negligent in not knowing of the constitutional infirmities of the legislation. In 2020, I wrote Senator Wiener, the author of SB 253, that SB 260, “abridges free speech rights guaranteed by the U.S. and California Constitutions”. At the time, I was distressed that the legislative analyses for SB 260 failed to mention the constitutional infirmities of the bill. See Legislators Again Kept In Dark About Constitutional Infirmities Of Climate Corporate Accountability Act and Legislators Again Kept In Dark About Constitutional Infirmities of Climate Corporate Accountability Act.

© 2010-2024 Allen Matkins Leck Gamble Mallory & Natsis LLP
by: Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP 
For more news on California Free Speech Laws regarding Climate Change, visit the NLR Environmental, Energy & Resources section.

Parody of Iconic Sneaker Isn’t Entitled to Heightened First Amendment Protection

The US Court of Appeals for the Second Circuit upheld a temporary restraining order and preliminary injunction enjoining use of a trademark and trade dress associated with an iconic sneaker design over a First Amendment artistic expression defense. Vans, Inc. v. MSCHF Product Studio, Inc., Case No. 22-1006 (2d Cir. Dec. 5, 2023) (per curiam). This case is the first time a federal appeals court has applied the Supreme Court of the United States’ recent decision in Jack Daniel’s v. VIP Products, which clarified when heightened First Amendment protections apply to expressive uses of another’s trademark and trade dress.

MSCHF Product Studio is a Brooklyn-based art collective known for provocative works that critique consumer culture. It sells its works in limited releases during prescribed sales periods called “drops.” It promoted and sold a shoe called the “Wavy Baby,” which is a distorted, corrugated version of the iconic black-and-white Vans Old Skool sneaker. MSCHF claimed that the product was a commentary on consumerism in sneakerhead culture and that the Wavy Baby shoes were not meant to be worn but were instead “collectible work[s] of art.”

MSCHF promoted the shoes using the musician Tyga. Vans sent MSCHF a cease-and-desist letter and a week later filed a six-count complaint in federal court, including a claim for trademark infringement under the Lanham Act. The following day, Vans filed a motion for a temporary restraining order, seeking to have the court enjoin the sale of the Wavy Baby shoes. Nevertheless, MSCHF proceeded with its pre-planned drop of the Wavy Baby sneakers and sold 4,306 pairs of the Wavy Baby in one hour.

About a week later, after oral argument on the temporary restraining order (TRO) motion, the district court granted Vans’s motion. The district court concluded that Vans would likely prevail in showing a likelihood of consumer confusion and rejected MSCHF’s contention that the Wavy Baby was entitled to special First Amendment protections because it was an artistic parody. MSCHF appealed.

The Second Circuit held the appeal in abeyance pending the Supreme Court’s Jack Daniel’s decision. In that case, Jack Daniel’s sued the maker of a squeaky dog toy that resembled the iconic whiskey bottle and used puns involving dog excrement in place of the actual language of the Jack Daniel’s label. In a unanimous decision, the Court clarified that special First Amendment protections (as used in the Rogers test for expressive works that incorporate another’s trademark) do not apply when a trademark is used as a source indicator—that is, “as a mark.”

The Second Circuit concluded that the Jack Daniel’s case “forecloses MSCHF’s argument that Wavy Baby’s parodic message merits higher First Amendment scrutiny” because, even though the product is a parody, the Rogers test does not apply if the mark is also used as a source identifier. The Second Circuit drew a direct parallel between Wavy Baby and the punning dog toy in the Jack Daniel’s case, noting that in both cases the infringing product evoked the protected trademark and trade dress of the target to benefit from the “good will” developed by the source brand. Hence, the Court held that the district court did not err in applying the traditional likelihood-of-confusion analysis rather than the speech-protective Rogers test.

Practice Note: An alleged infringer of a trademark may claim that its product is artistic expression to trigger the heightened First Amendment protections offered by filters such as the Rogers test. However, after Jack Daniel’s, courts are more likely to regard such defenses with skepticism unless the allegedly infringing work falls into a more canonical category of artistic expression such as a film, television show, song or video game.

This article was authored by Karen Gover.

© 2023 McDermott Will & Emery
For more news on First Amendment Trademark Protections, visit the NLR Intellectual Property section.

Supreme Court Upholds State Courts’ Power of Judicial Review Over Election Matters

On June 27, 2023, the United States Supreme Court upheld a decision by North Carolina’s highest court holding that the North Carolina legislature went too far in gerrymandering voting district maps. The Court affirmed the authority of state courts to review the decisions of state legislatures on election matters, rejecting the “independent state legislature theory.” The theory, taken to its extreme, is that no branch of state government can question a state legislature’s decision regarding any federal election.  The ruling is an encouraging sign for states like Arizona, Illinois, and Michigan, where independent redistricting commissions have created, or are creating, new maps intended to represent non-partisan, or less partisan, boundary drawing and citizen-driven ballot initiatives to protect voters’ rights.

The plaintiffs in Moore v. Harper, 600 U.S. ___ (2023), were groups and individuals challenging North Carolina’s 2021 congressional districting map, which they viewed as unacceptable gerrymandering, created to favor Republican candidates. The legislative defendants asserted that in creating the new map, they had exercised the authority established by the “Elections Clause” in Article I, Section 4 of the United States Constitution that provides that state legislatures shall prescribe, “the Times, Places and Manner of” federal elections. Although North Carolina judges had found the new map to be “a partisan outlier intentionally and carefully designed to maximize Republican advantage in North Carolina’s Congressional delegation,” the legislative defendants argued the map was beyond the reach of judicial review. The Supreme Court had to decide whether “the Elections Clause insulates state legislatures from review by state courts for compliance with state law.” Moore, slip opinion at p 11.

Writing for the majority, Chief Justice John Roberts began the analysis by citing our country’s long-standing legal tradition of judicial review of the constitutionality of legislative acts. The majority opinion noted the 1787 decision in Bayard v Singleton, where the North Carolina Supreme Court found a law banning British loyalists from challenging property seizures was unconstitutional. The opinion goes on to review many decades of decisions where courts have considered the “interplay between state constitutional provisions and a state legislature’s exercise of authority under the Elections Clause.” Moore, slip opinion at p 15.

Looking at the other side of the case, the Court examined the legislative defendants’ arguments about the impact of the Election Clause. Rejecting Justice Clarence Thomas’s dissent, Roberts addressed the concept known as “independent state legislature theory” which contends that, “because the Federal Constitution gives state legislatures the power to regulate congressional elections, only [the Federal] Constitution can restrain the exercise of that power.” Id at 18. The historical references supporting this theory are debunked in the Moore decision, and many commentators have stated the decision in Moore slams the door on the extreme view that state legislative acts around federal elections are not subject to review by state courts.

The Moore decision, however, refers to a need to balance competing interests: “Although we conclude that the Elections Clause does not exempt state legislatures from the ordinary constraints imposed by state law, state courts do not have free rein.” Moore, slip opinion at p 26.  The opinion goes on to note:

We do not adopt these or any other test by which we can measure state court interpretations of state law in cases implicating the Elections Clause… We hold only that state courts may not transgress the ordinary bounds of judicial review such that they arrogate to themselves the power vested in state legislatures to regulate federal elections.

Id. p 28-29. It therefore remains to be seen how difficult it will be to challenge state legislatures in their future attempts at partisan district drawing in state courts.  Paying homage to the Supreme Court decision in Bush v Gore, it also leaves open the question of when federal courts may find that a state court has transgressed the “ordinary bounds of judicial review.” And, Moore leaves the Court’s holding in Rucho v Common Cause, 139 S Ct 2484 (2019) that partisan gerrymandering claims brought in federal court are not justiciable because they present a political question beyond their reach.

Nevertheless, taken in the context of other decisions reached this term, such as the Alabama districting case implicating the Voting Rights Act (Allen v Milligan), the recent decision in Moore gives comfort to many traditionalists who have been increasingly fearful of sudden and/or extreme changes to norms in American jurisprudence.

Click Here for More Election Law News at the National Law Review.

© 2023 Miller, Canfield, Paddock and Stone PLC

Supreme Court to Consider First Amendment Protection for Parody Dog Toy

The Supreme Court of the United States has agreed to consider the scope of protection afforded by the First Amendment to commercial parody products that feature the unauthorized use of another party’s trademark(s). Jack Daniel’s Properties, Inc. v. VIP Products LLC, Case No. 22-148 (Supr. Ct. Nov. 21, 2022) (certiorari granted). The questions presented are as follows:

  1. Whether humorous use of another’s trademark as one’s own on a commercial product is subject to the Lanham Act’s traditional likelihood-of-confusion analysis, or instead receives heightened First Amendment protection from trademark-infringement claims.
  2. Whether humorous use of another’s mark as one’s own on a commercial product is “noncommercial” under 15 U.S.C. § 1125(c)(3)(C), thus barring as a matter of law a claim of dilution by tarnishment under the Trademark Dilution Revision Act.

This is the second time Jack Daniel’s has filed a petition for certiorari in connection with this case. The Supreme Court first considered the matter in January 2021, following the US Court of Appeals for the Ninth Circuit’s decision to vacate and remand the district court’s finding of trademark infringement, reverse the judgment on dilution and uphold the validity of Jack Daniel’s trademark and trade dress rights.

The case then returned to the district court, which granted summary judgment to VIP Products. The Ninth Circuit affirmed and then Jack Daniel’s filed its second petition for certiorari.

The Supreme Court will seek to settle the long-standing split amongst the US Courts of Appeal regarding the proper analysis for parody in trademark infringement and dilution claims and the scope of protection afforded to it via the First Amendment.

For more Supreme Court and Litigation News, click here to visit the National Law Review.

© 2022 McDermott Will & Emery