Various industry groups have filed lawsuits in multiple federal districts challenging the constitutionality of the Corporate Transparency Act (“CTA”). The first such suit, filed in the Northern District of Alabama, resulted in a ruling by the District Court that the CTA was unconstitutional because Congress lacked the authority to enact the CTA. The government appealed this ruling, and the Eleventh Circuit heard oral argument on Friday, September 27. As we discuss below, the tenor of the argument suggests, although hardly compels, the conclusion that the Eleventh Circuit will reverse the holding of the District Court.
Further, one week prior to the oral argument, on September 20, the District of Oregon rejected a motion for preliminary injunction to enjoin enforcement of the CTA, finding in part that plaintiffs had failed to show a likelihood of success on the merits in regards to a broad spectrum of constitutional claims. Although the District of Oregon did not issue a dispositive ruling on the merits, given the particular procedural posture of the case, the tenor of the opinion strongly suggests that plaintiffs’ lawsuit faces an uphill battle, at best.
Given the importance of the CTA and the existence of several other similar lawsuits in other federal districts challenging the CTA, both of these developments have been watched closely. FinCEN has estimated that over 30 million existing entities need to file reports regarding their beneficial owners (“BOs”) under the CTA by January 1, 2025. FinCEN also has indicated that, to date, only a small percentage of covered entities have done so. To the extent that entities may have been waiting to file their reports until a more clear picture of the CTA litigations materializes, they presumably should stop waiting. Although it is possible that a circuit split could develop, and that the U.S. Supreme Court ultimately could address and resolve the constitutionality of the CTA, the CTA still remains in force—with the current exception of entities affected by the District of Alabama ruling—and presumably will remain in force past January 1, 2025.
The District of Oregon Decision
In Firestone v. Yellen, the District of Oregon addressed and rejected numerous constitutional challenges to the CTA raised by plaintiffs seeking a preliminary injunction to enjoin its enforcement. Again, the Court did not make dispositive rulings on the merits, but the tenor of the opinion is clear in regards to the likely outcome. In language relevant to the argument before the Eleventh Circuit, discussed below, the Court found that “[t]he CTA imposes requirements only on entities with an apparent commercial character and does not require any individual to engage in a commercial transaction in which that person would prefer not to engage.”
The District of Oregon stressed that Congress passed the CTA to combat money laundering, the financing of terrorism, and other illicit financing activities. It observed that when “enacting the CTA, Congress amassed and evaluated vast amounts of data, considering testimony, reports, and interests of various stakeholders-ranging from law enforcement, the Executive Branch, foreign governments, intergovernmental expert bodies, journalists, small businesses, multinational corporations, the U.S. Chamber of Commerce, national security experts, international transparency organizations, the financial services industry, and others.”
With this background, the District of Oregon ruled that plaintiffs failed to prove their entitlement to a preliminary injunction because they were unlikely to prevail on any of the following claims:
- Congress lacked authority to enact the CTA under the Commerce Clause;
- Congress lacked authority to enact the CTA under the Necessary and Proper Clause;
- The CTA violates the First Amendment, in regards to compelling speech or interfering with free association;
- The CTA violates the Fourth Amendment as an unreasonable reporting requirement;
- The CTA violates the Fifth Amendment, as a matter of self-incrimination or vagueness;
- The CTA violates the Eighth Amendment, as an excessive fine;
- The CTA violates the Ninth Amendment, as to any substantive right to privacy; and
- The CTA violates the Tenth Amendment.
Eleventh Circuit Argument
As we blogged previously, the National Small Business Association (“NSBA”) and one of its individual members filed a lawsuit in the Northern District of Alabama challenging the constitutionality of the CTA, in part because Congress lacked the authority to enact the CTA. Before the District Court, the government argued that Congress had such authority under three distinct enumerated powers: (1) its Commerce Clause-derived regulatory authority; (2) oversight of foreign affairs and national security; and (3) its power to tax. The District Court held that the CTA was unconstitutional and enjoined its enforcement against plaintiffs.
Specifically, the District Court held, in part, that the CTA was constitutionally defective because it attempted to regulate the act of incorporation, a purview of the individual States, in the name of national security. However, the District Court opined that the CTA presumably would pass constitutional muster were its applicability limited to actual engagement in commercial activity by an incorporating entity (because such a limitation would serve as a “jurisdictional hook” tying the regulation to the flow of interstate commerce). The government appealed this ruling.
On September 27, the Eleventh Circuit held oral argument. The recording of the argument is here.
Prior to oral argument, the Eleventh Circuit requested supplemental briefing on the issue of whether the District Court erred in not holding plaintiffs—who mounted a “facial” challenge to the CTA, rather than an “as applied” challenge—to their burden of showing that there are no constitutional applications of the CTA. The government’s supplemental brief is here; the appellees’ supplemental brief is here. In its supplemental brief, the government argued that, “[e]ven if plaintiffs had identified one or more entities regulated by the CTA but beyond the reach of Congress’s enumerated powers, . . . they plainly have not identified a sufficient number of such entities to cast doubt on the statute’s facial validity.”
At oral argument, counsel for the government stressed that the whole point of forming an entity is to engage in commerce, and that—according to the government—plaintiffs had not identified any actual corporation not engaged in commerce but covered by the CTA. Rather, plaintiffs had identified only hypothetical situations. According to the government, this was fatal to plaintiffs’ facial challenge. Relatedly, there was an exchange at oral argument regarding the proper standard for assessing facial challenges. The government argued that a two-step analysis applies: first, a court must ask, is the regulated activity inherently commercial; second, if not, a court then must ask if there is still a “hook” for Congress to exercise its power under the Commerce Clause. According to the government, the District Court addressed the second question, but did not answer the first question—the answer to which is that the CTA generally regulates activity recognized as commercial, and is a proper exercise of Congressional authority.
Counsel for plaintiffs argued that Congress exceeded its Commerce Clause authority because the CTA applies upon incorporation, and therefore requires reporting from entities that are inactive and “just sitting there.” Counsel for plaintiffs also argued that the CTA assumes that any person incorporating an entity is a “criminal suspect,” and that the existence of the Customer Due Diligence (“CDD”) Rule under the BSA—which requires financial institutions such as banks to gather BO information from certain entity customers—renders the CTA unnecessary. In part, the government responded that the test for the Necessary and Proper Clause is not “absolute necessity,” and that the CTA and the CDD Rule have significant differences.
Finally, the appellate panel asked the government whether, if the Eleventh Circuit were to reverse the District Court, it should remand the case to the District Court to address plaintiffs’ Fourth Amendment claim. The government responded that it did not have a “strong view” regarding a potential remand, but noted that the CTA fits comfortably within Fourth Amendment jurisprudence.
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