The National Small Business Association (NSBA) and a small business owner (also a member of the NSBA) filed a lawsuit on Nov. 15, 2022, in the U.S. District Court for the Northern District of Alabama challenging the constitutionality of the Beneficial Ownership Information Reporting (BOIR) Rule of the Corporate Transparency Act (CTA or the Act).¹ In National Small Business United, d/b/a the National Small Business Association, et al. v. Yellen, et al., the plaintiffs asserted that, while well-intentioned in seeking to combat money laundering and other illicit activity, the BOIR Final Rule would require law-abiding Americans to provide highly personal information to a government agency to be stored in a database for criminal enforcement purposes and thus violates privacy protections, is unduly burdensome on small companies and infringes on states' powers to govern business.² The plaintiffs sought an immediate injunction against implementation of the CTA and U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) reporting rules.

On March 1, 2024, the court granted plaintiffs' motion for summary judgment, finding that the "CTA exceed the Constitution's limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress' policy goals… ."³

Procedural History of the Case

The parties agreed that the case could be resolved on dispositive motions without fact discovery and cross-moved for summary judgment in early 2023. The government simultaneously moved to dismiss. The court found that summary judgment was the most appropriate means for resolving the case since there were no genuine issues of material fact and the only questions before the court were pure questions of law. Ultimately, the court granted the plaintiffs' motion for summary judgment and denied the government's motion to dismiss and cross-motion for summary judgment.

Substantive Aspects of the Case

The court framed the substantive aspect of the case as follows:

"Does the Constitution give Congress the power to regulate millions of entities and their stakeholders the moment they obtain a formal corporate status from a State?"⁴

The government answered in the affirmative, arguing that the mandatory obligations imposed on in-scope companies to identify their "beneficial owners" and "company applicants," as applicable, and provide personal identifiable information were constitutionally supported by Congress' broad powers to oversee foreign affairs and national security, regulate commerce, and impose taxes and related regulations. The court rejected each of these positions.

Plenary Power of Congress to Conduct Foreign Affairs. The government argued that the CTA's mandate to require reporting companies to disclose beneficial ownership information (BOI) is directly tied to Congress' power to conduct foreign affairs because such information is "vital" to U.S. national security interests; assists national security, intelligence and law enforcement in countering money laundering, the financing of terrorism and other illicit activities; and brings the U.S. in line with international anti-money laundering/combating the financing of terrorism (AML/CFT) standards. The court was unpersuaded and noted that what Congress was doing here was not conducting foreign policy or regulating foreign affairs, but rather interjecting itself into domestic (or "internal") policy, where Congress' powers are limited. Noting that the CTA requires disclosure of BOI for entities that "incorporate" under state law, the court held that had Congress had exceeded its authority – i.e., its enumerated powers.⁵ The court framed the question as whether, in the United States' dual form of government, "Congress's Foreign Affairs powers justify the CTA's regulation of 'creatures of state law,' which are ordinarily within the sovereign purview of the States." In this case, the court held, "the answer is no." ⁶ The court found that the CTA "convert[s] an astonishing amount of traditionally local … conduct into a matter for federal enforcement, and involve[s] a substantial extension of federal police resources"⁷ and ruled that the Act cannot be justified as necessary and proper to carry out Congress' foreign affairs powers.⁸

Commerce Clause. The court next turned to the government's arguments under the Commerce Clause. The government argued that the CTA was a valid exercise of Congress' power under the Commerce Clause because the CTA regulates 1) the channels of interstate and foreign commerce, 2) the instrumentalities of and things and persons in interstate and foreign commerce, and 3) activities that have a substantial effect on interstate and foreign commerce.⁹ The court disagreed.

The court noted that "the plain text of the CTA does not regulate the channels and instrumentalities of commerce, let alone commercial or economic activity."¹⁰ Indeed, the court observed, the CTA fails to mention the word "commerce" or reference any channel or instrumentality of commerce at all.¹¹ And though some of the reporting companies who would have to disclose beneficial information under the CTA may indeed engage in interstate or foreign commerce, that is not sufficient to sustain the Act under the Commerce Clause because the CTA applies to all domestic entities that are created by a document filed with a state or foreign entities that register to do business with a state. Ultimately, the court found that because the CTA neither regulates entities who engage in interstate commerce directly, nor the channels and instrumentalities of commerce themselves, it cannot be justified as a valid exercise of the Commerce Clause.

Finally, the court rejected the contention that the CTA regulates activities that have a substantial effect on interstate and foreign commerce. At its core, the court observed, the CTA regulates reporting activity for entities who choose to register with a state or Indian tribe, not traditional economic or commercial activity, and the tie between reporting activity and economic activity was too attenuated to be justified under the Commerce Clause.¹²

Taxing Power and Necessary and Proper Clause. Finally, the court rejected the government's argument that the CTA is justified by Congress' taxing power and the Necessary and Proper Clause. The government's basic contention was that the collection of BOI from reporting companies is "necessary and proper to ensure taxable income is appropriately reported."¹³ To support this argument, the government noted that Congress recognized the relationship between BOI and tax administration by "draft[ing] the CTA to allow '[o]fficers and employees of the Department of the Treasury [to] obtain access to BOI for tax administration purposes[.]'"¹⁴ The court rejected this argument as "not enough."¹⁵ In sum, the court held that it would be a "substantial expansion of federal authority" to permit Congress to bring its taxing power to bear just by collecting "useful" data and allowing tax-enforcement officials access to that data.¹⁶

Conclusion of the Court. Having concluded that Congress exceeded its enumerated powers in enacting the CTA, the court did not ultimately address the constitutionality of the Act under the First, Fourth and Fifth Amendments to the U.S. Constitution. In light of this ruling, the court permanently enjoined the government from enforcing the CTA "against the plaintiffs."¹⁷

FinCEN Release

On March 4, 2024, FinCEN addressed the court's ruling in a press release, noting that it would comply with the court's order and that as a result, the agency was "not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time."¹⁸ (Emphasis added.)

In this release, FinCEN, albeit indirectly, provides that the government asserts continuing authority to enforce the law against nonparties, clarifying uncertainty as to the current scope of enforcement of the Act. Thus, nonparties are well advised to continue to timely, correctly and completely report the required information.

Holland & Knight Takeaways

• The U.S. Department of Justice will no doubt appeal this decision to the U.S. Court of Appeals and may request that the court's ruling be stayed pending appeal.
• Since the court did not issue a national injunction, but rather enjoined the government from applying the CTA to "the plaintiffs," the CTA's reporting regime remains in effect for all other reporting companies (other than the plaintiffs), who should continue to comply with the CTA.
• It is possible that other parties who feel aggrieved may file similar lawsuits in other federal courts alleging the unconstitutionality of the Act.
• Although only one court's opinion, the Northern District of Alabama's decision could have an impact on states presently contemplating adopting "mini" CTAs. California, Massachusetts and Maryland have proposed bills, and other states may follow.
• It will be important to closely track ongoing developments in this fast-changing area.

The authors would like to thank their colleague, Holland & Knight Partner Amit Agarwal, for his incisive comments as to the scope of the injunction and government enforcement in the subject case.

Notes

¹ Memorandum Opinion: National Small Business United v. Janet Yellen, in her official capacity as Secretary of the Treasury (Case No. 5:22-cv-1448-LCB).

² The plaintiffs alleged that the CTA's mandatory disclosure requirements exceeded Congress' authority under Article I of the U.S. Constitution and violates the First, Fourth, Fifth, Ninth and Tenth Amendments.

³ Mem. Op., at p. 2.

⁴ Mem. Op., at p. 3.

⁵ Mem. Op., at pp. 20-21.

⁶ Mem. Op., at p. 21.

⁷ Mem. Op., at p. 22.

⁸ Id.

⁹ Mem. Op., at p. 26.

¹⁰ Mem. Op., at p. 27.

¹¹ Mem. Op., at p. 28.

¹² Mem. Op., at pp. 36 and 40.

¹³ Mem. Op., at p. 50.

¹⁴ Id.

¹⁵ Mem. Op., at p. 51.

¹⁶ Mem. Op., at p. 52.

¹⁷ Final Judgment, March 1, 2024 ("The Defendants, along with any other agency or employee acting on behalf of the United States, are PERMANENTLY ENJOINED from enforcing the Corporate Transparency Act against the Plaintiffs."). 

¹⁸ FinCEN release.