Corporate Transparency Act Enjoined

In issuing the preliminary injunction, the court noted that “even in the face of the deference the Court must give Congress […] the CTA is likely unconstitutional as outside of Congress’s power.” Id. at 79. The court rejected the Government’s arguments that the CTA is authorized under the Commerce Clause and the Necessary and Proper Clause:

• The Commerce Clause: The court determined that, by its text, the CTA does not regulate channels or instrumentalities of commerce because companies do not fall under either definition. Id. at 38-39. It determined that the CTA does not regulate an existing activity that substantially impacts interstate commerce. The court reasoned that existing anonymously is not an activity; instead, Congress seeks to compel activity—rather than regulate existing activity—through its reporting requirements. Id. at 41-43. The court also declined to extend the definition of “substantially impacts interstate commerce” to a situation where there is no fungible good at issue and no attempt to regulate some issue of supply and demand but, instead, a law seeks to regulate companies for a law enforcement purpose. Id. at 51.
• The Necessary and Proper Clause in Tandem with the Commerce Clause: The court held that the CTA was not narrow in scope or incidental to Congress’s exercise of the commerce power, but instead sought to exercise an independent substantive power. Id. at 54.
• The Necessary and Proper Clause in Tandem with Congress’s Foreign Affairs Power: The court rejected the Government’s arguments that the information collected through the CTA would protect national security interests and assist in money laundering and anti-terrorism financing efforts, noting that the CTA seeks to regulate purely domestic affairs. Id. at 59-60.
• The Necessary and Proper Clause in Tandem with Congress’s Taxing Power: Finally, the court observed that the CTA does not generate revenue and is not constitutional simply because it carries with it an incidental tax benefit—e.g., possibly making taxes easier to collect. Id. at 71.

The court also concluded that because the Reporting Rule implements the CTA, it is likely also unconstitutional. Id. at 79. To warrant issuance of a preliminary injunction, the court also found a substantial likelihood of irreparable harm and that the balance of the equities favored an injunction.

While the federal government is likely to appeal the court’s ruling, the change in leadership that will take place in January at the Department of Justice leaves the long-term status of such an appeal uncertain. Pillsbury will continue to monitor developments in this and other cases involving the CTA.

Pillsbury will continue to monitor developments on this matter. While there is a strong institutional presumption that the Department of Justice will defend the constitutionality of a federal statute in court, the President can direct the Department (or the Attorney General can elect) not to defend a statute. But in those instances, courts can and often do appoint counsel to advocate for those statutes, so even if the Department declines to defend the statute, that may not be the last word on the subject.