Corporate Transparency Act Challenge Fails to Meet ‘Very High Bar,’ Says Government, Citing SCOTUS Social Media Decision

Treasury and National Small Business United (NSBU) exchanged briefs on the implications of the U.S. Supreme Court’s July ruling on facial challenges to constitutionality as the 11th U.S. Circuit Court of Appeals prepares to hear whether Congress went too far in establishing beneficial ownership reporting requirements under the Corporate Transparency Act (CTA).

The Supreme Court decision at issue was in a pair of cases challenging Florida and Texas statutes limiting social media companies from filtering, prioritizing, and labeling users’ posts. Moody v. NetChoice, NetChoice v. Paxton (144 S.Ct. 2383 (July 1, 2024)) Social media trade association NetChoice challenged the states’ laws on First Amendment grounds — and district courts in both cases granted NetChoice’s requests for preliminary injunctions.

On appeal, the 11th Circuit upheld the injunction, while the Fifth Circuit reversed — it found that the social media companies’ moderation activities are not speech and therefore do not implicate the First Amendment.

To settle the circuit split, the Supreme Court agreed to take up the cases — but in a July 1 decision authored by Justice Elena Kagan, it concluded that both circuit courts had erred. The key, said Kagan, is that NetChoice chose to bring the cases as facial challenges, which “comes at a cost” — namely that, for First Amendment purposes, plaintiffs must meet the burden of showing “a substantial number of [the law’s] applications are unconstitutional, judged in relation to the statute’s plainly legitimate sweep.”

But Kagan said that the bar is even higher for facial challenges on other grounds — those plaintiffs must show “that no set of circumstances exists under which the [law] would be valid,” or that the law “lacks a ‘plainly legitimate sweep.'”

After this statement on how to evaluate facial constitutional challenges, the 11th Circuit — which is slated to hear oral arguments in NSBU’s constitutional challenge to the CTA in late September — requested the parties submit supplemental briefs on whether the U.S. District Court for the North District of Alabama erred “in not holding the plaintiffs to their burden of showing that there are no constitutional applications of the Corporate Transparency Act.”

NSBU had challenged the CTA’s constitutionality before the Alabama district court in November 2022, alleging that Congress exceeded its powers in requiring that small businesses report their beneficial ownership information to Treasury’s Financial Crimes Enforcement Network (FinCEN). NSBU also alleges the law violates Fourth Amendment protections against unreasonable search and seizure and constitutional due process rights, among other things.

The CTA, enacted in 2021, is intended to help the government uncover financial crimes like money laundering, financing of terrorist activities, and tax evasion. With the initial reporting requirements going into effect in January 2024, existing businesses generally have until January 1, 2025, to file reports. However, several lawsuits have been brought alleging the reporting requirements are unconstitutional and raising concerns about the penalties for noncompliance.

NSBU’s suit is the furthest along, with the Alabama district court finding in March 2024 that the CTA is unconstitutional because “it cannot be justified as an exercise of Congress’ enumerated powers.” Treasury has appealed the decision to the 11th Circuit.

In its September 4 supplemental brief, Treasury contends that the 11th Circuit should reverse based on NetChoice because NSBU “come[s] nowhere near clearing the ‘very high bar’ governing facial challenges.” Treasury points to the “many valid applications” of the CTA as to “companies engaged in interstate commercial activity at the time they file reports.” It also notes NSBU’s “inability to identify any reporting company beyond the scope of Congress’s commerce power.”

But NSBU says in its supplemental brief that the Supreme Court’s “pronouncements against entertaining facial challenges” are inapplicable to its claim that Congress exceeded its powers in enacting the CTA.

NSBU explains that the CTA’s reporting requirements are triggered when a registration document is filed with a state to provide an entity with corporate status, not once the entity engages in interstate commerce. And presuming an entity will engage in interstate commerce based on its registration — a noncommercial activity — does not satisfy the jurisdictional requirement of the commerce clause, NSBU argues.

According to NSBU’s analysis, “if Congress lacks constitutional power to enact a federal statute, then that statute is facially invalid and has no constitutional applications.”