INDIANA et al v. INTERNAL REVENUE SERVICE et al
Filing
77
ORDER - For the reasons set forth herein, the Defendants' motion to dismiss (Dkt. No. 36 ) is DENIED as to Count I and GRANTED as to Count V. As to the remaining Counts, the motion is GRANTED as to the State of Indiana and DENIED as to the Plaintiff School Districts; however, the Court will consider the arguments raised by the Defendants as to the School Districts in its ruling on the pending motions for summary judgment. The School Districts' motion to join in the State of Ind iana's motion for summary judgment (Dkt. No. 49 ) is GRANTED and the arguments made in the State of Indiana's summary judgment briefs are incorporated by reference into the School Districts' summary judgment briefs. Finally, the Pla intiffs' motion for consolidated oral argument (Dkt. No. 50 ) is DENIED, inasmuch as the Court determined that oral argument was not necessary to resolve the issues addressed herein. However, the Court believes that oral argument on the pend ing motions for summary judgment will be helpful. That argument will be heard on October 9, 2014, at 9:30 a.m., in Room 202, Birch Bayh Federal Building and United States Courthouse, 46 East Ohio Street, Indianapolis, Indiana. The parties shall con fer and file a notice by August 28, 2014, in which they inform the Court (1) how much time they believe they will need for oral argument; and (2) the order in which they believe the parties should present their arguments. ***SEE ORDER***. Signed by Judge William T. Lawrence on 8/12/2014. (JKS)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
STATE OF INDIANA, et al.,
Plaintiffs,
vs.
INTERNAL REVENUE SERVICE, et al.,
Defendants.
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) CAUSE NO. 1:13-cv-1612-WTL-TAB
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ENTRY ON MOTION TO DISMISS
This cause is before the Court on the Defendants’ motion to dismiss (Dkt. No. 36). The
motion is fully briefed and the Court, being duly advised, GRANTS IN PART AND DENIES
IN PART the motion to the extent and for the reasons set forth below.1
I. THE AMENDED COMPLAINT
The State of Indiana and thirty-nine of the state’s school corporations bring this suit
challenging aspects of and a regulation implementing the Patient Protection and Affordable Care
Act (“ACA”). They allege the following facts relevant to the issues raised in the instant motion
to dismiss.
“The primary goal of the ACA is to create a health insurance system that provides nearly
universal coverage while reducing health care costs.” Amended Complaint at ¶ 145. One of the
means the ACA uses to further that goal is what is commonly referred to as the “employer
mandate.” Pursuant to the ACA, a large employer as defined by the Act (which each of the
Plaintiffs is or, in the case of one Plaintiff, would be but for efforts to avoid the requirements of
1
The Court recognizes that the Plaintiffs have requested a consolidated oral argument on
the instant motion and the Plaintiffs’ motions for summary judgment. The Court has determined
that oral argument is not necessary with regard to the issues addressed herein. Accordingly, that
motion (Dkt. No. 50) is DENIED.
the ACA) is required either to offer health insurance that provides “minimum essential coverage”
to all of its full-time employees (as defined by the Act) or be subject to a “shared responsibility
payment” for failing to do so as set forth in 26 U.S.C. § 4980H. The Plaintiffs aver that each of
them offers minimum essential coverage to the majority of its employees, but that each has
employees who would be defined as full-time by the Act but who are not eligible for health
insurance because they are considered part-time under the Plaintiff’s personnel policies
(hereinafter referred to as the “Affected Employees”). The Plaintiffs further aver that they do not
wish to offer the Affected Employees health insurance because of the cost of doing so.
The shared responsibility payment provision is triggered as to an employer when at least
one of its full-time employees purchases insurance from an “American Health Benefit
Exchange” (“Exchange”) and applies for and is granted a premium tax credit or cost-sharing
reduction (hereinafter referred to collectively as a “Tax Credit”).2 Some states have established
insurance Exchanges for their residents (“State Exchanges”); others, including Indiana, have not.
The Secretary of Health and Human Services is required to establish an Exchange (“Federal
Exchange”) in any state that does not establish its own, 42 U.S.C. § 1804(c), and has done so in
Indiana.
The eligibility requirements for a Tax Credit are set forth in 26 U.S.C. § 36B; one of
them is that the individual has enrolled in a qualified health plan “through an Exchange
established by the State under section 1311 of the [ACA].” 26 U.S.C. § 36B(c)(2)(A)(1)
(defining “coverage month” for which a Tax Credit can be allowed). The Plaintiffs argue that
this provision of the ACA and others limit the availability of Tax Credits to individuals who
2
The amount of premium tax credit or cost-sharing reduction (which are two different
ways of reducing the cost of health insurance premiums to an individual), if any, an individual
will be entitled to depends on a variety of factors, including the individual’s family size and
income.
2
enroll in State Exchanges; accordingly, they argue, there should be no consequence to them if
some of their employees purchase insurance from a Federal Exchange and receive a Tax Credit.
In other words, the Plaintiffs allege that by deciding not to create a State Exchange, Indiana
insulated its employers from the employer mandate by eliminating any consequence for choosing
not to provide ACA-compliant health insurance to their employees. See State’s Response at 3
(Dkt. No. 38 at 14) (“[I]f no federal subsidies are available in a State because the State has not
established its own Exchange, employers in that State will not be subject to the Employer
Mandate’s tax penalties. Indiana has not established its own Exchange, so by the terms of the
ACA Indiana employers should not be subject to the Employer Mandate penalty if they fail to
provide sufficient health insurance coverage to full-time employees.” 3).
The Defendants disagree with that reading of the ACA. The Internal Revenue Service
(“IRS”), as part of its role in implementing the ACA, promulgated a regulation (“the
Regulation”) in which it defined the term “Exchange” for purposes of determining the eligibility
of a Tax Credit as including both State Exchanges and Federal Exchanges, thus making the Tax
Credit available to eligible individuals regardless of whether they purchase insurance from a
State Exchange or a Federal Exchange. 26 C.F.R. § 1.36B-1(k) (incorporating definition found
in 45 C.F.R. § 155.20).
The Plaintiffs in this action allege that the Regulation’s definition of “Exchange” creates
a conflict with the statutory text of the ACA and will subject them to shared responsibility
payments that are not authorized by the ACA. Accordingly, in Count I of their Amended
3
This statement appears to be based on the assumption that all Indiana employers employ
only Indiana residents or, more accurately, only residents of states that do not have State
Exchanges. This assumption is clearly incorrect—Kentucky has a State Exchange, and there are
undoubtedly Kentucky residents who work for Indiana employers. As this assumption is not
relevant to the issues raised by the instant motion, the Court need not address its import at this
juncture.
3
Complaint, the Plaintiffs assert a claim pursuant to the Administrative Procedures Act (“APA”),
5 U.S.C. § 706, arguing that the IRS exceeded its statutory authority and/or abused its discretion
when it enacted the Regulation. In Count II, they allege that applying the employer mandate to
States and their political subdivisions violates the Tenth Amendment, either because it is a tax
that violates the doctrine of intergovernmental tax immunity or, if it is not a tax, because it
impermissibly interferes with the residual sovereignty of the State of Indiana. The Plaintiffs
make the same allegation in Count III with regard to certain reporting and certification
requirements the ACA imposes on employers. They assert in Count IV that the reporting
requirements cannot be severed from the employer mandate. Finally, in Count V, the Plaintiffs
allege that the Federal Government is estopped from imposing any assessable payments on
employers for noncompliance with the employer mandate in 2014 because the Department of the
Treasury and President Obama have announced that its implementation will be delayed until
2015.
II. DISCUSSION
The Defendants advance several grounds in support of their motion to dismiss this case,
each of which is addressed, in turn, below.
A. Count I: Validity of the Regulation
The Defendants argue that Count I of the Amended Complaint must be dismissed
because, for a variety of reasons, the Plaintiffs lack standing to challenge the Regulation. As the
Supreme Court explained recently:
Article III of the Constitution limits the jurisdiction of federal courts to “Cases”
and “Controversies.” The doctrine of standing gives meaning to these
constitutional limits by identifying those disputes which are appropriately
resolved through the judicial process. The law of Article III standing, which is
built on separation-of-powers principles, serves to prevent the judicial process
from being used to usurp the powers of the political branches.
4
Susan B. Anthony List v. Driehaus, 134 S. Ct. 2334, 2341 (2014) (internal citations and quotation
marks omitted). “To establish Article III standing, a plaintiff must show (1) an injury in fact, (2)
a sufficient causal connection between the injury and the conduct complained of, and (3) a
likelihood that the injury will be redressed by a favorable decision.” Id. “The party invoking
federal jurisdiction bears the burden of establishing standing. Each element must be supported in
the same way as any other matter on which the plaintiff bears the burden of proof, i.e., with the
manner and degree of evidence required at the successive stages of the litigation.” Id. at 2342.
In other words, because the Defendants have raised standing in a motion to dismiss, at this stage
the Plaintiffs must only show that there is a plausible basis for each element of standing. See,
e.g., Adams v. City of Indianapolis, 742 F.3d 720, 728 (7th Cir. 2014) (“To survive a motion to
dismiss under Rule 12(b)(6), a complaint must ‘state a claim to relief that is plausible on its
face.’” (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
1. Doctrine of Parens Patriae
The Defendants’ first standing argument is easily disposed of. The Defendants argue that
the State’s standing to bring this suit cannot be based on the doctrine of parens patriae. The
State agrees; indeed, it must agree, because “[a] State does not have standing as parens patriae to
bring an action against the Federal Government.” Alfred L. Snapp & Son, Inc. v. Puerto Rico ex
rel. Barez, 458 U.S. 592, 610 (1982) (citing Massachusetts v. Mellon, 262 U.S. 447, 485-86
(1923) (“While the State, under some circumstances, may sue in that capacity for the protection
of its citizens, it is no part of its duty or power to enforce their rights in respect of their relations
with the Federal Government. In that field it is the United States, and not the State, which
represents them as parens patriae.”) (citation omitted)). Accordingly, to the extent the Plaintiffs
5
have standing to challenge the Regulation, that standing must be based on something other than
the quasi-sovereign interests that may only be asserted by means of a parens patriae action.
2. Injury-in-Fact Requirement
The Plaintiffs allege that they have standing to sue in their capacity as employers because
the employer mandate affects them in that capacity. The Defendants recognize, as they must,
that a State and its political subdivisions may sue in their capacity as employers. See, e.g., Alfred
L. Snapp & Son, Inc., 458 U.S. at 601-02 (“[L]ike other associations and private parties, a State
is bound to have a variety of proprietary interests. A State may, for example, own land or
participate in a business venture. As a proprietor, it is likely to have the same interests as other
similarly situated proprietors. And like other such proprietors it may at times need to pursue
those interests in court.”). However, the Defendants argue that the Plaintiffs lack such standing
in this case because the possibility of being subject to a shared responsibility payment in the
future is not sufficient to satisfy the “injury in fact” requirement. Specifically, the Defendants
argue that the Plaintiffs can only speculate that they will ever be subject to a shared
responsibility payment pursuant to § 4980H because “the likelihood of a Section 4980
assessment will turn in part on the future actions of these plaintiffs’ employees, namely, whether
those employees obtain coverage under a plan offered in the Exchange, and whether those
employees receive premium tax credits to assist with the purchase of that coverage” which, in
turn, will depend on various circumstances, such as the employees’ income, tax filing status, and
eligibility for other coverage. Defendants’ Brief at 19 (Dkt. No. 37 at 29).
The injury-in-fact requirement “helps to ensure that the plaintiff has a personal stake in
the outcome of the controversy.” Susan B. Anthony List, 134 S. Ct. at 2341.
6
An injury sufficient to satisfy Article III must be “concrete and particularized” and
“actual or imminent, not ‘conjectural’ or ‘hypothetical.’” An allegation of future injury
may suffice if the threatened injury is “certainly impending,” or there is a “‘substantial
risk’ that the harm will occur.”
Id. (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992) and Clapper v. Amnesty
Int’l USA, 133 S. Ct. 1138, 1147, 1150 n.5 (2013)). In this case, there is no doubt that the
Plaintiffs have a personal stake in the outcome of this litigation—the avoidance of very large
shared responsibility payments. The Plaintiffs allege that they have in the past—and would still,
but for the Regulation—have (between them) hundreds of employees who work more than 30
hours per week on average and therefore are defined as full-time under the ACA, but who were
not entitled to health insurance under the Plaintiffs’ personnel policies because they did not
satisfy the relevant Plaintiff-employer’s definition of full-time (previously defined as the
“Affected Employees”).4
Only one of the Plaintiffs needs to have standing in order for this Court to have
jurisdiction over the Plaintiffs’ claims. Korte v. Sebelius, 735 F.3d 654, 667 n.8 (7th Cir. 2013)
(“Where at least one plaintiff has standing, jurisdiction is secure and the court will adjudicate the
case whether the additional plaintiffs have standing or not.”). Therefore, the question is whether
the Plaintiffs have alleged facts that show that—absent any changes by the Plaintiffs made in
response to the Regulation5—it is plausible that at least one of the hundreds of Affected
4
For example, the State of Indiana defines a full-time employee as one who works at least
37.5 hours per week. Therefore, state employees who work at least thirty but less than 37.5
hours per week are Affected Employees, defined as full-time by the ACA but not by the State.
5
In fact, the Plaintiffs have made substantial changes because of the Regulation in order
to minimize the number of Affected Employees that they have; for example, many of the
Plaintiffs have reduced the number of hours worked by employees in certain positions to under
thirty. The cost of making those changes is not relevant to the standing analysis, however,
because a plaintiff cannot “manufacture standing” by taking preventative measures if they would
not have had standing but for those measures—in other words, the cost of preventative measures
cannot be the basis for standing if the risk of harm that is being prevented by those measures
7
Employees would obtain insurance from the Federal Exchange and apply for and receive a Tax
Credit. If that were to happen, the Plaintiff who employed that employee would be subject to a
shared responsibility payment of approximately $167 per month for each of their full-time
employees.
In Lujan, the Supreme Court noted:
When the suit is one challenging the legality of government action or inaction, the
nature and extent of facts that must be averred (at the summary judgment stage) or
proved (at the trial stage) in order to establish standing depends considerably upon
whether the plaintiff is himself an object of the action (or forgone action) at issue.
If he is, there is ordinarily little question that the action or inaction has caused him
injury, and that a judgment preventing or requiring the action will redress it.
When . . . a plaintiff’s asserted injury arises from the government’s allegedly
unlawful regulation (or lack of regulation) of someone else, much more is needed.
In that circumstance, causation and redressability ordinarily hinge on the response
of the regulated (or regulable) third party to the government action or inaction—
and perhaps on the response of others as well. The existence of one or more of
the essential elements of standing depends on the unfettered choices made by
independent actors not before the courts and whose exercise of broad and
legitimate discretion the courts cannot presume either to control or to predict; and
it becomes the burden of the plaintiff to adduce facts showing that those choices
have been or will be made in such manner as to produce causation and permit
redressability of injury. Thus, when the plaintiff is not himself the object of the
government action or inaction he challenges, standing is not precluded, but it is
ordinarily substantially more difficult to establish.
Lujan, 504 U.S. 555, 561-62 (internal citations and quotation marks omitted). The Defendants
argue that this “substantially more difficult” standard applies here, and the Plaintiffs have failed
to satisfy it. The Court disagrees, for two reasons.
would not have sufficed to establish standing. Clapper, 133 S. Ct. at 1151 (“[A]llowing
respondents to bring this action based on costs they incurred in response to a speculative threat
would be tantamount to accepting a repackaged version of respondents’ first failed theory of
standing.”). Neither can a Plaintiff lose standing by taking effective preventative measures,
however, if those measures have caused it to do something it otherwise would not have done.
Therefore, in considering the Plaintiffs’ standing to challenge the Regulation, the Court has
considered the facts as they would have existed without the preventative measures already taken
by the Plaintiffs to avoid being subject to shared responsibility payments.
8
First, while it is literally accurate to assert that the Regulation challenged in this case
regulates someone else—individual taxpayers—and not the Plaintiffs, the Court believes that
view is too narrow. The Plaintiffs, as employers, are directly regulated by the ACA, and the
Regulation directly affects the manner in which the ACA is (or is not) applied to the Plaintiffs.
In Lujan, the legislative scheme in question did not govern the plaintiffs in any way; the law in
question did not require the plaintiffs to do anything. Instead, the plaintiffs asserted that the
failure of the challenged regulation to require others to do something would affect them. Here,
in contrast, the Regulation defines a term that is used in the part of the ACA that is directly
applicable to the Plaintiffs. The Plaintiffs are not simply third parties who may be affected by
the regulation (or non-regulation) of others; they are squarely within the universe of those
regulated by the ACA.6
Second, the Defendants argue that the Plaintiffs, like those in Lujan, cannot demonstrate
that they will suffer injury here because whether they become liable for shared responsibility
payments depends on the actions of the Affected Employees, which they argue are the type of
“unfettered choices made by independent actors not before the courts and whose exercise of
broad and legitimate discretion the courts cannot presume either to control or to predict” that
doomed standing in Lujan. This argument ignores a critical part of the ACA, however: the
individual mandate. The Affected Employees’ decisions whether to obtain health insurance is
not “unfettered”; at least some of them will be required by the ACA to obtain health insurance or
face financial consequences of their own. And the Court in this case easily can predict that it is
substantially likely that at least one of those employees will comply with the individual mandate
6
For this same reason, the Court rejects the Defendants’ prudential standing argument,
which also is based on the Defendants’ characterization of this suit as involving only the tax
liability of absent parties, without recognizing the likely direct economic effect on the Plaintiffs
themselves if the Regulation is enforced.
9
by purchasing insurance on the Indiana Exchange (assuming, as the Court must at this stage, that
the Tax Credits will be available) because the availability of Tax Credits for individuals making
less than 400% of the federal poverty guidelines makes that a particularly economical way to
obtain coverage.
The Court finds that the Plaintiffs have satisfied their burden of demonstrating “injury in
fact” at this stage of the litigation. It is indeed plausible that at least one of the Affected
Employees will (1) be subject to the ACA’s individual mandate (or simply wish to obtain health
insurance); (2) comply with the individual mandate (or obtain the desired coverage) by
purchasing health insurance on the Indiana Exchange; and (3) apply for and receive a Tax Credit
for doing so. That is all it would take for the Plaintiff-employer to be injured.
3. Redressability Requirement
Next, the Defendants argue that the Plaintiffs have not satisfied their burden of showing
that it is likely that their injury will be redressed by a favorable ruling because the Affected
Employees are not parties to this case and therefore will not be bound by this Court’s ruling.
Specifically they argue that even if the Plaintiffs win on the merits and obtain the relief they
seek—an injunction prohibiting the IRS from awarding Tax Credits to individuals who obtain
insurance coverage from a Federal Exchange—that would not stop any of the Affected
Employees from “bring[ing] their own claim seeking the award of the tax credit.” Defendants’
Brief at 21 (Dkt. No. 37 at 31). But just articulating the argument in this way demonstrates its
falsity: because only the IRS can grant the Tax Credits, an injunction prohibiting it from doing
so would prevent the Plaintiffs from suffering the injury at issue in this case. The Defendants
appear to have conflated the potential for the IRS to be subject to conflicting rulings by different
10
courts7—which, of course, exists in any case challenging the validity of a statute or regulation—
with the redressability requirement. In this case, the relief sought by the Plaintiffs would fully
insulate them from the injury they seek to avoid by this suit, barring reversal by a higher court
(or perhaps, at least temporarily, a contrary ruling by another court). In each of the cases cited
by the Defendants on this issue, that was not the case.8 In Lujan, the Court held that the
injunction sought by the plaintiffs was not likely to bind the various funding agencies that would
have to act to redress the plaintiffs’ asserted injury. In both of the other cases cited by the
Defendants in their opening brief, a second lawsuit against a different defendant would have
been necessary to redress the plaintiffs’ injuries. See University Med. Ctr. of S. Nevada v.
Shalala, 173 F.3d 438 (D.C. Cir. 1999) (plaintiffs would have to file second suit against drug
manufacturers to obtain retroactive discounts); Comite de Apoyo a los Trabajadores Agricolas v.
U.S. Dept. of Labor, 995 F.2d 510, 514 (4th Cir. 1993) (even if plaintiffs succeeded in action
against Department of Labor and obtained declaratory judgment that the DOL erred in approving
their wages, they could only obtain the additional wages they were owed from their employer,
who was not a party and would not be bound by declaratory judgment). And in Urban Health
Care Coalition v. Sebelius, 853 F. Supp. 2d 101, 109 (D.D.C. 2012), cited by the Defendants in
their reply brief, the court held that an injunction against the defendant, the Secretary of the
Department of Health and Human Services, would not redress the plaintiffs’ asserted injury
7
This is, of course, more than a possibility in this case; conflicting rulings by Courts of
Appeals already have been issued regarding the Regulation, with one circuit rejecting a challenge
to it, King v. Burwell, ____ F.3d ____, 2014 WL 3582800 (4th Cir. July 22, 2014), and the other
remanding to the district court with instructions to vacate it. Halbig v. Burwell, ___ F.3d ___,
2014 WL 3579745 (C.A.D.C. July 22, 2014).
8
Because the cases cited by the Defendants are readily distinguishable, the Court need
not, and therefore does not, determine whether it believes they were correctly decided.
11
because the statute challenged by the plaintiffs “impose[d] requirements on third parties
irrespective of actions of the Secretary or her agency.”
The Defendants in this case have not suggested how anyone could receive a Tax Credit
under the ACA without action by the IRS. In addition, pursuant to 42 U.S.C. § 18081, the
Secretary of the Department of Health and Human Services, a Defendant in this case, is
responsible for determining an individual’s eligibility for a Tax Credit and the amount of that
Tax Credit; accordingly, if the Plaintiffs are successful in this action they could obtain a
judgment enjoining that Defendant from finding any individual eligible for a Tax Credit if they
purchased insurance on a Federal Exchange. It therefore appears to the Court that the Plaintiffs
have sued all of the necessary parties in this case to permit redressability of their asserted injuries
should they ultimately prevail.
4. Availability of a Tax Refund Action
In addition to their standing arguments, the Defendants argue with regard to the
Plaintiffs’ challenge to the Regulation that the Plaintiffs may only make such a challenge by
means of a tax refund action; in other words, the Plaintiffs must pay any shared responsibility
payment they are assessed by the IRS and then file a suit seeking a refund in order to challenge
the validity of that assessment. There is, of course, a statute that prohibits suits to restrain the
collection of a tax; pursuant to the Anti-Injunction Act, 26 U.S.C. § 7421(a), “a tax ordinarily
may be challenged only in a suit for a refund after it is paid.” Korte, 735 F.3d at 669. The
Defendants acknowledge, as they must, that the Seventh Circuit’s holding in Korte forecloses
any argument (at least before this Court) that this suit is barred by the Anti-Injunction Act. See
Defendants’ Brief at 28 n.6 (Dkt. No. 37 at 38). They nonetheless argue that the fact that a
provision of the ACA, 26 U.S.C. § 4980H(d)(3), provides that a shared responsibility payment
12
made by an employer based upon the receipt of a Tax Credit by its employee is to be refunded if
the Tax Credit is later disallowed somehow precludes this action. That reading of § 4980H(d)(3)
can be described only as tortured. Of course there must be a mechanism by which an employer
who makes a shared responsibility payment because a Tax Credit is allowed can obtain a refund
if that Tax Credit is later disallowed. The existence of such a mechanism says nothing about
whether an employer can challenge the availability of a Tax Credit—and therefore the likely
imposition of a shared responsibility payment—prior to actually making the shared responsibility
payment.
B. Counts II through IV: Assertion that the Employer Mandate as Applied to the
Plaintiffs Violates the Tenth Amendment
In Counts II through IV, the Plaintiffs allege that applying the employer mandate and
related reporting requirements to States and their political subdivisions violates the Tenth
Amendment—either because it is a tax that violates the doctrine of intergovernmental tax
immunity or, if it is not a tax, because it “impermissibly interfere[s] with the residual sovereignty
of the State of Indiana,” Amended Complaint at ¶ 211—and that the reporting requirements are
not severable.9 The Defendants argue that these claims all are barred by the doctrine of res
judicata, or claim preclusion, because the State of Indiana was a plaintiff in the case that was
filed in the United States District Court for the Northern District of Florida and was eventually
decided by the Supreme Court under the caption National Federation of Independent Business v.
9
The Court disagrees with the Defendants’ assertion in their reply brief that the Plaintiffs
have waived these claims because they did not address in their response briefs to the instant
motion the Defendants’ argument that the claims fail on the merits in addition to being precluded
by the Florida Litigation. The Defendants’ merits argument was very brief and not sufficiently
developed to support a ruling in their favor; in addition, the State of Indiana fully addressed the
merits in its brief in support of its motion for summary judgment, which was filed very shortly
after its response to the instant motion.
13
Sebelius, 132 S. Ct. 2566 (2012) (“NFIB”) (collectively referred to as the “Florida Litigation”),
and the claims either were or could have been raised by the State in that case.
The law applicable to federal claim preclusion is well established.
A party asserting res judicata or claim preclusion must establish: (1) identity of
the claim, (2) identity of parties, which includes those in “privity” with the
original parties, and (3) a final judgment on the merits. . . . In order to decide
whether the two cases involve the same claim, we ask whether they arise out of
the same transaction. If they did, whether or not they were actually raised in the
earlier lawsuit, they may not be asserted in the second or subsequent proceeding.
Cannon v. Burge, 752 F.3d 1079, 1101 (7th Cir. 2014) (internal citations and quotation marks
omitted). As the School Districts were not parties to the Florida Litigation, the Court will
consider the preclusive effect of the Florida Litigation on the State of Indiana first, and then
consider it with regard to the School Districts.
1. The Effect of the Florida Litigation on the State of Indiana’s Claims
There is no question that the requirements of claim preclusion are satisfied with regard to
the Florida Litigation and the Tenth Amendment claims advanced by the State of Indiana in this
case. The plaintiffs in that case—including the State of Indiana—alleged the following in Count
Six of their Amended Complaint:
By imposing new employer healthcare insurance mandates on the Plaintiff States,
by requiring that they automatically enroll and continue enrollment of employees
in healthcare plans, by subjecting States to penalties and taxes depending upon
plan attributes and individual employee coverage decisions, and by burdening the
States’ ability to procure goods and services and to carry out governmental
functions, the Act exceeds Congress’s powers under Article I of the Constitution,
and interferes in the Plaintiff States’ sovereignty in violation of the Ninth and
Tenth Amendments and the constitutional principles of federalism and dual
sovereignty on which this Nation was founded.
14
Amended Complaint at ¶ 90,10 Florida v. United States Dept. of Health & Human Servs., Case
No. 3:10-cv-91 RV/EMT, Dkt. No. 42 (N.D. Fla., May 14, 2010). The district court rejected that
claim. Florida v. United States Dept. of Health & Human Servs., 716 F. Supp. 2d 1120, 115154 (N.D. Fla. 2010) (granting motion to dismiss Count Six). In the course of briefing the motion
to dismiss, the state plaintiffs in the Florida Litigation also “argue[d] that the employer mandate
runs afoul of the intergovernmental-tax immunity doctrine.” Id. at 1154 n.14. The court
addressed that argument as follows: “[T]he defendants persuasively respond that the claim has
not been pled in the amended complaint and that, in any event, it must fail as a matter of law.”
Id. The Plaintiffs apparently did not appeal that ruling to the Eleventh Circuit. See Florida v.
U.S. Dept. of Health and Human Servs., 648 F.3d 1235 (11th Cir. 2011) (appeal of ruling on
motion for summary judgment on claims not dismissed). In their petition for writ of certiorari,
the state plaintiffs asked the Supreme Court to consider several issues, including:
Question 2: May Congress treat States no differently from any other employer
when imposing invasive mandates as to the manner in which they provide their
own employees with insurance coverage, as suggested by Garcia v. San Antonio
Metropolitan Transit Authority, 469 U.S. 528 (1985), or has Garcia’s approach
been overtaken by subsequent cases in which this Court has explicitly recognized
judicially enforceable limits on Congress’s power to interfere with state
sovereignty?
The Supreme Court granted the petition as to several issues; Question 2 was not one of them.
Thus the arguments the Plaintiffs wish to make regarding the Tenth Amendment were raised and
rejected in the Florida Litigation, and final judgment has been entered in that case.
The State of Indiana argues that they are entitled to a second bite of the apple because
“[t]he Supreme Court has observed ‘[a] general rule that res judicata is no defense where
10
A second amended complaint was filed in the Florida Litigation after the district court
ruled on the motion to dismiss the first amended complaint; although it contains the same Count
Six, that count already had been dismissed and was not revived by its inclusion in the later
complaint.
15
between the time of the first judgment and the second there has been an intervening decision or a
change in the law creating an altered situation,’” and the Supreme Court’s ultimate decision in
the Florida case “so altered the legal background of the argument that the State’s Tenth
Amendment claims should not be precluded here.” State’s Response at 23 (Dkt. No. 38 at 14)
(quoting State Farm Mut. Auto. Ins. Co. v. Duel, 324 U.S. 154, 162 (1945)). This argument has
several shortfalls.
First, even assuming such a general rule exists, it does not, on its face, apply here. There
was no change in the law “between the time of the first judgment and the second”; any change in
the law that occurred took place during the course of the Florida Litigation itself. The “first
judgment” in this case was the Florida Litigation; nothing has happened since that litigation
concluded that has altered the relevant law in any way.
Second, it is far from clear that the quoted language from the State Farm case is good
law, inasmuch as the Supreme Court expressed a contrary conclusion in a far more recent case,
noting: “Nor are the res judicata consequences of a final, unappealed judgment on the merits
altered by the fact that the judgment may have been wrong or rested on a legal principle
subsequently overruled in another case.” Federated Dept. Stores, Inc. v. Moitie, 452 U.S. 394,
398 (1981). The parties point to no binding authority on the issue of the interplay between
Federated and State Farm, either from the Supreme Court or the Seventh Circuit, and the
Court’s own research has revealed none. With regard to the issue, however, the Court finds the
opinion in Pfizer Inc. v. Ranbaxy Labs. Ltd., 525 F. Supp. 2d 680, 689-90 (D. Del. 2007), both
instructive and persuasive:
To the extent Ranbaxy relies on a contrary statement by the Supreme Court in
[State Farm], the Court concludes that State Farm’s discussion of res judicata is
dicta, and in any event, State Farm has been superseded by Federated. See e.g.,
16
Forsman v. Chater, 1996 WL 396718, *1 (9th Cir. July 12, 1996). The Court’s
conclusion is consistent with the prevailing view by courts and commentators
alike that a change in the law is insufficient to bar the application of res judicata.
See e.g., Wilson v. Lynaugh, 878 F.2d 846, 850–851 (5th Cir. 1989), Precision Air
Parts, Inc. v. Avco Corp., 736 F.2d 1499, 1503 (11th Cir. 1984) (“The general
rule in this circuit, and throughout the nation, is that changes in the law after a
final judgment do not prevent the application of res judicata and collateral
estoppel, even though the grounds on which the decision was based are
subsequently overruled.”); Barzin v. Selective Service Local Board No. 14, 446
F.2d 1382, 1383 (3d Cir. 1971) (recognizing that “a prior decision may serve as
res judicata even if a contrary judicial decision on the legal issues involved
intervenes between the first and second suits.”); see also 18 Wright, Miller &
Cooper, Federal Practice and Procedure: Jurisdiction § 4403 (2d ed. 2002).
Accord Roche Palo Alto LLC v. Apotex, Inc., 531 F.3d 1372 (Fed. Cir. 2008) (citing Federated
for the proposition that “there is no ‘change of law’ or fairness exception to prevent application
of claim preclusion”).
Finally, as recognized by the court in Pfizer, some courts, even post-Federated, “have
recognized an exception to this principle in the case of momentous legal changes invoking
important and fundamental changes in constitutional rights,” Pfizer, 525 F. Supp. 2d at 690 n.2,
the paradigmatic example perhaps being the Supreme Court’s overruling of the separate but
equal doctrine in Brown v. Board of Education. Again, the parties cite to, and the Court has
found, no case in which either the Supreme Court or the Seventh Circuit has recognized this
exception, which has logical and equitable appeal but which seems to contradict the Supreme
Court’s rejection of either a “simple justice” or “public policy” exception to res judicata in
Federated:
The Court of Appeals also rested its opinion in part on what it viewed as “simple
justice.” But we do not see the grave injustice which would be done by the
application of accepted principles of res judicata. “Simple justice” is achieved
when a complex body of law developed over a period of years is evenhandedly
applied. The doctrine of res judicata serves vital public interests beyond any
individual judge’s ad hoc determination of the equities in a particular case. There
is simply no principle of law or equity which sanctions the rejection by a federal
court of the salutary principle of res judicata. . . . We have stressed that the
17
doctrine of res judicata is not a mere matter of practice or procedure inherited
from a more technical time than ours. It is a rule of fundamental and substantial
justice, of public policy and of private peace, which should be cordially regarded
and enforced by the courts.
452 U.S. at 401 (citations and internal quotation marks omitted).
In any event, the Court is unconvinced by the State of Indiana’s argument that the
Supreme Court’s decision in NFIB was the type of “momentous legal change” in Tenth
Amendment jurisprudence that would justify overlooking the preclusive effect of the Florida
Litigation. Principles discussed and applied in NFIB are certainly relevant to the Plaintiffs’
claims in this case, and perhaps, as they suggest, the Supreme Court’s application of those
principles in that case may support some of the Plaintiffs’ arguments in this case, making them
somewhat stronger than they would be but for the NFIB decision, but the State has identified no
clear change in the law such that there are arguments available to them now that were
unavailable to them in the Florida Litigation.11 There is a difference between a Supreme Court
holding that gives a litigant better ammunition than it had before and the type of “momentous
legal changes invoking important and fundamental changes in constitutional rights” that might
justify an exception to res judicata. At most, the State has shown that the former might be
present here.
There are three aspects of the State of Indiana’s argument that remain to be addressed.
First, the State argues at length that “[c]ase law involving the Bipartisan Campaign Reform Act
of 2002,” another complex federal statute, lends support to its position that claim preclusion
should not apply here. Specifically, the State notes that Republican Nat’l Comm’n v. Fed.
Election Comm’n, 698 F. Supp. 2d 150, 156 (D.D.C. 2010), aff’d, 130 S. Ct. 3544 (2010)
11
Again, the Court notes that not only could the State of Indiana have asserted its
intergovernmental tax immunity argument in the Florida Litigation; it did so. The same is true of
its argument that Garcia should be overruled.
18
(“RNC”) was decided on the merits, in spite of the Defendants’ argument that the claims were
barred by previous litigation between the same parties that ultimately was concluded by a
Supreme Court ruling in 2003. The State surmises that the reason the district court ruled on the
merits, rather than dismissing the case on res judicata grounds, is that the Supreme Court’s
intervening decision in Citizens United v. Federal Election Comm’n, 588 U.S. 310 (2010),
constituted a change in the applicable law. This argument is without merit. The court in RNC
expressly noted in a footnote that it did not consider the defendants’ claim preclusion argument
in any way. RNC, 698 F. Supp. 2d 150, 163 n.7 (D.D.C. 2010) (“Because we find that all of
plaintiffs’ claims are foreclosed on their merits, we need not consider the FEC’s argument that
some of the claims are also barred by res judicata.”). As the district court noted in RNC, res
judicata is not jurisdictional. District judges by and large are practical beings; if a case can be
decided in favor of a defendant as easily on the merits as on res judicata grounds, the court often
will simply address the merits. There is simply nothing in the district court’s opinion in RNC
that suggests that the court did anything other than determine that a decision on the merits—
something which was accomplished in a relatively brief opinion that was summarily affirmed by
the Supreme Court—was just as easy, or perhaps easier, than examining what occurred years
earlier in separate litigation in order to address the claim preclusion issue.
Second, the State argues that claim preclusion should not apply because of “factual
changes” that have occurred, arguing that claim preclusion “‘does not bar parties from bringing
claims based on material facts that were not in existence when they brought the original suit.’”
State’s Response at 26 (Dkt. No. 38 at 37) (quoting Apotex, 393 F.3d 210, 218 (D.C. Cir. 2004)).
The key word is material. None of the facts material to whether the employer mandate violates
the Tenth Amendment have changed. In the Florida Litigation, as summarized by the district
19
court, the plaintiffs argued that the employer mandate “require[d] the states, in their capacities as
large employers, to offer and automatically enroll state employees in federally-approved
insurance plans or else face substantial penalties and assessments.” Florida, 716 F. Supp. 2d at
1151. The court expressly assumed that it was true that “the employer mandate will be costly
and burdensome to the states in their capacity as large employers,” id., and nonetheless found
that it did not violate the Tenth Amendment. The fact that the parties are better able to quantify
the cost and burdens they face and have taken steps to minimize them would not have changed
the Tenth Amendment analysis in any way, and therefore it is not a material change.
Finally, the State of Indiana argues that claim preclusion does not apply to its challenge
in Count III to the ACA’s employer reporting requirements because, it argues, the reporting
requirements were not challenged in the Florida Litigation. As the Defendants correctly point
out, that assertion is incorrect. The amended complaint in the Florida Litigation asserted that
there were three “new requirements” imposed by the ACA that interfered with the state
plaintiffs’ “ability to perform government functions”: (1) the requirement to enroll employees
working 30 or more hours a week into health insurance plans; (2) the imposition of substantial
penalties and taxes “for State employees who obtain subsidized insurance from an exchange
instead of from a State plan, or if the State plan offers coverage that is either too little or too
generous as determined by the federal government”; and (3) “[n]ew tax reporting requirements
prescribed by the [ACA] [that] also will burden the Plaintiff States’ ability to source goods and
services as necessary to carry out government functions.” Amended Complaint at ¶ 48, Case No.
3:10-cv-91 RV/EMT, Dkt. No. 42 (N.D. Fla.) (May 14, 2010). In Count Six, the Plaintiff States
alleged that the ACA violated the Ninth and Tenth Amendments by “burdening the States’
ability to procure goods and services to carry out government functions.” Id. at ¶ 90. Therefore,
20
the issue of whether the reporting requirements violated the Tenth Amendment was squarely
raised in the Florida Litigation. That it apparently was not expressly addressed in the State
Plaintiffs’ brief in opposition to the motion to dismiss independently of the two other parts of the
employer mandate raised in the amended complaint is irrelevant to the question of whether it was
at issue in the case.
For the reasons set forth above, the Court finds that the State of Indiana is barred by res
judicata from arguing that the employer mandate—including the reporting requirements—
violates the Tenth Amendment. Accordingly, the motion to dismiss is GRANTED with regard
to Counts II, III, and IV as to the State of Indiana.12
2. The Effect of the Florida Litigation on the School Districts’ Claims
The School Districts were not parties to the Florida Litigation; therefore, the judgment in
that case can have preclusive effect on the School Districts’ claims in this case only if they were
in privity with the State of Indiana. This requires a “fact-specific analysis,” and “whether there
is privity between a party against whom claim preclusion is asserted and a party to prior
litigation is a functional inquiry in which the formalities of legal relationships provide clues but
not solutions.” Bernstein v. Bankert, 733 F.3d 190, 226 (7th Cir. 2013) (citations omitted).
The cornerstone of the Defendants’ argument that there is privity between the School
Districts and the State of Indiana with regard to the Florida Litigation is their assertion that “[t]he
school districts’ Tenth Amendment rights, if any, derive from those of the state.” Defendants’
Brief at 30 (Dkt. No. 37 at 40). The Defendants cite to no authority for this proposition, and in
light of the holding in Bond v. United States, 131 S. Ct. 2355 (2011), it is not clear to the Court
12
The Court notes that the School Districts have moved to join the State of Indiana’s
motion for summary judgment regarding these counts. That motion (Dkt. No. 49) is
GRANTED. In the event that the Court considers the merits of these claims as advanced by the
School Districts, the Court will consider the relevant arguments made by the State of Indiana in
its briefs.
21
that it is a correct statement of the law. The Court believes that this issue would benefit from
oral argument—to specifically address the import, if any, of the principles set forth in Bond, and
also to more fully address the arguments made in the parties’ briefs. Accordingly, the motion to
dismiss is DENIED on this issue, in favor of deciding the issue in conjunction with the pending
motion for summary judgment. In addressing this issue in its summary judgment ruling, the
Court will consider the Defendants’ briefs in support of the instant motion and the School
Districts’ brief in opposition to it.
C. Count V
Finally, in Count V, the Plaintiffs allege that the Federal Government is estopped from
imposing any assessable payments on employers for noncompliance with the employer mandate
in 2014 because the Department of the Treasury and President Obama have announced that its
implementation will be delayed until 2015. The Court agrees with the Defendants that there is
no case or controversy with regard to this issue; there is simply no suggestion that the
Defendants will attempt to enforce the employer mandate with regard to actions taken or not
taken by the Plaintiffs (or any employer) in 2014. Accordingly, the motion to dismiss Count V is
GRANTED.
III. CONCLUSION
For the reasons set forth above, the Defendants’ motion to dismiss (Dkt. No. 36) is
DENIED as to Count I and GRANTED as to Count V. As to the remaining Counts, the motion
is GRANTED as to the State of Indiana and DENIED as to the Plaintiff School Districts;
however, the Court will consider the arguments raised by the Defendants as to the School
Districts in its ruling on the pending motions for summary judgment. The School Districts’
motion to join in the State of Indiana’s motion for summary judgment (Dkt. No. 49) is
22
GRANTED and the arguments made in the State of Indiana’s summary judgment briefs are
incorporated by reference into the School Districts’ summary judgment briefs.
Finally, the Plaintiffs’ motion for consolidated oral argument (Dkt. No. 50) is DENIED,
inasmuch as the Court determined that oral argument was not necessary to resolve the issues
addressed herein. However, the Court believes that oral argument on the pending motions for
summary judgment will be helpful. That argument will be heard on October 9, 2014, at 9:30
a.m., in Room 202, Birch Bayh Federal Building and United States Courthouse, 46 East Ohio
Street, Indianapolis, Indiana. The parties shall confer and file a notice by August 28, 2014, in
which they inform the Court (1) how much time they believe they will need for oral argument;
and (2) the order in which they believe the parties should present their arguments.
SO ORDERED: 08/12/2014
_______________________________
Hon. William T. Lawrence, Judge
United States District Court
Southern District of Indiana
Copies to all counsel of record via electronic notification
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