INDIANA et al v. INTERNAL REVENUE SERVICE et al
Filing
96
ENTRY ON MOTIONS FOR SUMMARY JUDGMENT - For the reasons set forth above, the Defendants' motion for summary judgment Dkt. No. 61 is GRANTED as to all Plaintiffs with regard to Count I and GRANTED as to Counts II and III as to the School Dist ricts. In light of this holding, Count IV of the Amended Complaint, which asserts a severability argument that applies only if "the Court rejects Plaintiffs' challenge under Count II but agrees with Plaintiffs on Count III," Dkt. No. 22 219, is MOOT. The Plaintiffs' motions for summary judgment Dkt. Nos. 44 and 46 are DENIED Signed by Judge William T. Lawrence on 2/14/2018.(JDC)
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-MPB
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ENTRY ON MOTIONS FOR SUMMARY JUDGMENT
This cause is before the Court on three motions for summary judgment, one filed by
Plaintiff the State of Indiana (Dkt. No. 44) (“the State”), one filed by the remaining Plaintiffs
(hereinafter referred to as “the Plaintiffs” or “the School Districts”) (Dkt. No. 46), and one filed
by the Defendants (Dkt. No. 61). The motions are fully briefed, and the Court, having
considered the parties’ filings1 and oral arguments, now GRANTS the Defendants’ motion and
DENIES the Plaintiffs’ motions for the reasons set forth below.
I. BACKGROUND
The Amended Complaint in this case contains five counts. The parties agree that Count I
was fully resolved in the Defendants’ favor by the Supreme Court’s ruling in King v. Burwell,
135 S. Ct. 2480 (2015). See Dkt. No. 91 at 2. Count V has been dismissed by the Court. See
Dkt. No. 77. In Count II, the Plaintiffs assert that applying the provisions of the Patient
1
This case originally was filed by the State and the School Districts, which are thirty-nine
of the state’s school corporations. The Court dismissed certain of the State’s claims after the
parties had filed their summary judgment briefs; however, in making this ruling, the Court has
considered all of the summary judgment briefs filed by the State, inasmuch as the School
Districts sought and were granted leave to join in the State’s motion for summary judgment. See
Dkt. No. 77.
Protection and Affordable Care Act (“ACA”) that are commonly referred to as the “employer
mandate,”2 26 U.S.C. § 4980H (“ACA § 1513”), to the School Districts, as political subdivisions
of the State of Indiana, 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 26 U.S.C. § 6056 (“ACA § 1514”), which imposes certain
reporting and certification requirements on employers. They assert in Count IV that the
reporting requirements cannot be severed from the employer mandate.
II. DISCUSSION
In a previous ruling, the Court dismissed Counts II, III, and IV as to the State, finding
that its claims were barred by the doctrine of res judicata, or claim preclusion. Dkt. No. 77.
That ruling, which the Court incorporates herein by reference, was based on the fact that the
State was a plaintiff in a 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. Sebelius, 567 U.S. 519 (2012) (“NFIB”) (collectively
referred to as the “Florida Litigation”), and the claims in Counts II, III, and IV in this case were
raised or could have been raised by the State in that case.
While the School Districts were not parties in the Florida Litigation, the Defendants
argued in their motion to dismiss that the judgment in that case nonetheless barred the School
2
Pursuant to the employer mandate, a large employer (as defined by 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 ACA) or be subject to a “shared responsibility payment” for failing
to do so. The Plaintiffs allege that if they are subject to the employer mandate, they will be
required to provide health insurance to employees to whom they otherwise would not offer it
and/or be obligated to make shared responsibility payments for some of their employees.
2
Districts’ claims in this case because the School Districts were in privity with the State. The
Court deferred consideration of the nonparty preclusion issue to the summary judgment stage
and asked the parties to address it at oral argument, which they did. The Court therefore turns to
that issue now.
There is no question that “‘[u]nder res judicata, a final judgment on the merits bars
further claims by parties or their privies based on the same cause of action.’” Cannon v. Burge,
752 F.3d 1079, 1101 (7th Cir. 2014) (quoting Montana v. United States, 440 U.S. 147, 153
(1979)) (emphasis added). In Taylor v. Sturgell, 553 U.S. 880 (2008), the Court set forth six
categories of exceptions to “the general rule that a litigant is not bound by a judgment to which
she was not a party.” The Court described the exception that is relevant to this case as follows:
[N]onparty preclusion may be justified based on a variety of pre-existing
“substantive legal relationships” between the person to be bound and a party to
the judgment. Qualifying relationships include, but are not limited to, preceding
and succeeding owners of property, bailee and bailor, and assignee and assignor.
These exceptions originated as much from the needs of property law as from the
values of preclusion by judgment.
Id. at 894 (citations and internal quotation marks omitted). Thus, if the School Districts and the
State have the type of “substantive legal relationship” that would justify the application of
nonparty preclusion, the judgment in the Florida Litigation is binding on the School Districts.
With regard to the claims dependent on the intergovernmental tax immunity doctrine, that
issue is easily resolved.
[U]nder current intergovernmental tax immunity doctrine the States can never tax
the United States directly but can tax any private parties with whom it does
business, even though the financial burden falls on the United States, as long as
the tax does not discriminate against the United States or those with whom it
deals. A tax is considered to be directly on the Federal Government only when
the levy falls on the United States itself, or on an agency or instrumentality so
closely connected to the Government that the two cannot realistically be viewed
as separate entities. The rule with respect to state tax immunity is essentially the
same, except that at least some nondiscriminatory federal taxes can be collected
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directly from the States even though a parallel state tax could not be collected
directly from the Federal Government.
South Carolina v. Baker, 485 U.S. 505, 523 (1988) (emphasis added) (citations and footnote
omitted).3 Thus, by asserting that the intergovernmental tax immunity doctrine applies to them,
the School Districts are asserting that a tax on them is a tax directly on the State which, by
definition, means that in that context they are “so closely connected to the [State] that the two
cannot realistically be viewed as separate entities.” See id. If that is, in fact, their relationship to
the State in the relevant context,4 then they clearly have the type of “substantive legal
relationship” with the State that would justify applying nonparty preclusion to them. Thus, the
judgment in the Florida Litigation operates as a bar to the School Districts’ claims in this case
that arise under the intergovernmental tax immunity doctrine.
With regard to the School Districts’ alternative argument—that if the employer mandate
and reporting requirements are not a tax, but rather were enacted pursuant to Congress’s
3
As this quote from Baker makes clear, the Plaintiffs’ blanket statements in their briefs
such as “the Federal Government cannot exercise direct taxing authority over the sovereign
states,” Dkt. No. 45 at 29, “[t]he Court in Baker explicitly held that the Constitution also forbids
direct taxation of one level of government by another,” Dkt. No. 65 at 33, “[t]he Federal
Government cannot directly tax the States, and the States cannot directly tax the Federal
Government, and neither Baker nor any other case holds to the contrary,” Dkt. No. 65 at 34, and
“[u]ltimately, there is no Tax Clause authorization to levy direct taxes on the States,” Dkt. No. 65
at 35, go too far, as they ignore the fact—stated explicitly in Baker—that there are instances in
which the federal government may directly tax a state. Indeed, the Supreme Court in Baker
expressly noted that “at least some state activities have always been subject to direct federal
taxation” but concluded that “[w]e need not concern ourselves here . . . with the extent to which,
if any, States are currently immune from direct federal taxation.” Baker, 485 U.S. at 523 n.14.
Indeed, the Plaintiffs themselves recognize that “reciprocal immunity is not precisely
symmetrical.” Dkt. No. 65 at 33.
4
The School Districts point to the fact that their interests are at times at odds with those of
the State as support for their argument that they are not in privity with the State. However, they
clearly may be in privity with the State for some purposes but not others. If they are not in
privity with the State for purposes of the application of the intergovernmental tax immunity
doctrine, then that doctrine cannot bar taxation of them by the United States.
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authority under the Commerce Clause, they violate the Tenth Amendment—the analysis is
somewhat different. A governmental entity need not be a “state” to be entitled to challenge a
federal statute on Tenth Amendment grounds. See Printz v. United States, 521 U.S. 898, 931
(1997) (noting the Supreme Court’s refusal to apply “the distinction in our Eleventh Amendment
jurisprudence between States and municipalities . . . to the question of whether a governmental
entity is protected by the Constitution’s guarantees of federalism, including the Tenth
Amendment”) (citing, inter alia, Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S.
528 (1985) (resolving Tenth Amendment issues in suit brought by local transit authority)). The
Court need not decide whether claim preclusion is nonetheless appropriate with regard to these
alternative claims, however, because the holding in Garcia compels this Court to find in favor of
the Defendants on those claims on their merits.
The Plaintiffs urge the Court not to apply the holding of Garcia to their Tenth
Amendment claims, arguing that Garcia’s “central premise has been explicitly jettisoned by the
Supreme Court, and it no longer accurately states the law.” Dkt. No. 45 at 33. As recognized by
the Plaintiffs, however, only the Supreme Court can overrule its own precedent, and the Supreme
Court has not overruled Garcia. See Dkt. No. 45 at 33 n.6 (“The law would be clearer if the
Supreme Court expressly overruled Garcia. The issue is mentioned here to preserve it on
appeal.”). And, in any case, the Court does not find persuasive the Plaintiffs’ arguments that the
Supreme Court’s holdings in several cases decided after Garcia—New York v. United States, 505
U.S. 144 (1992), Printz, 521 U.S. 898, and NFIB, 567 U.S. 519—demonstrate that Garcia is no
longer good law.
In Garcia, the Supreme Court held that the application of the minimum wage and
overtime provisions of the Fair Labor Standards Act to the states was a permissible exercise of
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Congress’s power under the Commerce Clause. In so ruling, the Court overruled National
League of Cities v. Usery, 426 U.S. 833 (1976), in which it had reached the opposite conclusion,
finding that the principle expressed in that case—that whether states were immune from federal
regulation depended on whether the regulation involved a “traditional government function”—
was “not only unworkable but [was] also inconsistent with established principles of federalism
and, indeed, with those very federalism principles on which National League of Cities purported
to rest.” Garcia, 469 U.S. at 531. Rather, the Court held that
we continue to recognize that the States occupy a special and specific position in
our constitutional system and that the scope of Congress’ authority under the
Commerce Clause must reflect that position. But the principal and basic limit on
the federal commerce power is that inherent in all congressional action—the builtin restraints that our system provides through state participation in federal
governmental action. The political process ensures that laws that unduly burden
the States will not be promulgated. In the factual setting of these cases the
internal safeguards of the political process have performed as intended.
Id. at 556. The Court further noted that “[t]hese cases do not require us to identify or define
what affirmative limits the constitutional structure might impose on federal action affecting the
States under the Commerce Clause.” Id.
In the cases cited by the Plaintiffs as being irreconcilable with Garcia, the Supreme Court
identified one such affirmative limit. Each of those cases involved “federal legislation that
commandeer[ed] a State’s legislative or administrative apparatus for federal purposes” that was
found to be unconstitutional because “‘the Constitution has never been understood to confer
upon Congress the ability to require the States to govern according to Congress’ instructions.’”
NFIB, 567 U.S. at 577 (quoting New York, 505 U.S. at 162). As described in NFIB, Printz
involved “striking down federal legislation compelling state law enforcement officers to perform
federally mandated background checks on handgun purchasers,” while New York involved
“invalidating provisions of an Act that would compel a State to either take title to nuclear waste
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or enact particular state waste regulations.” NFIB, 567 U.S. at 577. In NFIB, the Supreme Court
held that the Medicaid expansion provisions of the ACA violated this rule, reiterating that
“Congress may not simply ‘conscript state [agencies] into the national bureaucratic army.’” Id.
at 585 (quoting FERC v. Mississippi, 456 U.S. 742, 775 (1982) (O’Connor, J., concurring in
judgment in part and dissenting in part)). This fundamental restriction on Congress’s authority
under the Commerce Clause simply was not at issue in Garcia.
The Seventh Circuit recognized this distinction in Travis v. Reno, 163 F.3d 1000, 1003
(7th Cir. 1998). In Travis, the court noted that in Garcia and other cases the Supreme Court held
that “states may be subjected to regulation when they participate in the economic marketplace”5
as long as the regulations were applied to public and private spheres neutrally, but that
[a]longside the prohibition of discrimination against the states is a rule that
remains absolute, a genuine “immunity.” Congress may not “commandeer the
legislative processes of the States by directly compelling them to enact and
enforce a federal regulatory program.” Hodel v. Virginia Surface Mining &
Reclamation Ass’n, Inc., 452 U.S. 264, 288, 101 S. Ct. 2352, 69 L.Ed.2d 1 (1981).
See also Printz, 521 U.S. 898; New York, 505 U.S. 144; FERC v. Mississippi, 456
U.S. 742, 762-66 (1982). When Congress enacted legislation requiring states to
pass laws regulating nuclear waste—and to pay the steep penalty of taking title to
all waste within their borders if they failed to comply—the Court replied (in New
York) that the national government simply may not direct the states to use their
legislative powers to regulate private conduct. Printz adds that the same principle
applies to the federal government’s direction that a state’s executive branch
enforce federal rules.
Id. It is clear that the provisions of the ACA at issue in this case do not implicate the absolute
rule recognized in Travis. Rather, they constitute the type of non-discriminatory regulation
applied to the states and private entities alike that Garcia held to be constitutionally permissible.
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The Plaintiffs argue that Garcia’s holding should be limited to federal labor law,
specifically to statutes codified in Title 29. The Plaintiffs point to nothing in Garcia that
suggests that the Supreme Court intended its holding to be so limited and, in fact, as the
Plaintiffs recognize, the Seventh Circuit applied Garcia outside of the labor law context in
Travis.
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Accordingly, the Court finds that the holding of Garcia dictates a finding that if ACA Sections
1513 and 1514 are properly examined as an exercise of Congressional power under the
Commerce Clause, rather than as a tax, their application to the School Districts is not barred by
the Tenth Amendment.
III. CONCLUSION
For the reasons set forth above, the Defendants’ motion for summary judgment (Dkt. No.
61) is GRANTED as to all Plaintiffs with regard to Count I and GRANTED as to Counts II and
III as to the School Districts. In light of this holding, Count IV of the Amended Complaint,
which asserts a severability argument that applies only if “the Court rejects Plaintiffs’ challenge
under Count II but agrees with Plaintiffs on Count III,” Dkt. No. 22 ¶ 219, is MOOT. The
Plaintiffs’ motions for summary judgment (Dkt. Nos. 44 and 46) are DENIED.
SO ORDERED: 2/14/18
_______________________________
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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