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Fifth Circuit Weighs in on State of Texas v. USA; Remands the All Important Severability Question to District Court for a Closer Examination

December 19, 2019

On December 18, 2019 the Fifth Circuit Court of Appeals finally weighed in on the Texas District Court ruling from last December. The District Court previously held that Congress’ amendment to reduce the Individual Mandate to $0 through the Tax Cuts and Jobs Act of 2017 made the Individual Mandate unconstitutional. Furthermore, the District Court held that the Individual Mandate was inseverable from the rest of the ACA so the District Court struck down the entire Affordable Care Act (ACA). The District Court's decision was appealed to the United States Court of Appeals for the Fifth Circuit. In summary, the Fifth Circuit held the parties had standing, the Individual Mandate as currently constructed is unconstitutional, and, most importantly, the District Court needed to more thoroughly review each ACA provision to determine if each provision is inseverable from the Individual Mandate in light of Congress' intent in 2017. The remainder of this paper exams each of the four issues (please note the Fifth Circuit decided two standing issues) decided by the Fifth Circuit with the greatest emphasis placed on the fourth issue of severability.

Before diving in to the Fifth Circuit’s decision it is helpful to refresh everyone’s recollection regarding the complicated procedural history of the case. The case was originally brought by a collection of Attorneys General in red States (the State plaintiffs) along with two individuals (the individual plaintiffs) who sued the United States, the Department of Health and Human Services (HHS), the Secretary of HHS, the IRS, and the Commissioner of the IRS (collectively referred to as the federal defendants in the Fifth Circuit opinion and in this article). Several Attorneys General from blue States (referred to as interventor-defendants in Fifth Circuit opinion and throughout this article) intervened as defendants because the federal defendants did not plan to fully oppose the lawsuit. Furthermore, the House of Representatives joined the suit to defend the case in full. To complicate matters further the federal defendants changed some of their positions on appeal which will be discussed near the conclusion of this article.

Issue One – Do the defendants have standing to appeal?

Holding One – Yes, the defendants have standing to appeal.

While the issue of standing is rarely discussed outside of Constitutional Law class during a law student's 1L year, it is vital for any case brought before a court. The intricacies of standing fill up entire textbooks and are best discussed by constitutional scholars. Suffice it to say for the purposes of this article that the Fifth Circuit ruled that the federal defendants had standing because the District Court ruling would require the federal defendants to take actions that it would not take but for the District Court’s order. Furthermore, the federal defendants would suffer financially if the District Court’s judgment was affirmed. These facts put the federal defendants on all fours with the Supreme Court decision in United States v. Windsor which held there was standing for a similar party in that case. Additionally, the Fifth Circuit ruled the intervenor-defendants had standing as a result of showing that they would suffer injury should the District Court’s decision be enforced.

Issue Two – Did the individual plaintiffs and/or the State plaintiffs have standing to bring the case?

Holding Two – Both the individual plaintiffs and the State plaintiffs have standing.

The Fifth Circuit relied on the Supreme Courts logic in Lujan v. Defenders of Wildlife which held that “the legality of government and action or inaction, the nature and extent of facts that must be averred or proved in order to establish standing depends considerably upon whether the plaintiffs are themselves the objects of the action (or forgone action) at issue.” Lujan further held if a plaintiff is indeed the object of a regulation “there is ordinarily little question that the action or inaction has caused the plaintiff’s injury and that a judgment preventing or requiring the action will redress it.” Thus, in those circumstances it is well-established that the injured party has standing. The District Court and the Fifth Circuit were in agreement that the individual plaintiffs in this case were the objects of the Individual Mandate and each purchased insurance as a result of the Individual Mandate. Therefore, the Courts agreed that the individual plaintiffs had standing. The Fifth Circuit also found the State plaintiffs had standing as a result of the fiscal injuries suffered by the States as employers by provisions such as the reporting requirements.

Issue Three – Is the Individual Mandate a constitutional exercise of congressional power?

Holding Three – The Individual Mandate as constructed after the Tax Cuts and Jobs Act of 2017 is unconstitutional.

As to the constitutionality of the Individual Mandate, the Fifth Circuit reviewed the recent Supreme Court decision of Nat’l Fed’n of Indep. Businesses v. Sebelius (NFIB) which held that the Individual Mandate was constitutional in a splintered 5-4 decision (with Roberts, Ginsburg, Breyer, Sotomayor, and Kagan agreeing) based on Roberts’ deciding vote relying on Congress Tax Power. Chief Justice Roberts was joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan in holding that the Individual Mandate read in conjunction with the shared responsibility payment could be read as a legitimate exercise of Congress’ taxing power. The Justices forming a 5-4 majority in NFIB reasoned that the Individual Mandate in conjunction with the shared responsibility payment could be read as a legitimate exercise of Congress’ taxing power for four reasons:

  1. That the shared responsibility payment produced some revenue;
  2. The shared responsibility payment was paid into the Treasury by taxpayers when they filed their tax returns;
  3. The amount owed under the ACA was determined by such familiar factors as taxable income, number of dependents, and joint filing status; and
  4. The requirement to pay was found in the Internal Revenue Code and enforced by the IRS which is the same manner taxes are collected.

The Fifth Circuit observed that as a result of the shared responsibility payment being reduced to $0 the shared responsibility payment no longer produces revenue. Therefore, the first, and most important prong, in the narrow majorities holding in NFIB is no longer true. Furthermore, with the Individual Mandate no longer producing revenue, the Individual Mandate necessarily lacks the other three characteristics that once rendered the provision a tax. As a result, it is no longer possible to save the Individual Mandate's constitutionality under Congress' taxing power.

The Fifth Circuit also stated, the splintered opinions in NFIB had five justices agree (Roberts, Scalia, Kennedy, Thomas, and Alito) that the Individual Mandate could not be held to be constitutional under Congress’s power under the Interstate Commerce Clause or the Necessary and Proper Clause. As a result, the Fifth Circuit found that the Individual Mandate as currently constructed is unconstitutional.

Issue Four – In light of the Individual Mandate being found to be unconstitutional, how much, if any, of the rest of the ACA is severable from the constitutional defect?

Holding Four – This issue was remanded to the District Court with the instructions that the District Court examine the issue of severability more thoroughly on a provision by provision basis. Furthermore, the Fifth Circuit instructed the District Court to consider Congress' intent in 2017 (the Congress which reduced the Individual Mandate to $0). Finally, the District Court was instructed to review and rule on the new positions asserted by the federal defendants during the appeal.

The Fifth Circuit stated that the well-established standard on determining the severability of an unconstitutional provision was set out in the Supreme Court’s decision in Alaska Airlines v. Brock. In Alaska Airlines the Supreme Court stated unless it is “evident that the legislature would not have enacted those provisions which are within its power, independently of that which is not, the invalid part may be dropped if what is left is fully operative as a law.” Alaska Airlines set out the following two-step framework to determine Congress’ intent:

  1. First, one must examine whether the constitutional provisions standing on their own (without the unconstitutional provisions) are fully operative as a law. The standard is higher than whether the constitutional provisions would simply operate in some coherent way not designed by Congress (also see Free Enter. Fund v. Pub. Co. Accounting Oversight Bd.)

  2. Second, even if the remaining provisions can operate as Congress designed them to, the court must determine if Congress would have enacted the remaining provisions without the unconstitutional portion. If Congress would not have done so, then those provisions must be deemed inseverable.

The Supreme Court has continually found that a duty to maintain the constitutional part of an act severable and valid so long as it contains unobjectionable provisions severable from those found to be unconstitutional. Therefore, it is well understood that the presumption is that of severability.

The Fifth Circuit then goes on to discuss the challenges an already challenging severability issue presents when examining a 900 page act like the ACA. The Fifth Circuit determines that given the complexity of the severability doctrine and the unique challenges presented by the extensive, complex and frequently amended ACA the District Court fell short of the standard needed for determining whether the entire ACA was inseverable from the Individual Mandate. The Fifth Circuit informs the District Court it needs to reexamine the severability question with a more careful, granular approach with a focus on the intent of the 2017 Congress as opposed to the 2010 Congress. Additionally, the Fifth Circuit instructs the District Court to do the necessary legwork of parsing through the 900 pages of the post-2017 ACA explaining how each particular provision is inseverably linked to the Individual Mandate.

Finally, the Fifth Circuit also states the District Court should review the federal defendants changed litigation positions on remand. The federal defendants (i.e. the Trump administration) changed its position during the appeal to agree with the plaintiffs that no ACA provision was severable in light of the Individual Mandate being deemed unconstitutional. Additionally, the federal defendants also changed their litigation position to argue that the relief should be to prevent the enforcement of the ACA only in the plaintiff States (i.e. in general red States) and that the declaratory judgment should only reach ACA provisions that injure the plaintiffs. The Fifth Circuit correctly states that the District Court is in a far better position than a Court of Appeals to look in to these new positions brought up by the federal defendant on appeal.

Summary - What does this Fifth Circuit case mean moving forward?

The ACA remains the law of the land. The Fifth Circuit is now requiring the parties to relitigate the issue of severability at the District Court level. The Fifth Circuit has instructed the District Court to go over each provision (or at the very least groups of similar provisions) of the ACA to determine whether the provision is severable from the Individual Mandate in light of Congress’ intent in 2017. That is likely to take some time. Regardless of what the District Court finds, the case will, in all likelihood, find its way back to the Fifth Circuit and then possibly to the Supreme Court.

Employers should continue to monitor this case. However, an employer with reporting responsibilities should be focused on 2019 ACA reporting. Should you have any additional questions or need assistance filing the Forms 1094-C and 1095-C, please contact us.

About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorneys P.C. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.

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