Employee Benefits Compliance, Laws, Regulations & FAQs

Fourth Circuit Court of Appeals Dismisses Two Cases Challenging Health Care Reform

The Fourth Circuit Court of Appeals on September 8, 2011 dismissed two separate cases challenging the Patient Protection and Affordable Care Act (PPACA). In neither case did the court rule on the merits of PPACA, but instead vacated the district court’s decision and remanded the case with instructions to dismiss for procedural reasons. In Virginia v Sebelius, the appeals court held that Virginia lacked standing to sue, saying “the sole provision challenged here – the individual mandate – imposes no obligations on the sole plaintiff, Virginia.” In Liberty University v Geithner the appeals court said it lacked subject-matter jurisdiction. It found that the federal Anti-Injunction Act (AIA) applied because the PPACA penalty for noncompliance with the individual mandate is essentially a tax, and the AIA prohibits pre-enforcement lawsuits to prevent the collection of a tax.

In contrast, two other Circuit courts of appeal have ruled on the merits, determining that they were not barred from issuing substantive decisions due to issues of standing or of whether Congress imposed a “tax” versus a “penalty” for non-compliance. In fact, these two courts have issued conflicting decisions on the constitutionality of the individual mandate. The Eleventh Circuit, in Florida v HHS (where 26 other states also joined Florida as plaintiffs), held the individual mandate unconstitutional, but severable from the rest of PPACA. The Sixth Circuit, in Thomas More Law Center v Obama, upheld the constitutionality of the individual mandate.

An additional note: In a September 13, 2011 District Court Case, the judge ruled that the individual mandate is an unconstitutional exercise of Congress’s Commerce Clause power to regulate commerce among the states). This case is Goudy-Bachman v. HHS, and if appealed (as it no doubt will be) will go to the Third Circuit Court of Appeals, which has not yet heard a case challenging the individual mandate.

Virginia v Sebelius: A State Does Not Have Standing to Challenge the Individual Mandate
In order to have standing to sue, a plaintiff must have suffered or be about to suffer an “injury in fact.” The court reviewed prior cases that discussed what such injuries might be, for individuals and for states, and said that Virginia must show that the individual mandate invades Virginia’s “legally protected interest.” Citing prior cases in which states were found to have legally protected interests, the court stated that the individual mandate does not directly burden Virginia, nor does it commandeer Virginia’s enforcement officials, nor does it threaten Virginia’s sovereign territory.

Virginia claimed that it had standing to challenge the individual mandate because the mandate conflicts with the Virginia Health Care Freedom Act (VHCFA), which Virginia had enacted the day after federal health care reform was enacted. The Virginia law provides that “no resident of this Commonwealth. . . shall be required to obtain or maintain a policy of individual insurance coverage.” (VA. Code Ann. 38.2-3430.1:1)

The Appeals Court disagreed, however, saying : “Under Virginia’s standing theory, a state could acquire standing to challenge any federal law merely by enacting a statute– even an utterly unenforceable one — purporting to prohibit the application of the federal law. For example, Virginia could enact a statute declaring that “no Virginia resident shall be required to pay social security taxes” and proceed to file a lawsuit challenging the social security act.”

Because the Court found that Virginia lacked standing, it did not address the issue of whether Congress had Constitutional authority to enact the individual mandate.

Liberty University v Geithner: The Anti-Injunction Act Prohibits Pre-Enforcements Lawsuits to Prevent the Collection of a Tax
The Appeals Court dismissed this case because it said the Anti-Injunction Act (AIA) bars the court from ruling on it until the individual mandate “tax” or “penalty” is in effect (which won’t be until 2014). The court also found that regardless of whether it is called an assessment, exaction, penalty or tax, the monetary assessment that will apply in 2014 to taxpayers who fail to comply with the individual mandate is in essence a “tax.” The AIA (section 7421 of the Internal Revenue Code) prohibits taxpayers from filing federal court cases challenging a federal tax before the IRS enforces the tax.

Once the tax/penalty for noncompliance with the individual mandate is in effect, however, the court would have jurisdiction to decide this case on the merits. (Two of the three judges on the panel indicated they would uphold the individual mandate if they were to decide this case on the merits.) “The AIA forbids only pre-enforcement actions brought before the [IRS] has assessed or collected an exaction. A taxpayer can always pay an assessment, seek a refund directly from the IRS, and then bring a refund action in federal court.” The court noted that there are numerous exceptions to the AIA bar, but said the parties did not claim that any of these exceptions applies here.

Neither party on appeal had argued that the AIA barred the court from hearing this case. At the District Court the Treasury Dept. (the defendant) had made this argument but the District Court had rejected it, on the basis that Congress had not called it a “tax” and that it was in fact a “regulatory penalty” and not a tax. The Appeals court asked both sides to file briefs on whether the AIA bar might apply, and the court noted that both sides argued that it did not, but the court disagreed.

In explaining why the court believes the AIA does apply, it noted that federal courts are courts of limited jurisdiction and have only that power authorized by the Constitution and by statute. Thus, if the AIA applies, it prevents the courts from hearing this challenge. The court cited numerous US Supreme Court cases supporting the position that the AIA uses the term “tax” in the broadest possible sense, and that “an ‘exaction’ qualified as a tax even when the exaction raises ‘obviously negligible’ revenue and furthers a revenue purpose ‘secondary’ to the primary goal of regulation.”

The Appeals Court also reviewed the plaintiff’s and defendant’s arguments as to why the AIA bar did not apply and explained why the court disagreed. It’s interesting reading, if you’re interested in the tax issue and the application of the AIA. If you’re only interested in whether the individual mandate is constitutional, you will not find the AIA discussion interesting. (I found it fairly interesting.)