Kentucky v. Yellen

• Decision Date: 18 November 2022
• Docket Number: 21-6108
• Citation: 54 F.4th 325
• Parties: Commonwealth of KENTUCKY; State of Tennessee, Plaintiffs-Appellees, v. Janet YELLEN, in her official capacity as Secretary of the U.S. Department of the Treasury; Richard K. Delmar, in his official capacity as Acting Inspector General of the U.S. Department of the Treasury; United States Department of the Treasury, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

54 F.4th 325

Commonwealth of KENTUCKY; State of Tennessee, Plaintiffs-Appellees,

v.Janet YELLEN, in her official capacity as Secretary of the U.S. Department of the Treasury; Richard K. Delmar, in his official capacity as Acting Inspector General of the U.S. Department of the Treasury; United States Department of the Treasury, Defendants-Appellants.

No. 21-6108

United States Court of Appeals, Sixth Circuit.

Argued: July 21, 2022

Decided and Filed: November 18, 2022

ARGUED: Daniel Winik, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellants. Brett R. Nolan, OFFICE OF THE ATTORNEY GENERAL OF KENTUCKY, Frankfort, Kentucky, for Appellees. ON BRIEF: Daniel Winik, Alisa B. Klein, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellants. Brett R. Nolan, Barry L. Dunn, Matthew F. Kuhn, OFFICE OF THE ATTORNEY GENERAL OF KENTUCKY, Frankfort, Kentucky, Andrée S. Blumstein, Brandon J. Smith, OFFICE OF THE ATTORNEY GENERAL AND REPORTER OF TENNESSEE, Nashville, Tennessee, for Appellees. Paul D. Clement, KIRKLAND & ELLIS LLP, Washington, D.C., Joseph D. Henchman, NATIONAL TAXPAYERS UNION FOUNDATION, Washington, D.C., Sheng Li, NEW CIVIL LIBERTIES ALLIANCE, Washington, D.C., Drew C. Ensign, OFFICE OF THE ATTORNEY GENERAL OF ARIZONA, Phoenix, Arizona, for Amici Curiae.

Before: DONALD, BUSH, and NALBANDIAN, Circuit Judges.

BUSH, J., delivered the opinion of the court in which DONALD, J., joined in full, and NALBANDIAN, J., joined in part. NALBANDIAN, J. (pp. –––– – ––––), delivered a separate opinion concurring in part and dissenting in part.

JOHN K. BUSH, Circuit Judge.

In response to the grave economic challenges posed by COVID-19, Congress enacted the American Rescue Plan Act of 2021 ("ARPA" or "the Act"). Pursuant to Congress's spending power, ARPA set aside $195.3 billion in stimulus funds, to be distributed by the Treasury Department to states and the District of Columbia. This appeal concerns a challenge brought by Kentucky and Tennessee ("the States") to what they allege is an ambiguous, coercive, and commandeering condition attached to those funds. Specifically, to get the money, the States had to certify that they would comply with the Act's "Offset Provision." Its terms bar the States from enacting tax cuts and then using ARPA funds to "directly or indirectly offset a reduction in [their] net tax revenue" resulting from such tax cuts. 42 U.S.C. § 802(c)(2)(A). And a related portion of the Act explains that should a State violate the Offset Provision, Treasury may initiate a recoupment action to recover the misused funds. 42 U.S.C. § 802(e)(1)–(2).

What the Offset Provision actually means, however, is the subject of grave dispute. Because money is fungible, enacting any tax cut and then spending ARPA funds could be construed, the States say, as having impermissibly used those funds to "indirectly offset" a revenue reduction from the tax cut. Appellees’ Br. at 12–13. As a result, should the States wish to expend their ARPA funds, they are effectively barred from enacting any tax cuts¹ —despite their desire to do so—for fear that Treasury could construe the cuts as implicating an "indirect offset" and correspondingly pursue recoupment. Id. at 22–23; 38. Compounding the Act's indeterminacy, the Offset Provision itself never explains which fiscal year ("FY") serves as the baseline for calculating a "reduction" in net tax revenue. Id. at 13, 40. That omission allegedly leaves the States in the dark about when Treasury may deem them to have violated the Act. Id. And even though a Treasury regulation has since offered a narrowing construction of the Offset Provision, the States assert that this construction in no way follows clearly from the text of the Offset Provision itself. Id. at 41. Thus, the States object that the Offset Provision failed to provide them with clear notice of whatever conditions it entails. And because of those indeterminacies, they contend that the Offset Provision is unenforceable under the clear-statement rule the Supreme Court has long instructed governs spending legislation.

Worse yet, the States argue, they were coerced into relinquishing this control over their sovereign taxing authority. Amended Complaint ¶74, R. 23. By offering such a massive aid package—promising to confer on the States a sum equal to one-fifth of their annual budgets—in a time of fiscal crisis no less, the federal government made the States an offer they couldn't refuse. Appellees’ Br. at 4, 12. Given these alleged intrusions upon their sovereignty, the States filed suit against the Treasury Department. They sought an injunction of the Offset Provision's enforcement and a declaratory judgment that the provision is unenforceable.

Relying on the coercion rationale alone, the district court granted the States a permanent injunction in September 2021. Treasury's appeal of that order is now before us. It asserts that the States’ challenges are nonjusticiable and that, in any event, their objections to the Offset Provision fail on the merits.

We agree that Kentucky's challenge is nonjusticiable. At the outset of their suit, both Kentucky and Tennessee had standing to bring their pre-enforcement challenges, since the Offset Provision itself at least arguably proscribed the post-acceptance enactment of any revenue-reducing tax cut. Thus, the Offset Provision at least arguably threatened a significant intrusion upon state taxing authority—an intrusion that arguably offended the Spending Clause because it was not clearly authorized by the Offset Provision itself. But Treasury later promulgated an implementing regulation ("the Rule") that disavowed this interpretation of the Offset Provision and established certain safe harbors permitting the States to cut taxes. See Coronavirus State and Local Fiscal Recovery Funds, 86 Fed. Reg. 26,786 (proposed May 17, 2021) (interim final rule); see also Coronavirus State and Local Fiscal Recovery Funds, 86 Fed. Reg. 4,338 (Jan. 27, 2022) (final rule); 31 C.F.R. § 35 et seq. In response, Kentucky and Tennessee offered no additional evidence of a concrete plan to violate the Rule , so they failed to establish that Treasury will imminently seek recoupment because of any demonstrated policy they wish to pursue. And because Kentucky offered no evidence for any other theory of injury, the Rule mooted its challenge to the Offset Provision. We thus reverse the district court's conclusion that Kentucky's claim is justiciable and vacate the injunction to the extent that it bars enforcement of the Offset Provision against Kentucky.

Tennessee, by contrast, did adduce additional evidence of a distinct theory of injury: that Treasury's Rule (and the underlying Offset Provision it implements) burden the State with compliance costs. See Eley Dec., R. 25-3. These costs represent additional labor and other expenses that Tennessee must incur to ensure that its recent and proposed tax cuts do not violate the Offset Provision; expenses that it would not incur were enforcement of the Offset Provision enjoined. Far from mooting the compliance-costs theory of injury, the Rule in fact exacerbated the harm with its more detailed explanation of the measures required to comply with the Offset Provision. Thus, we hold that Tennessee's challenge is justiciable.

On the merits of Tennessee's claim, we affirm the district court's injunction on the basis that the Offset Provision is impermissibly vague under the Spending Clause. Because the Offset Provision is subject to a range of plausible meanings, Tennessee was deprived of the requisite "clear notice" of ARPA's conditions when it accepted the funds. Cummings v. Premier Rehab Keller, P.L.L.C. , ––– U.S. ––––, 142 S. Ct. 1562, 1574, 212 L.Ed.2d 552 (2022) (quoting Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy , 548 U.S. 291, 296, 126 S.Ct. 2455, 165 L.Ed.2d 526 (2006) ). As a result, Treasury cannot use its Rule to impose compliance requirements upon Tennessee that are not clearly authorized by the Offset Provision itself. And because this defect suffices to affirm, we need not consider Tennessee's additional objections to the Offset Provision.

I.

Congress enacted ARPA in March 2021 to make available almost $2 trillion in COVID-related relief funding. Approximately $195.3 billion of that sum was set aside for distribution to the states and the District of Columbia. "Kentucky's allotment under the Act is about $2.1 billion," while Tennessee's is about $3.7 billion. Amended Complaint ¶¶26–27, R. 23. These sums amount to nearly one-fifth of the States’ respective annual general revenues. Id. In the States’ view, "[t]he financial aid the Act offer[ed] ... is simply unparalleled in size." Id. ¶28.

That offer also came with several conditions. For instance, the States may spend their ARPA funds in only four particular areas that Congress deemed relevant to economic recovery from the pandemic. Those four areas are as follows:

(A) to respond to the public health emergency with respect to the Coronavirus Disease 2019 (COVID-19) or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality;

(B) to respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers of the State, territory, or Tribal government that are performing such essential work, or by providing grants to eligible employers that have eligible workers who perform essential work;

(C) for the provision of government services to the extent of the reduction in revenue of such State, territory, or Tribal government due to the COVID-19 public health emergency relative to revenues collected in the most recent full fiscal year of the State, territory, or Tribal government prior to the emergency; or

(D) to make necessary investments in water, sewer, or broadband infrastructure.

42 U.S.C. § 802(c)(1)(A)–(D).

Conversely, the States are...