Court Allows Challenge to Healthcare Tax Credit Regs to Proceed

"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 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 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 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.

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:

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.

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 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:

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 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.

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.

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. 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.

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 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:

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:

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) ("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 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, 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

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 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.

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

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.

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.

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 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.

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.

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.

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.

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.

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.

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.