Federal District Court Issues Nationwide Preliminary Injunction Enjoining Enforcement of the Corporate Transparency Act

Background and The Court’s Decision

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued an opinion and order (the Order) enjoining the federal government, including the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), from enforcing the Corporate Transparency Act (CTA) and a FinCEN rule implementing the CTA, codified at 31 C.F.R. § 1010.380) (i.e., the Reporting Rule).  The Reporting Rule requires certain entities formed or registered to do business in the U.S. (reporting companies) to report information about themselves, including personal identifiers for their natural-person “beneficial owners.”  For background on the CTA and the Reporting Rule, please see our previous client alert discussing a separate district court’s decision (National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala. Mar. 1, 2024) (NSBU) ruling the CTA unconstitutional.) 

The Order arises from a challenge filed by several small businesses, as well as the National Federation of Independent Businesses (NFIB), which sued on behalf of itself and its members.  While the plaintiffs challenged the CTA on numerous grounds, the Court based its holding on its finding that plaintiffs were likely to succeed on their facial challenge under the Tenth Amendment, arguing that Congress exceeded its constitutional authority in enacting the CTA. 

Because the NFIB has over 300,00 members, the Government argued that a grant of an injunction would functionally be a nationwide injunction.  The Court adopted that reasoning to issue a nationwide injunction, even though the plaintiffs only appeared to seek an injunction for themselves and the NFIB’s members.  The Court reasoned that, because the CTA applied to approximately 32.6 million existing reporting companies, and NFIB members were located throughout the United States, a nationwide injunction was appropriate.  The Court also ruled that, under the Administrative Procedure Act (APA), the January 1, 2025, deadline for reporting companies formed prior to January 1, 2024, to report pursuant to the Reporting Rule is now stayed (i.e., is not applicable until further court order).

Implications

The Court’s ruling creates substantial uncertainty about the ultimate fate of the CTA and the Reporting Rule, and raises questions as to whether and how reporting companies should plan for possible compliance with the CTA.  As of the date of publication of this alert, neither the U.S. Department of Justice (DOJ) nor FinCEN has issued a statement addressing how the federal government plans to proceed in light of the Court’s Order. 

The Order is preliminary only, and not a final decision.  While CTA enforcement is currently paused because of the nationwide injunction, that could change.  For example, DOJ could seek reconsideration to ask the Court to narrow the injunctive relief to the named plaintiffs and members of the NFIB.  That would be similar to the position that FinCEN took earlier this year in the NSBU litigation, where a different district court ruled the CTA unconstitutional.  After the NSBU decision, FinCEN stated that the ruling only applied to members of NSBU who were members as of the date of that court’s order.  Further, in response to that NSBU order, FinCEN said that it would continue to enforce the CTA against reporting companies not covered by that court’s decision.  Alternatively, here, DOJ could ask the Court to stay its order pending appeal or, barring that, appeal immediately to the Fifth Circuit and seek an emergency stay from that Court of Appeals, a process which could take several months.

Complicating matters is the upcoming change in administration as of January 20, 2025, which will usher in new leadership at DOJ and the U.S. Department of the Treasury (Treasury), the latter of which oversees FinCEN.  While nothing is certain, a new administration could decline to defend the law on appeal or take action to withdraw the Reporting Rule, leaving it to Congress to fix the constitutional issues identified by the Court.  

It is also possible that Congress, which passed the CTA in 2021 as part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA), could amend the CTA to address potential constitutional vulnerabilities.  Whether the lame duck Congress in 2024 or a newly-constituted Congress in 2025 would take such steps is difficult to predict. 

An additional complication is the fact that other courts are also considering the legality of the CTA.  In two separate challenges to the CTA, the U.S. District Courts for the District of Oregon and Eastern District of Virginia issued separate orders declining to preliminarily enjoin enforcement of the CTA  .  Meanwhile, the 11th Circuit Court of Appeals has yet to issue an appellate decision in the NSBU case as to whether the CTA is constitutional or not.  But in the NSBU case, DOJ did not seek an emergency stay from the 11th Circuit.  

Until there is further clarity, and given there could be intervening decisions, reporting companies may wish to remain prepared to comply with the CTA’s filing requirements.  Sudden decisions could lead to reporting companies once again being required to report beneficial ownership, potentially in a short period time.

In particular, reporting companies may elect to assess what information they must report to FinCEN in the event the Reporting Rule ultimately takes effect.  In many cases, this may require consulting with counsel and considering corporate ownership structures and responsibilities, as well as allocating time to compile the requisite personal information for any beneficial owners that must be reported. 

Crowell & Moring will continue to monitor this case and provide updates as appropriate.  Please do not hesitate to reach out to your Crowell & Moring contacts or the authors of this alert with questions.