Sixth Circuit Concludes ARPA Condition on COVID Relief Violates Spending Clause

The U.S. Court of Appeals for the Sixth Circuit concluded some state challenges to the COVID relief bill were not justiciable, but reaches the merits in one case and finds the law lacking.

Today the U.S. Court of Appeals for the Sixth Circuit issued opinions in two cases challenging the constitutionality of the American Rescue Plan Act of 2021 (ARPA), under which the federal government provided financial relief to states on the condition that the funds not be used to finance tax cuts. In one of the cases, Ohio v. Yellen, the court concluded the claims were moot. In the other, Kentucky v. Yellen, the court concluded that at least one of the plaintiff states had standing, and that the relevant provisions of ARPA are unconstitutional.

Although the two cases were  before two different panels, Judge Bush wrote the opinion for the court in both cases. Here is how Judge Bush explained the decisoin of the court in Kentucky.

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 cuts—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., 142 S. Ct. 1562, 1574 (2022) (quoting Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 291, 296 (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.

Judge Donald joined Judge Bush in full. Judge Nalbandian concurred in part and dissented in part, writing separately to explain why he believed that both states had standing.

I concur with nearly all of the majority's well-reasoned opinion. Importantly, I agree with the majority that the vagueness of the American Rescue Plan Act of 2021 ("ARPA") violates the Spending Clause. And I agree that Tennessee has standing for the reasons that the majority gives. My only disagreement is about whether Kentucky can press its claim. In short, I believe that both Tennessee and Kentucky ("States") have standing for reasons related to the federal government's intrusion on their sovereign-taxing authority. And I don't believe that the Department of Treasury's ("Treasury") Rules on ARPA's enforcement ("Rules") affect justiciability. So I concur with respect to Tennessee's participation in the case, but respectfully dissent over Kentucky's.

Judge Nalbandian's separate opinion also has an interesting footnote discussing whether this is a case in which the single-party rule -- the rule that only one party needs to demonstrate standing for a court to have jurisdiction to hear the case -- applies in this litigation.

1My analysis assumes that the majority is correct that the one-party rule doesn't apply. (See Majority Opinion, at 20 n.12.) But I'm not sure that's the case. The rule allows courts to review claims so long as one plaintiff has standing. Massachusetts v. EPA, 549 U.S. 497, 505 (2007). And courts have applied the rule to other Article III requirements like mootness. Nat'l Rifle Ass'n of Am. v. Magaw, 132 F.3d 272, 278 n.4 (6th Cir. 1997); see Nat'l Rifle Ass'n of Am., Inc. v. McCraw, 719 F.3d 338, 344 n.3 (5th Cir. 2013). But this doesn't mean that a party can obtain relief to which it is not entitled. So we can eventually address standing when a plaintiff would obtain "attorney's fees" or other "relief different from that sought by plaintiffs whose standing has not been questioned." Gen. Bldg. Contractors Ass'n v. Pennsylvania, 458 U.S. 375, 402 n.22 (1982); see 13B Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure, § 3531.15, at *4 (3d ed. 2022).

But a different situation arises when each plaintiff would obtain the same relief regardless. For cases involving injunctive or declaratory remedies, the practical effects of granting relief may apply to each plaintiff even if we dismiss one for lack of standing. For example, in Bowsher v. Synar, the Supreme Court applied the one-party rule to avoid analyzing other plaintiffs' standing. 478 U.S. 714, 721 (1986). Without returning to the standing questions, the Court affirmed relief that declared a statute unconstitutional. See id. at 736. Because the standing determinations wouldn't affect how the Court distributed relief, the Court didn't need to revisit its use of the rule. See id.; accord McCraw, 719 F.3d at 344 n.3 (recognizing that courts "do not need to verify the independent standing of the other co-plaintiffs" when one party with standing "rais[es] the same claims and issues" (quotation omitted)). Here, Tennessee meets Article III's requirements, and the relief granted to Tennessee applies to Kentucky regardless: Treasury cannot enforce ARPA's unconstitutional conditions. So we did not need to resolve Kentucky's mootness. That aside, I analyze why both States meet Article III's requirements.

Judge Bush also wrote for the Court in Ohio, in which he concluded that the Treasury Department's regulations disclaiming a broad interpretation of ARPA mooted the case. In this opinion he was joined by Judges Griffin and Donald.

Seeking to mitigate the devastating economic effects of COVID-19, Congress enacted the American Rescue Plan Act ("ARPA" or "the Act") in March 2021. See 42 U.S.C. § 802 et seq. ARPA appropriated $195.3 billion in aid to the states and the District of Columbia. But to get the money, states had to certify that they would comply with several conditions. One was ARPA's "Offset Provision," which forbids a state from using the funds "to either directly or indirectly offset a reduction in the net tax revenue" that "result[s] from" a tax cut. § 802(c)(2)(A). Claiming that this condition amounts to a prohibition on tax cuts during ARPA's "covered period," id., and that such a condition would violate the Constitution in multiple respects, Ohio brought the present challenge. See, e.g., Mot. for Prelim. Injunction at 1–2, 5, R. 3. And the district court found Ohio's objections persuasive, permanently enjoining enforcement of the Offset Provision on the ground that its terms are "unconstitutionally ambiguous" under the Spending Clause. Ohio v. Yellen, 547 F. Supp. 3d 713, 740 (S.D. Ohio. 2021).

The Treasury Department appeals, arguing, among other things, that the district court should never have reached the merits of this case, as Ohio failed to establish a justiciable controversy. We agree with Treasury. Regardless of standing, the controversy is moot. Treasury later promulgated a regulation (the "Rule") disavowing Ohio's interpretation of the Offset Provision and explaining that it would not enforce the Provision as if it barred tax cuts per se. 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, 87 Fed. Reg. 4,338 (Jan. 27, 2022) (final rule); 31 C.F.R. § 35 et seq. We have no reason to believe that Treasury will not abide by its disavowal of Ohio's interpretation of the Offset Provision as it administers the statute. So, we hold, Treasury's credible disavowal of Ohio's broad view of the Offset Provision mooted the case. We thus reverse the district court's determination that the case is justiciable and vacate the permanent injunction.

I want to think about this a little more, but I am skeptical that a narrowing regulation can moot a challenge to a law that would otherwise be unconstitutionally vague. Judge Bush does not try to claim that the Treasury Department is owed Chevron deference for its interpretation, so the mootness arises solely from the Treasury Department's claim that it will not seek to enforce the law in a broad manner. This does not seem right to me, but I will ponder it further.

Also of note, the U.S. Court of Appeals for the Eighth Circuit also heard a state challenge to ARPA, concluding in July that Missouri lacked standing to bring similar claims. We will see whether the Biden Administration seeks to use this circuit split over state standing in these cases to obtain High Court review.