A new Corporate Transparency Act (CTA) ruling has hit the newsstands, setting the stage for significant changes in corporate reporting requirements. On Dec. 3, Judge Amos L. Mazzant III of the U.S. District Court for the Eastern District of Texas granted a motion for preliminary injunction in favor of plaintiffs, effectively suspending the impending "reporting rule" deadline of Jan. 1, 2025. Notably, this is not the typical preliminary injunction. Instead, the court found it appropriate to make this injunction a nationwide one, primarily on the reasoning that "the CTA and the reporting rule apply nationwide, to 'approximately 32.6 million existing reporting companies,'" and the court felt it could not provide Plaintiffs with meaningful relief without practically enjoining the CTA and reporting rule nationwide.

So, what caused the court to arrive at this result? The beginning of the opinion wades through a discussion on federalism principles and the inability of Congress to act where it lacks the power to do so. Nonetheless, the court's decision was based largely on a combination of two details: 1) Irreparable harm to the plaintiffs (in the form of unrecoverable costs); and 2) A substantial likelihood of success on the merits. These are only the first two elements of a successful preliminary injunction, but the bulk of the court's analysis is found within these two elements. Let's look at each in turn as they pertain to the CTA.

• The plaintiffs had to first show a "substantial threat of irreparable harm," and according to the court, they did so. Namely, the plaintiffs pointed to the fact that complying with the CTA will require significant costs. The government disagreed here, arguing that any costs Plaintiffs will incur are at the most de minimis and compliance as a whole is not difficult. The court disputed the government on this point, finding persuasive FinCEN's concession that "the total cost of filing BOI reports is approximately $22 billion in the first year and $5 billion in the years after." As such, the court reasoned that the costs plaintiffs must incur "are far more than speculative" and most certainly not de minimis.
• Along with the above, plaintiffs alleged the CTA violates three of their fundamental rights: the right to be free from laws Congress does not have the authority to enact, rights under the 1st Amendment, and rights under the 4th Amendment. Without delving into too much detail, the court concluded that by the time Jan. 2, 2025, rolls around, the plaintiffs would have "disclosed the information they seek to keep private under the 1st and 4th Amendments and surrendered to a law that they contend exceeds Congress's powers." This is enough to show irreparable harm.
• As to the "substantial likelihood of success on the merits" prong, the plaintiffs argue that the CTA is unconstitutional facially and as applied. This is where things became interesting. In sum, the plaintiffs allege that Congress is acting beyond the powers granted to it by the Constitution (to which the government obviously disagrees) on the basis that the CTA is authorized by the Commerce Clause and Necessary & Proper Clause.
• The Necessary & Proper argument by the government was more of a futile attempt to recover after being denied on the hard-hitting analysis surrounding the Commerce Clause. The court did not find it convincing that the government should be able to regulate all reporting companies simply because it uses the channels of interstate commerce (like telecommunications and bank routing systems). For one, the court noted that the word "commerce" or any reference to instrumentalities is found nowhere in the CTA, and reporting companies are not a "channel" or "instrumentality." Further, the court noted that the CTA does not only regulate companies that use channels or instrumentalities; rather, the CTA "assumes that every company does use channels and instrumentalities of interstate commerce without a jurisdictional hook of any kind that would limit the CTA's reach to only those companies who do use those channels ...".
• Even so, the government's last attempt at success under the commerce clause came under the premise that Congress has the ability to regulate anything that, in the aggregate, substantially impacts interstate commerce. This did not pass muster either, as the court found that the CTA does not regulate activity but rather regulates an entity's existence. For this reason, the court didn't even need to get to the "aggregation" point of the Commerce Clause because the government is compelling activity, not regulating existing activity. Put succinctly, "In other words, the CTA is a law enforcement tool — not an instrument calibrated to protect commerce; an exercise of police power, rather than a regulation of an activity which might impair commerce among the several states. This the Commerce Clause will not tolerate."

Now, with all that said, there is of course still a lack of clarity on where the discourse surrounding the CTA will lead. As the court said in the opinion, "Whether the CTA and the Reporting Rule are absolutely unconstitutional is a question for another day." Indeed, there has already been further activity surrounding the CTA since the December 3rd ruling. On Dec. 23rd, a motions panel of the U.S. Court of Appeals for the Fifth Circuit granted a temporary stay on the preliminary injunction, essentially reasoning that the government would be likely to succeed on the merits in defending the CTA's constitutionality. On Dec. 26th, the merits panel of the Court of Appeals for the Fifth Circuit issued an order vacating the government's motion to stay the district court's preliminary injunction. In their words, this order was necessary to "preserve the constitutional status quo while the merits panel considers the parties' weighty substantive arguments."

In sum (and in simple terms), a district court in Texas issued a nationwide preliminary injunction, halting all reporting requirements under the CTA. Then, the 5th Circuit stayed the injunction, making reporting requirements/filings again mandatory. Shortly after, the 5th Circuit lifted the stay of the preliminary injunction, once again halting reporting requirements under the CTA until the parties' arguments play out on appeal. As of this writing, the original nationwide preliminary injunction is in force. All things considered, with the number of companies the CTA affects, this is only the beginning of further litigation and constitutional analysis.

Van East is a partner at Bradley Arant Boult Cummings LLP. He represents clients on matters involving closely held business entities, including formations, conversions, mergers, acquisitions and dispositions, as well as restructuring ownership and control. East has represented clients in purchasing and selling a variety of businesses, including home-building, real estate development, manufacturing and restaurant entities. He routinely organizes limited liability companies, corporations and partnerships for a variety of business purposes, including preparation of buy-sell, employment and noncompetition agreements.

Christian Wilkinson is an attorney at Bradley Arant Boult Cummings LLP. He is an associate in the firm’s Real Estate Practice Group. Wilkinson assists in the drafting and editing process of purchase and sale agreements, financing documents and ancillary closing documents. He also assists in the due diligence process for various commercial real estate transactions.