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2014 Section 4: Business Institute of Bill of Rights Law at the William & Mary Law School

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Copyright c 2014 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository. https://scholarship.law.wm.edu/preview IV. Business In This Section:

New Case: 13-433 Integrity Staffing Solutions, Inc. v. Busk p. 256

Synopsis and Questions Presented p. 256

“AMAZON WAREHOUSE WORKER PAY SUIT HEADS TO SUPREME COURT” p. 262 Claire Zillman

“SUPREME COURT MAY FINALLY CLARIFY COMPENSABLE TIME” p. 264 Kenneth W. Gage

“AMAZON WORKERS WANT PAY FOR TIME SPENT AT SECURITY p. 268 CHECKPOINT” Aaron Kase

“FLSA ACTION CAN COEXIST WITH STATE CLASS CLAIMS: 9TH CIRC.” p. 270 Ben James

New Case: 13-894 Department of Homeland Security v. MacLean p. 272 p.

Synopsis and Questions Presented p. 272

“SUPREME COURT TO DECIDE WHETHER AIR MARSHAL SHOULD BE p. 280 PROTECTED AS WHISTLEBLOWER” Robert Barnes

“IS HIKE IN WHISTLEBLOWER CLAIMS A SIGN OF PROGRESS OR GROWING p. 282 MISTRUST?” Jack Moore

“FED. CIRC. UPS PROTECTION FOR WHISTLEBLOWERS’ DISCLOSURES” p. 285 Bill Donahue

New Case: 13-485 Comptroller v. Wynne p. 287

Synopsis and Questions Presented p. 287

“SUPREME COURT AGREES TO HEAR LANDMARK CASE ON WHETHER p. 303 STATES MAY TAX INCOME EARNED IN OTHER STATES” Kelly Phillips Erb

“SUPREME COURT TO HEAR MARYLAND DOUBLE TAXATION CASE” p. 306 Joseph Henchman “THE RESIDENT INCOME TAX CREDIT: DID MARYLAND MISAPPLY THE p. 308 COMMERCE CLAUSE?” Robert J. Firestone

New Case: 13-1080 Department of Transportation v. Association of American p. 317 Railroads

Synopsis and Questions Presented p. 317

“SUPREME COURT TO REVIEW AMTRAK ROLE IN SETTING RAIL p. 327 REGULATIONS: HIGH COURT TO HEAR CHALLENGE BY FREIGHT RAILROADS” Brent Kendall

“SUPREME COURT TO CONSIDER USDOT VS. AAR RE: AMTRAK” p. 328 William C. Vantuono

“AMTRAK BARRED FROM REGULATING FREIGHT RAILROADS ON DELAYS” p. 330 Angela Greiling Keane & Tom Schoenberg

“A NEW PRIVATE DELEGATION DOCTRINE?” p. 332 Alexander Volokh

New Case: 13-1032 Direct Marketing Association v. Brohl p. 338

Synopsis and Questions Presented p. 338

“HIGH COURT TO HEAR APPEAL OVER COLORADO ‘AMAZON TAX’ LAW” p. 351 Drew Singer

“SUPREME COURT TO HEAR DMA PRIVACY SUIT, REVIEW COLORADO WEB p. 353 TAX SALES STATUTE” Alexander Ripps

“TENTH CIRCUIT: TAX INJUNCTION ACT PRECLUDED FEDERAL p. 355 JURISDICTION IN COLORADO’S E-COMMERCE USE TAX REPORTING REQUIREMENTS CASE” Ellen Buckley

New Case: 12-1497 Kellogg Brown & Root Services, Inc. v. United States ex rel. p. 356 Carter

Synopsis and Questions Presented p. 356

“US SUPREME COURT AGREES TO ADDRESS TWO IMPORTANT FALSE p. 377 CLAIMS ACT ISSUES” Jonathan G. Cedarbaum & Daniel S. Volchok “SUPREME COURT TO HEAR APPEAL OF KBR OVER FALSE CLAIMS ACT p. 379 LAWSUIT” Eric Young

“THE SUPREME COURT WILL REVIEW FOURTH CIRCUIT DECISION THAT p. 381 WEAKENED THE FALSE CLAIMS ACT’S STATUTE OF LIMITATIONS AND FIRST-TO-FILE BAR” Patrick M. Hagan & Brent D. Craft

“HALLIBURTON, KBR WHISTLE-BLOWER’S CASE REVIVED ON APPEAL” p. 384 Tom Schoenberg

Integrity Staffing Solutions, Inc. v. Busk

13-433

Ruling Below: Busk v. Integrity Staffing Solutions, Inc., 713 F.3d 525 (9th Cir. 2013), cert granted, 134 S.Ct. 1490 (U.S. 2014).

Former employees brought putative class action against former employer, alleging violations of the Fair Labor Standards Act (FLSA) and Nevada labor laws. The United States District Court for the District of Nevada, Roger L. Hunt, Senior District Judge granted employer's motion to dismiss. Employees appealed.

Question Presented: Whether time spent in security screenings is compensable under the Fair Labor Standards Act, as amended by the Portal-to-Portal Act.

JESSE BUSK; LAURIE CASTRO, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants,

v.

INTEGRITY STAFFING SOLUTIONS, INC., Defendant-Appellee.

U.S. Court of Appeals, Ninth Circuit

Decided on April 12, 2013

[Excerpt; some footnotes and citations omitted.]

THOMAS, Circuit Judge part, reverse in part, and remand for further proceedings. In this appeal, we consider whether the district court erred in dismissing the I plaintiffs' state law claims for unpaid wages because those claims would be certified Plaintiffs Jesse Busk and Laurie Castro are using different class certification procedures former employees of Integrity Staffing than their federal wage and hour claims. We Solutions, Inc., which provides warehouse also consider whether the plaintiffs have space and staffing to clients such as alleged plausible claims for unpaid wages Amazon.com. Busk and Castro worked as under federal and Nevada law for hourly employees at warehouses in Las undergoing a security screening meant to Vegas and Fernley, Nevada, respectively, prevent employee theft and for unpaid lunch filling orders placed by Amazon.com periods shortened by five-minute walks to customers. In 2010, Busk and Castro sued the cafeteria. We affirm the district court in Integrity on behalf of a putative class of workers in both warehouses, claiming

256 violations of the Fair Labor Standards Act meal periods did not state a claim under (FLSA) and Nevada labor laws. FLSA because the plaintiffs did not allege that they performed “any duty related to Busk and Castro alleged Integrity violated their job as warehouse workers” during their federal and state labor laws by requiring lunch breaks. them to pass through a security clearance at the end of each shift, for which they were The district court also held that the state law not compensated. Employees waited up to claims “must be dismissed” due to 25 minutes to be searched; removed their “conflicting” class certification mechanisms, wallets, keys, and belts; and passed through namely that while plaintiffs must opt into a metal detectors. The plaintiffs alleged the collective action under FLSA, plaintiffs clearances were “necessary to the must opt out of a class action under Federal employer's task of minimizing ‘shrinkage’ Rule of Civil Procedure 23. Alternatively, or loss of product from warehouse theft.” the court dismissed the state claims on the merits. It held that since the claims were The plaintiffs also sought compensation based entirely on the security clearance and under FLSA and Nevada law for their entire lunch allegations, the “Plaintiffs have failed 30–minute unpaid lunch periods because to allege fact scenarios that would support a they spent up to 10 minutes of the meal valid claim” under Nevada law. period “walking to and from the cafeteria and/or undergoing security clearances.” II They said it took them about five minutes after punching out “to walk to the facility We review de novo the district court's cafeteria and/or pass through security conclusion that a FLSA collective action and clearances” and “approximately five minutes state law class action are inherently to walk from the cafeteria to the time incompatible as a matter of law. We agree keeping system to clock back in.” with all other circuits to consider the issue Additionally, managers would frequently that such actions can peacefully coexist. “remind” workers to “finish their meal Therefore, the district court erred in period quickly so that they would clock back dismissing the state law claims based on a in on time.” perceived conflict.

The district court granted Integrity's motion Under FLSA, a potential plaintiff does not to dismiss the amended complaint for failure benefit from (and is not bound by) a to state a claim under Federal Rule of Civil judgment unless he or she “affirmatively Procedure 12(b)(6). The court held that the ‘opts in’ ” to the lawsuit. This rule is in time spent clearing security was not contrast to a typical Rule 23 class action, compensable under FLSA, relying on out- where a potential plaintiff must opt out to be of-circuit cases finding the time employees excluded from the class. Although some spent passing through security screenings district courts have held that a FLSA noncompensable. The court also held that collective action cannot be brought in the the plaintiffs' allegations about shortened same lawsuit as a state-law class action

257 based on the same underlying allegations, all and hour claims brought in federal court. circuit courts to consider the issue have held Even if it did, Congress has expressed a that the different opting mechanisms do not contrary intent in the Class Action Fairness require dismissal of the state claims. Act of 2005, which confers federal jurisdiction over class actions where certain Our sister circuits have correctly reasoned diversity and amount-in-controversy that FLSA's plain text does not suggest that requirements are met. Because the Class a district court must dismiss a state law Action Fairness Act provides that federal claim that would be certified using an opt- courts should exercise jurisdiction over out procedure. Its opt-in requirement certain class actions (including those extends only to “any such action”—that is, a alleging violations of state wage and hour FLSA claim. FLSA also expressly permits laws), and these class actions are certified more protective state labor laws. This pursuant to Rule 23's opt-out procedure, we savings clause provides further evidence that cannot conclude that Congress intended a federal lawsuit combining state and federal such claims be dismissed simply because wage and hour claims is consistent with they were brought in conjunction with FLSA FLSA. claims.

Nor does the legislative history of Section Integrity argues that allowing both classes to 216(b) support the view of some district proceed simultaneously would cause courts that allowing both actions to proceed “unnecessary confusion” for potential class simultaneously “would essentially nullify members who would receive notices “stating Congress's intent in crafting Section 216(b) both that they must opt in to have their and eviscerate the purpose of Section compensation issues adjudicated and that 216(b)'s opt-in requirement.” We agree with they must opt out to avoid having their the Third Circuit that the “full legislative compensation issues adjudicated.” While we record casts doubt” on the contention that do not minimize this practical concern, we Section 216(b) was intended to eliminate agree with the Seventh Circuit that district opt-out class actions. When Congress courts should be able to “work[ ] out an created Section 216(b)'s opt-in requirement adequate notice in this type of case.” as part of the Portal–to–Portal Act of 1947, Furthermore, “if these actions were to it was responding to concerns about third proceed separately—the FLSA in federal parties filing “representative” FLSA actions court and the state-law class action in state on behalf of disinterested employees. court—an entirely different and potentially Accordingly, it amended FLSA “for the worse problem of confusion would arise, purpose of limiting private FLSA plaintiffs with uncoordinated notices from separate to employees who asserted claims in their courts peppering the employees.” own right and freeing employers of the burden of representative actions.” In sum, we agree with the other circuits to consider the issue that the fact that Rule 23 This purpose does not evince an intent to class actions use an opt-out mechanism eliminate opt-out class actions for state wage

258 while FLSA collective actions use an opt-in packing plant because the gear was required mechanism does not create a conflict by the employer's rules, by federal warranting dismissal of the state law claims. regulators, and by the “ ‘nature of the work.’ ” Moreover, the donning and doffing III benefited the employer by preventing Turning to the merits, we review de novo a “workplace injury and contamination.” But district court's dismissal of a complaint for in Bamonte v. City of Mesa, we held that failure to state a claim under Rule 12(b)(6). donning and doffing police uniforms was Accepting the plaintiffs' allegations as true not necessary to police officers' principal and construing them in the light most work because they could change at home favorable to plaintiffs, we may affirm a and chose to do so at work for their own dismissal only if the complaint fails to state benefit. a claim for relief that is plausible on its face. Here, Busk and Castro have alleged that Applying this standard, we hold that the Integrity requires the security screenings, district court erred in holding that the which must be conducted at work. They also plaintiffs failed to state a claim under FLSA allege that the screenings are intended to for passing through security clearances at prevent employee theft—a plausible the end of the day. But, under the facts allegation since the employees apparently alleged, we affirm its dismissal of the claim pass through the clearances only on their for shortened lunch periods. way out of work, not when they enter. As A alleged, the security clearances are necessary to employees' primary work as FLSA, as amended by the Portal–to–Portal warehouse employees and done for Act of 1947, generally precludes Integrity's benefit. Assuming, as we must, compensation for activities that are that these allegations are true, the plaintiffs “preliminary” or “postliminary” to the have stated a plausible claim for relief. “principal activity or activities” that the employee “is employed to perform.” But In holding otherwise, the district court relied preliminary and postliminary activities are upon out-of-circuit cases holding that time still compensable under the Portal–to–Portal spent clearing security was not compensable Act if they are “integral and indispensable” under the Portal–to–Portal Act. But these to an employee's principal activities. To be cases are distinguishable because, in these “integral and indispensable,” an activity cases, everyone who entered the workplace must be (1) “necessary to the principal work had to pass through a security clearance. In performed” and (2) “done for the benefit of Gorman v. Consolidated Edison Corp., the the employer.” Second Circuit held that security procedures at a nuclear power plant were part of In Alvarez, we held that putting on and noncompensable travel time under 29 U.S.C. taking off protective gear was necessary to § 254(a)(1) in part because the “security the principal work of employees at a meat measures at entry are required (to one

259 degree or another) for everyone entering the cannot be docked for lunch breaks during plant,” including visitors. In Bonilla v. which he is required to continue with any Baker Concrete Construction Inc., the duties related to his work.” An “employee is Eleventh Circuit held that construction not relieved if he is required to perform any workers employed by a subcontractor to duties, whether active or inactive, while work on an airport construction project were eating.” For example, “an office employee not entitled to compensation for passing who is required to eat at his desk or a factory through a security clearance. Because the worker who is required to be at his machine Federal Aviation Administration mandated is working while eating.” the security process, the court held that the screening did not benefit the employer. Here, Busk and Castro alleged they were not “completely relieved from duty” because by Gorman and Bonilla do not concern a placing the time clocks far from the security screening put in place because of lunchroom, Integrity forced upon them the the nature of the employee's work. But here “duty to walk to the lunch room in order to Integrity allegedly requires the screening to eat lunch.” But the district court correctly prevent employee theft, a concern that stems held that walking to the lunchroom is not a from the nature of the employees' work work duty. Walking to the lunchroom is not (specifically, their access to merchandise). necessary to the plaintiffs' principal work as Therefore, the district court erred in warehouse employees. Moreover, though the assuming Gorman and Bonilla created a Portal–to–Portal Act does not clearly blanket rule that security clearances are preclude compensation for walking to the noncompensable instead of assessing the lunchroom, as it only expressly applies to plaintiffs' claims under the “integral and walking before the workday starts and after indispensable” test. it ends, it would be incongruous to preclude compensation for walking into work on the Because we hold that the plaintiffs have employer's premises, but require it for stated a valid claim for relief under FLSA walking to the lunchroom. for the time spent passing through security clearances, we also reverse the district Busk and Castro also argue they are entitled court's dismissal of the parallel state law to compensation for their entire 30–minute claim. lunch periods because supervisors would frequently “remind” workers to “finish their B meal period quickly so that they would The district court also held that the plaintiffs clock back in on time.” They rely upon failed to state a claim under FLSA for their cases noting that “very frequent shortened lunch periods. Under the facts as interruptions” might make meal periods alleged, we agree. compensable. But these cases concern whether employees are entitled to FLSA does not require compensation for an compensation for lunch periods when they employee's lunch period, but an “employee remain “on call.” They use the term

260

“interruptions” to refer to instances where Nevada law requires that an employer the employee has to resume a work duty— provide a half-hour meal break if it employs for instance, when emergency medical a worker for a continuous eight-hour period. service employees fielded emergency calls, The law provides, “No period of less than 30 or maintenance workers responded to minutes interrupts a continuous period of maintenance problems. That supervisors work for the purposes of this subsection.” may have “interrupted” Busk and Castro in But there is no private right of action to another sense of the word does not make enforce this section. The Nevada Legislature their lunch periods compensable absent any has entrusted the enforcement of this statute claim that they performed a work duty. to the state Labor Commissioner by expressly providing that the “Labor Finally, the first amended complaint alleges Commissioner or the representative of the that employees had to pass through a Labor Commissioner shall cause the security clearance on their way to the provisions of NRS 608.005 to 608.195, lunchroom. Assuming that the time passing inclusive, to be enforced.” through the security clearance on the way to lunch constitutes compensable work, the Nevada Revised Statute § 608.140 does time alleged in this case is de minimis. As provide a private right of action to recoup alleged in the first amended complaint, the unpaid wages. Thus, the district court walk to and from the cafeteria takes correctly focused on whether Busk and “approximately five minutes” each way, Castro alleged they were required to “work” though employees pass through security during their lunch periods. However, the only on their way to the cafeteria, not on the plaintiffs raised for the first time on appeal return trip. The relatively minimal time their argument that Nevada defines “work” expended on the clearance in this context differently than federal law, such that their differs from the 25–minute delay alleged for lunch periods might be compensable under employees passing through security at day's state law even if they were not compensable end. Therefore, the district court correctly under federal law. Because the district court dismissed this claim under Rule 12(b)(6). has not considered this argument, we remand for it to do so in the first instance. The plaintiffs also argue that even if the district court correctly dismissed their FLSA AFFIRMED IN PART; REVERSED IN claim relating to the shortened lunch PART; REMANDED. Each party shall periods, it should not have dismissed their bear its own costs on appeal. state law claim because Nevada law would require compensation even when federal law does not.

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“Amazon Warehouse Worker Pay Suit Heads to Supreme Court”

Fortune Claire Zillman March 3, 2014

Security lines. They are the worst. And use of security checks in workplaces likely many workers have to pass through them carried a lot of weight. every day. The U.S. Supreme Court decided on Monday to tackle the question of whether In petitioning the Supreme Court to take the the time spent waiting in those lines is case, Integrity’s lawyer, Paul Clement, deserving of hourly pay. argued that “in the post-9/11 world, security screenings have become ubiquitous in the The Supreme Court said that it would hear a American workplace and are routinely class action lawsuit filed in 2010 by former required for employees working in employees of Amazon contractor Integrity skyscrapers, corporate campuses, federal, Security Systems who claim that, under the state, and local government officers, Fair Labor Standards Act (FLSA), they courthouses, sports arenas, museums, deserve back pay for the time they spent in airports, power plants, theme parks, and security checks at the beginning and end of countless other places.” Allowing the the day, which the warehouse mandated to Nevada workers’ suit to go forward, prevent employee theft. Clement argued, “opens employers up to billions of dollars in retroactive damages.” The workers were “required to wait at least 10 to 15 minutes each day, and often more Indeed, after the U.S. Court of Appeals for than a half hour, at the beginning and end of the 9th Circuit let the Nevada workers’ case each shift without compensation whatsoever continue, other employees filed similar in order to undergo a search for contraband nationwide class actions against Amazon and/or pilferage of inventory,” the complaint distribution centers in Kentucky, Tennessee, says. and Washington state. Workers at a regional distribution center sued CVS Pharmacy in Integrity Security contends that the security September 2012 over its security checks, screenings are similar to other tasks — such and tens of thousands of workers sued Apple as waiting to punch the clock or walking to in July 2013 because it requires its hourly and from the workplace — that are non- retail employees to go through bag searches compensable under the FLSA. Amazon said and clearance checks. on Monday that it doesn’t comment on pending litigation. Wage and hour lawsuits in general — in which workers accuse their employers of The Supreme Court never explains why it unfair pay practices — is one of the few accepts or rejects a case, but the widespread areas of workplace litigation that’s on the

262 rise. There were 7,882 lawsuits filed under Second Circuit decided the issue as it related the FLSA last year, up about 3% from 2012, to workers at a nuclear power plant. In both according to the Annual Workplace Class cases, the courts sided with the employers. Action Litigation Report from law firm But the Integrity case is different and a fairer Seyfarth Shaw. Many of the lawsuits hinge test of the issue because it’s the employer on what sort of activity constitutes the itself — Integrity Security — that mandated compensable workday, says Gerald the security checks, not an outside authority Maatman, a labor and employment lawyer at like the Transportation Security Seyfarth, who is representing a third-party Administration. contractor in one of the Amazon lawsuits. That means the outcome of the Integrity The Supreme Court’s decision in the case will apply to a “greater variety of Integrity case will at least give a definitive companies,” says Mark Batten, a labor and answer to the question of whether security employment lawyer at Proskauer Rose. “It checks should be included in the payable will have a lot of impact on a lot of workday. Other courts have tackled this businesses.” issue before: the Eleventh Circuit evaluated whether airport employees deserved pay for their time in the security line, and the

263

“Supreme Court May Finally Clarify Compensable Time”

Law 360 Kenneth W. Gage April 2, 2014

Over the years, the U.S. Supreme Court has The FLSA, as originally passed, was had multiple occasions to address whether interpreted by the Supreme Court in — and under what circumstances — Anderson v. Mt. Clemens Pottery Co. (1946) employers must compensate employees for to require compensation for all time during their time going from point A to point B and which an employee was required to be on back. Most often, this question has arisen in the employer’s premises. Congress quickly “donning and doffing” cases, in which point responded to a sharp increase in litigation A is the place where uniforms or protective that arose after that decision by passing the gear are put on and taken off and point B is Portal-to-Portal Act in 1947, which excludes the location where employees perform their two categories of activity from compensable principal duties. time: (1) traveling to and from the place where employees perform their principal The question revolves around the distinction activities, and (2) “activities that are between activities that are “integral and preliminary to or postliminary to” “the indispensable” to an employee’s principal principal activity or activities which” the activities, which are compensable under the individual is employed to perform.” This left Fair Labor Standards Act, and activities that for the courts to define in any given case are merely “preliminary” and what employee activities are “principal.” “postliminary,” which are excluded from compensable time by the Portal-to-Portal The Supreme Court subsequently held that Act. activities which are “integral and indispensable” to an employee’s “principal” On March 3, 2014, the Supreme Court activities are themselves principal activities agreed to hear the case of Integrity Staffing and therefore compensable. In 1956, the Solutions Inc. v. Busk, which presents a new high court addressed the issue in two cases. twist to this issue, that is somewhat a creature of the modern age. Integrity In Steiner v. Mitchell, it held that changing Staffing is not a donning and doffing case. clothes and showering were compensable Instead, it relates to the time employees activities for employees who worked in an spend going from point B (i.e., where they environment where caustic and poisonous fill customer orders for retail goods) back to chemicals were used in their work. In point A (i.e., where the employer requires Mitchell v. King Packing Co., the Supreme them to pass a security screening before Court held that knife sharpening is “an leaving the facility). integral part of and indispensable to” the butchering activities for which the Framework of Existing Case Law employees were principally employed.

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Then, in 2005, the Supreme Court held in times of up to 25 minutes as hundreds of IBP v. Alvarez, that employee time spent employees’ shifts ended simultaneously. walking at the end of the day from the Seeking compensation for the time they location where they performed their meat spent in this process, the plaintiffs filed a processing activities back to the area where class action complaint on behalf of they removed their protective gear — an themselves and those similarly situated. activity the employer conceded was integral and indispensable to the meat processing The U.S. district court in Nevada granted duties — was compensable. Integrity’s Rule 12 motion to dismiss; the Ninth Circuit reversed. The Ninth Circuit The Supreme Court explained that “during a applied a two-pronged test to determine continuous workday, any walking time that whether the activity at issue was “integral occurs after the beginning of the employee’s and indispensable,” considering whether it first principal activity and before the end of is: (1) “necessary to the principal work the employee’s last principal activity” is performed” and (2) “done for the benefit of compensable. Applying these rules, lower the employer.” Because the security courts have held that time spent waiting to screening process was allegedly required by punch in and out on a time clock, walking Integrity for the purpose of preventing theft from an employer’s parking facility to the by employees with access to retail workplace and even changing clothes or merchandise, the circuit court explained, the showering, where those activities could be plaintiffs’ allegations were sufficient at the performed off-site, is not compensable under motion-to-dismiss stage to conclude that the the FLSA. screening was integral and indispensable to their principal activity of filling customer The Challenge of Security Screenings in orders. Put slightly differently, the Ninth the Workplace Circuit reasoned that if the screening was Integrity Staffing supplies warehouse not aimed at all employees, then it must be workers on a contract basis to various related to the work performed by those clients; the plaintiffs worked for Integrity employees to which it did apply. Relying on filling customer orders for retail goods at the allegation that all employees were not warehouses owned by Amazon.com in required to participate in the security Nevada. At the ends of their shifts, the screening, the Ninth Circuit distinguished plaintiffs and their fellow order-fillers were the case before it from a Second Circuit required to pass through a security screening case, Gorman v. Consolidated Edison Corp., station designed to reduce employee theft. and an Eleventh Circuit case, Bonilla v. The screening process itself appears to have Baker Concrete Construction Co. been relatively simple — employees were Gorman involved nuclear power plant required to empty their pockets and walk employees seeking compensation for the 10 through a metal detector. According to the to 30 minutes a day spent in security checks plaintiffs, however, the security stations at the plant’s entrance that were required for were badly understaffed, resulting in wait

265 all persons entering the plant, including insufficient standing alone to make the time visitors; the Second Circuit affirmed a compensable. The court concluded, in order district court’s Rule 12 dismissal. The to be compensable “the activity in question Second Circuit’s analysis was different from must be work in the benefit of the the Ninth Circuit’s in Integrity Staffing; it employer,” and the FAA-mandated security explained that “’[i]ndispensable’ is not screening was not. synonymous with ‘integral’,” and therefore the fact that an employer required The Supreme Court’s Opportunity to employees to engage in certain activity only Clarify What it Means for an Activity to establishes indispensability. be "Integral and Indispensable" to an Employee’s Principal Activity The Second Circuit did not consider whether the activity benefited the employer. To be In today’s environment, it is the rare integral, the activity at issue must be employer that does not have some sort of somehow joined or linked in other ways security process for employees entering with the employee’s principal activities, the and/or leaving the work location, even if that court explained. The court held that the process merely involves swiping an security activities required were “necessary identification badge. Participation in such in the sense that they are required and serve security processes is invariably required of essential purposes of security; but they are employees, and those processes undoubtedly not integral to principal work activities.” benefit the employer. The Portal to Portal There are two things worth noting about Act clearly excludes the time an employee Gorman, however. First, the plaintiff’s travels to and from the place where she complaint did not “even mention what kind performs her principal activities from of work [p]laintiff” did at the power plant. compensable time, however. Second, the court of appeals explained in a But, under the Ninth Circuit’s decision, footnote that the result may be different for employee participation in a simple security an employee whose principal activity was screening may be sufficient to support a “monitoring, testing and reporting on the claim that the time traveling from point A plant’s infrastructure security.” (i.e., the security screen at the beginning of Bonilla involved construction-workers the workday) to B (i.e., the place where the seeking compensation for time spent in employee performs her principal activities) FAA-mandated security checks at the — and the time traveling from point B back entrance to a restricted portion of the airport to A at the end of the workday — is where they were working; the Eleventh compensable. Circuit affirmed the district court’s order Integrity Staffing provides the Supreme granting summary judgment to the Court an opportunity to more specifically employer. Like the Second Circuit, the articulate what it means for an activity Eleventh Circuit explained that the necessity occurring at the beginning or end of an of going through the security screening was employee’s workday to be integral and

266 indispensable to an employee’s principal perform, other than to allow him access to work activity. The court’s existing case law his workplace. The question, instead, should requires that there must be some relationship be whether the activity is required (i.e., between the activity at issue and the indispensable) for the employee to carry out principal activities the employee is paid to his or her job, as was the case in Mitchell perform. But, as the Eleventh Circuit where the evidence revealed that observed in Bonilla, the statute “does not “[s]harpening the knife is integral to carving allow for a clean analytical distinction a carcass.” Or in the case of an employee between those activities that are ‘integral participating in a security screening, as and indispensable’ and those that are not.” suggested by the Second Circuit in Gorman, Whatever test the Supreme Court may where the evidence reveals that her principal adopt, it should not be sufficient, as the activity was “monitoring, testing and Ninth Circuit suggests is the case, that the reporting on the plant’s infrastructure activity be required by and for the benefit of security.” the employer in order for it to be compensable — something more should be Similarly, the fact that an activity benefits an required. employer also does not logically lead to the conclusion that it is integral and The Ninth Circuit’s approach in Integrity indispensable to the employee’s principal Staffing is unworkable and inconsistent with activities. Rarely does an employer require the Supreme Court’s jurisprudence. If the anything of its employees without deriving activity is required by someone other than some benefit. Requiring employees to park the employer, as the court in Bonilla at the back of a parking lot, for example, so observed, then that activity certainly should that customers can park closer to the facility not be compensable. But the fact that an benefits the employer, but has nothing to do activity is required by an employer does not with the employee’s principal activities. logically lead to the conclusion that the Requiring employees to wear a specific activity is integral and indispensable to the uniform certainly provides a benefit to the employee’s principal activities. employer, and many employers require uniforms for all employees, regardless of The activity may be required by virtue of the their duties. But, it is already well- employment relationship itself (e.g., all established that such a uniform requirement employees must swipe a security badge to does not start the time clock running for all enter the building) or by virtue of the employees the moment they get dressed at employee’s work location (e.g., all home before their shift. employees assigned to work in a particular location must pass through security for However the Supreme Court rules in safety reason). In either case, performance Integrity Staffing, its decision will of the activity may not facilitate the potentially have a wide-ranging impact on principal activities the employee is paid to most large employers.

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“Amazon Workers Want Pay for Time Spent at Security Checkpoint”

Lawyers.com Aaron Kase April 25, 2013

Warehouse workers subcontracted to However, the 9th Circuit upheld the District Amazon.com can move forward with a Court’s dismissal of a portion of the suit lawsuit seeking wages for the time it takes seeking compensation for the time it took to them to pass through a security checkpoint walk to the employee lunch area. at the end of their shift, a court ruled this Time on the Clock month. The federal Fair Labor Standards Act After the workday is over, employees mandates that workers get paid for “all time at Integrity Staffing Solutions who spend the during which an employee is necessarily day at a warehouse filling Amazon orders required to be on the employer’s premises, are required to wait in line for a search to on duty or at a prescribed work place,” make sure they aren’t stealing anything. It which may “be longer than the employee’s takes about 20 to 25 minutes to get through scheduled shift, hours, tour of duty, or the checkpoint, plaintiffs say, after they’ve production line time.” Work time includes already clocked out. periods during which an employee is That’s nearly two hours or more every week “engaged to wait” for an employment- spent at work that isn’t being compensated. related activity. Alleging that the practice violates federal Other courts have found that employees do labor rules, former employees Jesse Busk not have to be compensated for the time it and Laurie Castro initiated a class action takes to pass through security. However, in lawsuit against Integrity to recoup the those instances the checks were made difference. uniformly in the interest of safety, such as A district court stepped in and dismissed the for workers at an airport or other sensitive suit, but earlier this month the 9th U.S. facilities. Circuit Court of Appeals gave the class The distinction in the Busk-Castro suit is action the green light to advance. The that the checks were made solely to protect plaintiffs “allege that the screenings are the employer’s interest in not having intended to prevent employee theft – a merchandise stolen, and therefore could plausible allegation since the employees count as time on the clock, the 9th Circuit apparently pass through the clearances only reasoned. on their way out of work, not when they enter,” the opinion says. “As alleged, the “Postliminary activities are still security clearances are necessary to compensable . . . if they are ‘integral and employees’ primary work as warehouse indispensable’ to an employee’s principal employees and done for Integrity’s benefit.” activities,” the opinion states, comparing the

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Integrity checks to situations in which account employee turnover, the total number employees are required to put on and take could approach 100,000 members. off specialized outfits on the premises of a The statute allows for compensation to be job. sought for the previous three years, although If Integrity doesn’t want to pay for the extra the attorneys are hoping to extend the period 20 minutes, they could reduce the amount of to five years given the time it took to appeal time it takes to leave the warehouse. “There the dismissal. are thousands of employees all going Most of the workers affected make between through the gates at the same time,” says $9 and $12 an hour. “If you want to take the Mark Thierman, a labor and employment pencil to paper we’re talking hundreds of attorney at the Reno-based Thierman Law millions of dollars,” the lawyer says. Firm, which is representing the plaintiffs. “They could relieve it by opening more Current or former Integrity employees checkpoints or staggering releases.” eligible to join the class need to opt in to the lawsuit by filing a consent to sue form or Head of the Class contacting the attorneys. “The bottom line,” The class potential could be huge. “We says Thierman, “is people are going to get estimate there’s over 38,000 Amazon some serious money if they participate.” workers employed by Integrity or other subcontractors,” Thierman says. Taking into

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“FLSA Actions Can Coexist with State Class Claims: 9th Circ.”

Law 360 Ben James April 12, 2013

The Ninth Circuit ruled Friday that Fair order granting a motion to dismiss — also Labor Standards Act collective action and shot down the lower court's finding that the state law class action claims were not plaintiffs hadn't stated a valid FLSA claim inherently incompatible, reviving a lawsuit based on post-shift time workers had to accusing Integrity Staffing Solutions Inc. of spend passing through security checkpoints illegally failing to pay warehouse workers allegedly meant to deter theft. However, the for time spent waiting to clear security panel agreed with the trial court that the checkpoints. plaintiffs hadn't stated a claim under the FLSA for shortened lunch periods. A three-judge appellate panel issued a published opinion that partially reversed a Busk and Castro worked at warehouses in Nevada district judge's ruling that said Nevada filling orders placed by former Integrity workers Jesse Busk and Amazon.com customers, court papers said. Laurie Castro failed to state valid claims Busk filed the suit in October 2010, and under the FLSA and that their Nevada law both plaintiffs lodged an amended complaint claims had to be dismissed because of in December 2010, alleging that workers conflicting class certification mechanisms had to wait up to 25 minutes at the end their under the FLSA and Federal Rule of Civil shifts to passed through a theft-deterrent Procedure 23, which governs class actions. “post 9/11 type” of security clearance that involved removing wallets, keys and belts, The panel fell into step with its sibling and passing through metal detectors. circuits' reasoning that the text of the FLSA — which calls for class members to opt in to They also sought compensation under the the suit — doesn't suggest that a district FLSA and federal law based on the fact that court had to dismiss state law class claims they had to spend 10 minutes of their 30- governed by the usual opt-out mechanism, minute unpaid meal breaks moving to and under which class members are covered from a cafeteria. The plaintiffs and others unless they affirmatively exclude like them were entitled to regular pay for all themselves. hours worked and premium pay for any overtime hours, the amended complaint said. “We agree with all other circuits to consider the issue that such actions can peacefully Although the question of whether there's a coexist. Therefore, the district court erred in conflict between the opt-out FLSA claims dismissing the state law claims based on a and opt-in state law class claims is perceived conflict,” the panel held. interesting, the Ninth Circuit's ruling was very significant because of what it said The panel — ruling on a challenge to an about whether time spent waiting to clear

270 security checkpoints was compensable, said wasn't compensable based on “out-of - Mark Thierman of the Thierman Law Firm circuit cases.” Here, the plaintiffs' allegation PC, which represents the plaintiffs. Making that the security screenings are meant to stop employees wait to go through security theft is plausible, because they only had to without paying them after shifts is a go through such screenings when they left common practice, according to Thierman. work, not when they arrived, the appeals court noted. In the cases the district court “It's a huge case for the real world, and not relied on, employees had to pass through just the legal world,” Thierman said of the security when entering the workplace, the Integrity Staffing matter. panel said. The panel said that the district court dropped “As alleged, the security clearances are the ball by assuming that there was a necessary to employees’ primary work as “blanket rule” that security clearance time warehouse employees and done for isn't compensable, as opposed to applying Integrity’s benefit,” the panel held. the appropriate test. An attorney for Integrity declined to The appeals court said that the lower court comment. had found that the plaintiffs' waiting time

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Department of Homeland Security v. MacLean 13-894

Ruling Below: MacLean v. Department of Homeland Security, 714 F.3d 1301 (Fed. Cir. 2013), cert granted, 2014 WL 297729 (U.S. 2014).

Federal Air Marshal petitioned for review of a decision of Merit Systems Protection Board, 116 M.S.P.R. 562, which sustained his removal by the Transportation Security Administration (TSA) for his unauthorized disclosure of sensitive security information. He argued that the Whistleblower Act of 1989 barred the government from disciplining any federal employee for exposing information that the individual worker believed would be “a specific danger to public health or safety.” The respondent argued the information petitioner disclosed was protected by law from exposure, and therefore, the Whistleblower Act of 1989 does not apply.

Question Presented: Whether certain statutory protections codified at 5 U.S.C. § 2302(b)(8)(A), which are inapplicable when an employee makes a disclosure “specifically prohibited by law,” can bar an agency from taking an enforcement action against an employee who intentionally discloses Sensitive Security Information

ROBERT J. MACLEAN, Petitioner v. DEPARTMENT OF HOMELAND SECURITY, Respondent.

United States Court of Appeals, Federal Circuit Decided on April 26, 2013

[Excerpt; some footnotes and citations omitted]

MOORE, Circuit Judge Mr. MacLean became a Marshal in 2001. In July 2003, all Marshals received a briefing Robert J. MacLean petitions for review of a from the Agency that there was a “ final decision of the Merit Systems ‘potential plot’ to hijack U.S. Airliners.” Protection Board (“Board”), which sustained Soon after that briefing, however, the the Transportation Security Administration's Agency sent an unencrypted text message to (“Agency's”) removal of Mr. MacLean from the Marshals' cell phones cancelling all the position of Federal Air Marshal missions on flights from Las Vegas until (“Marshal”). Because the Board incorrectly early August. After receiving this directive, interpreted the Whistleblower Protection Act Mr. MacLean became concerned that (“WPA”), we vacate and remand. “suspension of overnight missions during a BACKGROUND hijacking alert created a danger to the flying

272 public.” He complained to his supervisor Mr. MacLean challenged his removal before and to the Office of Inspector General, but the Board, arguing that his disclosure of the they responded that nothing could be done. text message was protected whistleblowing Dissatisfied, Mr. MacLean told an MSNBC activity. After an interlocutory appeal from reporter about the directive so as to “create a the Administrative Judge (AJ), the full controversy resulting in [its] rescission.” Board determined that Mr. MacLean's MSNBC published an article criticizing the disclosure fell outside the WPA because it directive, and the Agency withdrew it after was “specifically prohibited by law.” The several members of Congress joined in the Board reasoned that the regulation criticism. prohibiting disclosure of SSI, upon which the Agency relied when it removed Mr. In 2004, Mr. MacLean appeared on NBC MacLean, had the force of law. Nightly News in disguise to criticize the Agency dress code, which he believed The AJ then upheld Mr. MacLean's removal allowed Marshals to be easily identified. and the Board affirmed in MacLean II, the However, someone from the Agency decision now on appeal. Reconsidering recognized his voice. During the Agency's MacLean I, the Board explained that a subsequent investigation, Mr. MacLean regulation is not a “law” within the meaning admitted that he revealed the cancellation of the WPA. Instead, the Board held that the directive to an MSNBC reporter in 2003. disclosure of the text message could not Eventually, Mr. MacLean was removed qualify for WPA protection because it was from his position because his contact with directly prohibited by a statute, the Aviation the MSNBC reporter constituted an and Transportation Security Act (ATSA). unauthorized disclosure of sensitive security The Board also determined that the AJ information (SSI). Although the Agency had applied the correct regulation in upholding not initially labeled the text message as SSI the Agency's removal of Mr. MacLean, and when it was sent, it subsequently issued an that the penalty of removal was reasonable. order stating that its content was SSI. Moreover, the Board upheld the AJ's finding Mr. MacLean challenged the SSI order in that the Agency did not terminate Mr. the Ninth Circuit as a violation of the MacLean in retaliation for his activities on Agency's own regulations and as an behalf of the Federal Law Enforcement impermissible retroactive action, but the Officers Association (FLEOA) because the court rejected Mr. MacLean's challenges. It unauthorized disclosure of SSI was a non- held that substantial evidence supported retaliatory reason for removal. Therefore, designating the text message as SSI under the Board sustained the removal. the applicable regulations, and that the This appeal followed. We have jurisdiction Agency did not engage in retroactive action under 28 U.S.C. § 1295(a)(9). because it “applied regulations ... in force in 2003” to determine that the text message DISCUSSION was SSI.

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We must affirm the Board's decision unless SSI when it was sent. He argues that the it is “(1) arbitrary, capricious, an abuse of termination was improper because he did not discretion, or otherwise not in accordance know that he was violating any Agency with law; (2) obtained without procedures rules by revealing the content of the text required by law, rule, or regulation having message. Mr. MacLean admits that he been followed; or (3) unsupported by signed a nondisclosure agreement as a substantial evidence.” We review the condition of his employment, which states Board's legal determinations de novo. that Marshals “may be removed” for “[u]nauthorized release of security-sensitive I. Application of Agency Regulations to or classified information.” He argues, Mr. MacLean's Removal however, that he believed that the message The Board explained that, “[u]nder the was not SSI and that, in any event, he was regulations in effect in July 2003, protected as a whistleblower. Repeating the information relating to the deployment of argument rejected by the Board, Mr. [Marshals] was included within the MacLean thus insists that he tried in good definition of SSI,” and concluded that, as a faith to proceed within the law. result, Mr. MacLean's communication with a We do not find Mr. MacLean's arguments reporter constituted an unauthorized challenging the Agency's charge to be disclosure. Mr. MacLean argues, however, persuasive. The regulation that the Board that the Board erred by upholding his ultimately relied upon to uphold Mr. removal because he was not charged under MacLean's removal is no different from the the right regulation. He explains that the regulation under which he was initially regulation quoted in the initial charge, 49 charged. The earlier regulation bars C.F.R. § 1520.5(b)(8)(ii), was not in force in disclosing “[s]pecific details of aviation 2003 and only became codified in 2005. Mr. security measures,” including “information MacLean contends that the Board wrongly concerning specific numbers of [Marshals], concluded that the regulation it ultimately deployments or missions,” while the latter relied on to uphold his removal, 49 C.F.R. § prohibits revealing “specific details of 1520.7(j), which was in force in 2003, is the aviation ... security measures” and same as the 2005 regulation. Mr. MacLean “[i]nformation concerning deployments.” In argues that the Board violated the rule fact, the regulation's history shows that § of SEC v. Chenery Corp. because the Board 1520.5(b)(8)(ii) is simply a recodified affirmed his removal on grounds different version § 1520.7(j). Because the Agency from those under which he was initially removed Mr. MacLean for revealing SSI, charged by the deciding official. and the Board affirmed the termination for Mr. MacLean also maintains that, although that same reason, the Board did not violate the Ninth Circuit upheld the Agency's the Chenery doctrine. eventual designation of the text message as We likewise reject Mr. MacLean's due SSI, his removal violated his due process process and “good faith” arguments. Both rights because the message was not labeled

274 the applicable regulation and the The government counters that the Board did nondisclosure agreement that Mr. MacLean not abuse its discretion when it determined signed put him on notice that revealing that Mr. MacLean's termination promoted information concerning coverage of flights the efficiency of the service. The by Marshals could lead to termination. Thus, government argues that there is no evidence the Agency did not violate due process even that Mr. MacLean's actions made the flying though it formally designated the text public safer. The government contends that, message as SSI only after it was sent. because even a possibility that a Marshal Furthermore, we agree with the government may be onboard is an important deterrent to that, because the regulation prohibiting terrorist activity, Mr. MacLean's disclosure disclosure of SSI does not include an intent compromised flight safety and forced the element, Mr. MacLean cannot be exonerated Agency to reallocate scarce resources to by his subjective belief that the content of address this new vulnerability. The the text message was not SSI or that he was government explains that, although Mr. protected as a whistleblower. MacLean was a first-time offender with a clean record, he was properly removed II. Reasonableness of Mr. MacLean's because his disclosure could have had Removal catastrophic consequences. The government Mr. MacLean argues that the Board failed to argues that Mr. MacLean differs from the adequately analyze the factors listed Marshals who kept their jobs in spite of SSI in Douglas v. Veterans Administration for breaches because those Marshals possible mitigation of the penalty of compromised only individual flights and removal. Mr. MacLean contends that the showed remorse. Board did not take into account the fact that We agree with the government. The Board he was a one-time offender and otherwise analyzed the relevant Douglas factors and had an unblemished record. Mr. MacLean did not abuse its discretion in concluding also argues that Douglas's “comparative that Mr. MacLean's removal was not a discipline” factor did not weigh in favor of disparate penalty. Unlike other Marshals, removal because other Marshals were not Mr. MacLean revealed that multiple flights terminated even though they disclosed SSI would be unprotected, and we cannot say regarding specific flights. Mr. MacLean that it was unreasonable for the Board to contends that the Board ignored the fact that find that Mr. MacLean's belief that he was other Marshals' disclosures were for doing the right thing was outweighed by the personal gain, while his disclosure exposed resulting threat to public safety. Moreover, it and led to correcting an Agency mistake. He was not unreasonable for the Board to thus argues that revealing the text message determine that Mr. MacLean's conduct to a reporter served the public interest, and “caused the [A]gency to lose trust in him,” that his termination undermined the because Mr. MacLean admitted that he has efficiency of the service. “no regrets” and “feel[s] no remorse for going to a credible and responsible media

275 representative,” Given these circumstances, activities. Indeed, it is undisputed that the the Board did not abuse its discretion by Agency began to investigate Mr. MacLean upholding Mr. MacLean's removal. “within days of his unauthorized appearance” on NBC Nightly News, which III. Mr. MacLean's Prohibited Personnel was “approximately 22 months after he Practice Claim began organizing and leading the [FLEOA] The Board rejected Mr. MacLean's chapter.” Although the Agency ultimately argument that the Agency violated the Civil did not pursue the media appearance charge Service Reform Act by investigating him in and focused on the SSI disclosure charge, retaliation for his FLEOA activities. The the initial investigation does not appear to be statute at issue prohibits individuals in frivolous or pretextual because it was positions of authority from discriminating justified by Directive ADM 3700. against a government employee “on the IV. Mr. MacLean's Affirmative Defense basis of conduct which does not adversely Under the WPA affect the performance of the employee ... or the performance of others.” The Board The WPA prohibits individuals in positions concluded that Mr. MacLean's prohibited of authority from taking a “personnel personnel practice challenge failed because action” against a government employee in he did not “meet his burden to establish that certain circumstances, particularly the reason articulated by the [A]gency was because of any disclosure of pretextual and that the real reason information by an employee ... which underlying that decision was his FLEOA the employee ... reasonably believes activities.” Mr. MacLean reasserts his evidences ... a substantial and specific discrimination argument on appeal. He danger to public health or safety, if such contends that the Agency investigated him disclosure is not specifically prohibited because of his 2004 appearance on NBC by law ... Nightly News, which he made as part of his Board rejected Mr. MacLean's affirmative advocacy on behalf of FLEOA. defense that his disclosure of the text message was protected whistleblowing We agree with the government that activity because it determined that the substantial evidence supports the Board's disclosure was “specifically prohibited by conclusion that the Agency did not law” within the meaning of the WPA. The discriminate against Mr. MacLean on the law that the Board relied upon is the ATSA, basis of his FLEOA activities. Agency which states, in relevant part: Policy Directive ADM 3700 “regulate[s] and prohibit[s] [Marshals'] unauthorized Notwithstanding section 552 of title 5 contact with the media,” and record ..., the Secretary of Transportation shall evidence is consistent with the AJ's prescribe regulations prohibiting determination that Mr. MacLean was disclosure of information obtained or developed in ensuring security under initially investigated for his unauthorized this title if the Secretary of media appearance, not for his FLEOA Transportation decides disclosing the

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information would ... be detrimental to Act, which directly authorizes removal of transportation safety. any federal employee who divulges Because its conclusion that revealing the information that falls into particular content of the text message was specifically categories. prohibited by the ATSA made further WPA The government counters that Mr. MacLean inquiry unnecessary, the Board did not reach violated a regulation promulgated pursuant the question of whether Mr. MacLean to an express legislative directive in the “reasonably believe[d]” that this information ATSA, which made his disclosure “evidence[d] ... a substantial and specific “specifically prohibited” by a statute. It thus danger to public ... safety.” argues that Mr. MacLean's disclosure does The parties do not dispute that, in order to not qualify for WPA protection. The fall under the WPA's “specifically government contends that Mr. MacLean's prohibited by law” proviso, the disclosure reading of the WPA eviscerates laws that must be prohibited by a statute rather than provide for any Agency discretion in by a regulation. Thus, the core of the classifying information as SSI, and thus disagreement is whether the ATSA disables Congress from directing agencies to “specifically prohibit[s]” disclosure of pass nondisclosure regulations. Lastly, the information concerning coverage of flights government argues that it does not make by Marshals within the meaning of the sense for Congress to order an agency to WPA. promulgate nondisclosure regulations and at the same time prohibit that agency from Mr. MacLean and his amici (three members disciplining an employee for violating those of Congress) argue that the Board regulations by providing a defense under the erroneously concluded that the ATSA's WPA. mandate to the Secretary of Transportation to “prescribe regulations prohibiting We agree with Mr. MacLean that the ATSA disclosure” of certain kinds of information is does not “specifically prohibit” the a specific prohibition under the WPA. They disclosure at issue in this case. The ATSA's contend that the phrase “specifically plain language does not expressly prohibit prohibited by law” in the WPA can only employee disclosures, and only empowers refer to explicit statutory language that the Agency to prescribe regulations identifies specific classes of prohibiting disclosure of SSI “if the information. They argue that the ATSA's Secretary decides disclosing the information “detrimental to transportation safety” would ... be detrimental to public safety.” language does not establish particular Thus, the ultimate source of prohibition of criteria for withholding information and Mr. MacLean's disclosure is not a statute but leaves a great deal of discretion to the a regulation, which the parties agree cannot Agency, which is inconsistent with the be “law” under the WPA. WPA's requirement of specificity. They Notably, Congress changed the language contrast the ATSA with the Trade Secrets “specifically prohibited by law, rule, or

277 regulation” in the statute's draft version to statistical data, amount or source of any simply “specifically prohibited by law.” income, profits, losses, or expenditures of Congress did so because it was concerned any person, firm, partnership, corporation, that the broader language “would encourage or association....” The same is true of § 6013 the adoption of internal procedural of the Internal Revenue Code, which the regulations against disclosure, and thereby Ninth Circuit in Coons v. Secretary of the enable an agency to discourage an employee Treasury held to fall within the meaning of from coming forward with allegations of the WPA's “specifically prohibited” wrongdoing.” Congress explained that only language. That statute prohibits federal “a statute which requires that matters be employees from “disclos[ing] any return or withheld from the public as to leave no return information obtained by him in any discretion on the issue, or ... which manner in connection with his service,” and establishes particular criteria for withholding then goes on to define “return” and “return or refers to particular types of matters to be information” in explicit detail, mentioning withheld” could qualify as a sufficiently such things as “a taxpayer's identity, the specific prohibition. In contrast, the nature, source or amount of his income, “detrimental to transportation safety” payments, receipts, deductions, exemptions, language of the ATSA does not describe credits, assets, overassessments, or tax specific matters to be withheld. It provides payments ...” Thus, when Congress seeks to only general criteria for withholding prohibit disclosure of specific types of information and gives some discretion to the information, it has the ability to draft the Agency to fashion regulations for statute accordingly. prohibiting disclosure. Thus, the ATSA does Nonetheless, we note that the ATSA's not “specifically prohibit” employee conduct charge to the Secretary of Transportation to within the meaning of the WPA. prescribe regulations pursuant to specific The ATSA's insufficient specificity becomes criteria (i.e., only information that would be even more apparent when it is contrasted detrimental to transportation safety) makes with statutes that have been determined to this a very close case. Indeed, the ATSA fall under the WPA's “specifically appears to fall in the middle of the spectrum prohibited by law” proviso. For example, the of statutes flanked at opposite ends by (a) Trade Secrets Act, which the Board those that fall squarely under the WPA's in Kent held to qualify as a specific “specifically prohibited by law” proviso, prohibition, is extremely detailed and such as the Trade Secrets Act and § 6013 of comprehensive. That statute penalizes the Internal Revenue Code, and (b) those in federal employees who “divulge[ ] ... any which Congress delegates legislative information coming to [them] in the course authority to an administrative agency of [their] employment ... which information without circumscribing the agency's concerns or relates to the trade secrets, discretion. Regulations promulgated processes, operations, style of work, or pursuant to Congress's express instructions apparatus, or to the identity, confidential would qualify as specific legal prohibitions.

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In this case, given the clarity of the statutory access to information that the Agency might language and legislative intent behind the otherwise be forced to disclose under the WPA's specificity requirement, the Freedom of Information Act parameters set by Congress are not enough (FOIA). Indeed, it appears that the to push the ATSA over that threshold. paramount goal of the ATSA is to empower the Agency to reject the public's requests for We are similarly unpersuaded by the Agency intelligence because the statute government's argument that a parade of recites that, “[n]otwithstanding [FOIA] ..., horribles necessarily follows our adoption of the Secretary of Transportation shall Mr. MacLean's interpretation of the WPA. prescribe regulations prohibiting disclosure The government argues that, if Mr. of information obtained or developed in MacLean is allowed to pursue his ensuring security under this title.” Our whistleblower defense, the WPA would in interpretation of the WPA does not deprive effect prohibit later Congresses from the ATSA of meaning. directing agencies to pass nondisclosure regulations. The government is concerned CONCLUSION that, under Mr. MacLean's reading, the Because Mr. MacLean's disclosure is not WPA would prohibit agencies from “specifically prohibited by law” within the disciplining employees for violating meaning of the WPA, we vacate the Board's nondisclosure regulations and thereby decision and remand for a determination prevent agencies from enforcing such whether Mr. MacLean's disclosure qualifies regulations. for WPA protection. For example, it remains The government is mistaken. In spite of the to be determined whether Mr. MacLean WPA, Congress remains free to enact reasonably believed that the content of his statutes empowering agencies to promulgate disclosure evidenced a substantial and and enforce nondisclosure regulations, and it specific danger to public health or safety. has done so in the ATSA. The government VACATED AND REMANDED ignores the fact that the ATSA covers a wide range of conduct that would not qualify as WALLACH, Circuit Judge, concurring. whistleblowing. For example, no one Mr. MacLean presented substantial evidence disputes that the ATSA empowers the that he was not motivated by personal gain Agency to promulgate regulations that but by the desire to protect the public. He enable it to discipline employees who reveal averred proof that he sought direction from SSI for personal gain or due to negligence, his supervisors before making allegedly or who disclose information that the protected disclosures. While I join in the employee does not reasonably believe analysis and the result of the majority evidences a substantial and specific danger opinion, I concur to emphasize that the facts to public health or safety. The WPA also alleged, if proven, allege conduct at the core does not prohibit the Agency from following of the Whistleblower Protection Act. the ATSA's mandate to regulate public

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“Supreme Court to Decide Whether Air Marshal Should be Protected as Whistleblower” Washington Post Robert Barnes May 19, 2014 The Supreme Court said Monday that it will in a brief, “effectively permits individual decide an important question of when a federal employees to override the TSA’s federal employee may release to the public judgments about the dangers of public sensitive information from his agency that disclosure.” he feels endangers fellow citizens. MacLean’s response was that he should not The court agreed to a request from the have been fired for actions that others found Obama administration that the justices heroic and were not unlawful. review a lower court’s decision that a “Robert MacLean was a federal air marshal federal air marshal may have been unfairly who spoke up about the consequences of a fired for going to the media about a security dangerous and possibly unlawful plan with which he disagreed. government decision,” wrote Washington Robert J. MacLean was an air marshal in lawyer and former deputy solicitor general 2003. Just after being briefed about a Neal Katyal. potential terrorist attack, MacLean said he “Because he blew the whistle, the received another message from the government changed policy and a potential Transportation Security Administration: that tragedy was averted. But Mr. MacLean paid because of a budget shortfall, the agency a hefty price.” was cutting back on overnight trips for undercover air marshals. According to MacLean’s brief, Sen. Barbara Boxer (D-Calif.) thanked the anonymous MacLean said he went to his boss, who told tipster “who came forward and told the him to keep quiet. Instead, he leaked the truth.” information to a reporter for MSNBC. This caused a congressional uproar, and the MacLean’s identity was not discovered until Department of Homeland Security canceled three years later, when he appeared on an the order within 24 hours, calling it NBC Nightly News program about a “premature and a mistake.” different incident.

The U.S. Court of Appeals for the Federal His disguise on that broadcast “proved to be Circuit said MacLean was entitled to argue inadequate,” the government’s brief says, that he was protected by whistleblower laws and the TSA fired him for disclosing after he was fired by the TSA in 2006. sensitive security information. The lower court ruling, U.S. Solicitor The appeals court said General Donald B. Verrilli Jr. told the court MacLean was entitled to argue that he was

280 protected as a whistleblower and that his considered sensitive by the agency; it had disclosure had not been “specifically been sent unencrypted to his cellphone. prohibited by law.” The government said the The case, Department of Homeland Security regulations passed by the agency, which it v. MacLean, will be heard sometime during contends prohibited MacLean’s actions, the court’s term that begins next October. were authority enough to fire the air marshal. MacLean had contended that the plan about eliminating overnight trips was not

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“Is Hike in Whistleblower Claims a Sign of Progress or Growing Mistrust?” Federal News Radio Jack Moore May 20, 2014

Not quite two years ago, President Barack "When we have an environment and an Obama signed into law a sweeping update to atmosphere where employees are rewarded whistleblower protections for civilian instead of punished for coming forward, I federal employees. think that creates a better culture and it certainly creates a more effective The Whistleblower Protection Enhancement government." Act expanded the authority of both the Office of Special Counsel and the Merit Still, an exclusive Federal News Systems Protection Board to review Radio survey reveals a wide chasm of trust employees' claims of agency wrongdoing remains when it comes to feds blowing the and made it easier to discipline agency whistle at work. Just 16 percent of officials who retaliate against respondents to the survey said they felt whistleblowers. protected enough to report waste, fraud or abuse at their agencies even with the recent Both agencies have seen their caseloads changes in law. skyrocket since the law went into effect. "Retaliation for whistleblowing is alive and But are the growing claims of retaliation well, despite supposed legal protections," evidence of a crackdown on whistleblowing one respondent said. employees or that more employees actually feel comfortable coming forward to report Agencies hit with wave of new agency misconduct? whistleblower claims The heads of both OSC and MSPB told Lerner said OSC has seen an incredible Federal News Radio as part of the special uptick in its caseload over the last year or so report, Trust Redefined: Reconnecting as more employees come to the agency Government and Its Employees, that their alleging that they've been retaliated against increasing workloads could actually be a for reporting agency misconduct. sign of progress — that more employees feel Very often, "after somebody blows the protected now to make disclosures. whistle, the terms or conditions of their "If people can come forward and report employment change," Lerner said. "It can be waste, fraud or abuse — or health and safety something like a hostile work environment. problems — it makes our government It can be up to and including termination." stronger," said Carolyn Lerner, head of the So far, in fiscal 2014, the agency has OSC, in an interview with Federal received more than 1,700 complaints of Drive hosts Tom Temin and Emily Kopp. prohibited personnel practices, about half of

282 which involve retaliation for The ultimate goal of OSC's outreach efforts whistleblowing, she said. is to change the conversation — the climate — around whistleblowing. Lerner's agency wasn't the only one to be hit with an increased workload following recent "No one likes to be criticized; no one likes changes in the law. to feel like they are being called out for doing something wrong," Lerner said. "But Whistleblower claims filed with MSPB have the more we can create a climate where more than doubled in recent years, disclosures are viewed as ultimately a good according to the board's chairwoman, Susan thing, as an employee trying to do what's Tsui Grundmann. right for the agency and for the government But there may be more than the new law at and, frankly, for our country, the better work that explains the rise in cases, she said. things will be. If we can help agencies create that climate of openness where employees "The reason why I suspect we're seeing feel like coming forward as valued, that will more claims may have less to do with help trust." changes in the law and more to do with a greater awareness of a federal employee's That will also have a very practical impact, rights to file in this area," she told Federal she suggested. Drive hosts Tom Temin and Emily Kopp. "I'm convinced that more education and For one thing, whistleblower organizations outreach will help prevent and good-government groups have helped misunderstandings and mistakes and, raise awareness of whistleblowing concerns, ultimately, result in fewer complaints she said. needing to be filed in the first place." Agencies are also attempting to do their part. Shirine Moazed, chief of OSC's Washington, D.C., field office, oversees a "At the same time, agencies are a lot sharper team responsible for training federal in terms of getting the word out, training managers and ensuring an agency's people [on] what's protected, what's not whistleblower practices pass muster. protected and your venue to redress your claims," Grundmann said. Moazed said the trainings emphasize that education is an essential step in preventing Do agencies' whistleblower practices pass whistleblower retaliation — and other muster? prohibited practices — and that such OSC runs training workshops to brief education must start at the top. managers on their responsibilities under the "So, if the head of the agency and the head whistleblower laws and to educate of the components make it very significant employees about their rights, including the that their supervisors be trained and train fact that retaliation against whistleblowers is others on the prohibitions against a prohibited personnel practice. whistleblower retaliation, that's something

283 that's going to generate interest and "There are no real protections in place. It is understanding throughout the agency," she all lip service. All the employees who have told In Depth with Francis Rose. come forward in recent memory have their careers destroyed ... or they were punished 'There are no real protections in place' with career-ending reassignments." But despite the recent changes to law and While fewer than 22 percent of respondents the outreach efforts across government, it said they had personally reported waste, appears many would-be whistleblowers still fraud or abuse at their agency, 44 percent of don't feel protected enough to disclose those who did said they were retaliated potential wrongdoing. Just 14 percent of against in some form. respondents to an exclusive Federal News Radio survey agreed that there are enough Those findings are similar to a 2011 MSPB protections in place for whistleblowers to report on whistleblower retaliation. The feel safe to report waste, fraud and abuse. report indicated that while employees' perceptions of agency wrongdoing had "In print and in theory, yes, there are enough actually declined between 1992 — when protections in place for federal MSPB first studied the issue — to 2011, the whistleblowers," one respondent said. "In overall perception that employees would be reality, there is not because of the real retaliated against for speaking out had not. possibility of retaliation from management and/or the agency." About 36 percent of respondents said they were retaliated against or threatened with Another respondent presented an even retaliation for reporting agency misconduct, gloomier perspective. according to the MSPB study.

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“Fed. Circ. Ups Protection for Whistleblowers’ Disclosures” Law 360 Bill Donahue April 19, 2013

The Federal Circuit stressed Friday that merely empowers an agency to create government whistleblowers are protected by nondisclosure regulations—don’t make that federal law unless their disclosures are cut, the court said. explicitly prohibited by another statute, “Notable, Congress changed the language reviving the case of an air marshal who was ‘specifically prohibited by law, rule, or fired for leaking policy changes to a regulation’ in the [WPA]’s draft version to reporter. simply ‘specifically prohibited by law,’” the According to the opinion, Robert MacLean appeals court said. was terminated after he told an MSNBC “Congress did so because it was concerned reporter that the Department of Homeland that the broader language would encourage Security planned to remove all marshals the adoption of internal procedural from flights in and out of Las Vegas for a regulations against disclosure, and thereby short period in 2003 – a change he thought enable an agency to discourage an employee endangered public safety. from coming forward with allegations of Though several congressmen publicly came wrongdoing,” the panel added. to his aid and the department eventually In contrast, similar but more direct reversed course, the Merit Systems provisions under laws like the Internal Protection Board later found that MacLean Revenue Code—which bans employees didn’t qualify for reinstatement as a bona from disclosing a private tax return for any fide whistleblower. reason—are specific enough to qualify The Whistleblower Protection Act exempts under the WPA’s exemption, the court protection for employees who break other wrote. laws when they come forward, and the “When Congress seeks to prohibit disclosure department persuaded the MSPB that of specific types of information, it has the MacLean had violated the Aviation and ability to draft the statute accordingly,” the Transportation Security Act by disclosing court said. classified air marshal information to the reporter. The opinion also rejected Department of Homeland Security’s argument that The Federal Circuit overturned that decision MacLean’s tougher interpretation of the Friday, saying the WPA’s exemption was WPA would effectively neuter Congress’ reserved for the release of classified ability to empower government agencies to information that a law specifically bans. implement and enforce nondisclosure laws. More vague laws like the ATSA—which

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Under the court’s reading of the WPA, sacrifices, but no one should have to endure agencies can still punish and fire employees seven or more years of aggravation,” from disclosing information for personal MacLean said. gain or out of negligence and can pass rules A representative for the Department of to limit their exposure to Freedom of Homeland Security didn’t immediately Information Act requests, the court said. return a request for comment on the What they can’t do, the court said, is punish decision. an employee for blowing the whistle by releasing information that Congress hasn’t Judges Sharon Prost, Kimberly Moore and specifically barred. Wallach sat on the panel, with Moore penning the majority opinion. Though a win for MacLean, Friday’s ruling does not a whistleblower make. With the MacLean was represented by Lawrence proper interpretation of the WPA Berger of Mahon and Burger and by established, the appeals court remanded the Thomas M. Devine of Government case back to the MSPB to determine other Accountability Project. prongs of the whistleblower test, like The case was Robert J. MacLean v. whether MacLean made his disclosure Department of Homeland Security, case because he believed the department’s policy number 11-3231, in the U.S. Court of posed a legitimate threat. Appeals for the Federal District. Writing a one-paragraph concurring opinion,

U.S. Circuit Judge Evan Wallach agreed with the ruling of the majority but used stronger language to stress the high bar for exempting disclosures from protection. “I concur to emphasize that the facts alleged, if proven, allege conduct at the core of the Whistleblower Protection Act,” Wallach wrote.

In a statement on Monday, MacLean said the ruling—alongside last year’s Whistleblower Protection Enhancement Act—would mean that whistleblowers will have “significantly more confidence to expose wrongdoing without the fear of being marginalized or suffering financial hardship.” “An honest employee with the fortitude to expose corruption should expect to make

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Comptroller v. Wynne 13-485

Ruling Below: Maryland State Comptroller of the Treasury v. Brian Wynne, 431 Md. 147 (2013), cert granted, 134 S.Ct. 2660 (2014).

Individual state-resident taxpayers sought judicial review of Tax Court decision that affirmed, against a Commerce Clause challenge, assessment by state comptroller of county income tax without a credit for payment of out-of-state income taxes. Following a hearing, the Circuit Court, Howard County, Louis A. Becker, III, J., reversed decision of Tax Court and remanded case. After an appeal was noted to the Court of Special Appeals, the Court of Appeals granted certiorari.

Question Presented: Whether the United States Constitution prohibits a state from taxing all the income of its residents -- wherever earned -- by mandating a credit for taxes paid on income earned in other states.

MARYLAND STATE COMPTROLLER OF the TREASURY v. Brian WYNNE, et ux.

Court of Appeals of Maryland Decided on January 28, 2013

[Excerpt; some footnotes and citations omitted.]

McDONALD, Judge an individual's State tax liability for income taxes paid to other states based on the Federal and Maryland law allow for the income earned in those states. However, that attribution of corporate income to the credit takes no account of, and cannot be corporation's shareholders—without being taken against, the portion of the Maryland taxed at the corporate level—in defined income tax known as the “county income circumstances. In particular, the income of a tax.” Subchapter S corporation is deemed to “pass through” to the shareholders who are then This case poses the question whether the directly taxed on that income. Some or all of failure to allow a credit violates the federal that income may be generated outside the Constitution when a portion of a Maryland state in which a shareholder resides. resident taxpayer's income consists of significant “pass-through” income generated The Maryland income tax law reaches all of by a Subchapter S corporation in other the income of a Maryland resident. The states, apportioned to the taxpayer, and State income tax law allows a credit against taxed by the states in which it was

287 generated. The taxpayer has appealed an As explained below, the Commerce Clause assessment by the State Comptroller that did of the federal Constitution sets certain not allow a credit against the county income constraints on this possibility, which the tax portion of the Maryland income tax. states recognize through the provision of credits for payments of out-of-state taxes. The Comptroller, as he should, defends the tax law as written by the Legislature and Maryland Individual Income Tax interpreted by this Court. The taxpayers State law imposes an income tax on accept that interpretation, but assert that it is individuals. It is composed of three parts: wanting when measured against the federal Constitution. They rely on a multitude of (1) a State income tax (the “State tax”) cases—virtually all of which are subsequent at a rate set by the Legislature in statute; to the 1975 amendment of the Maryland tax (2) a county income tax that applies law that uncoupled the credit from the only to residents of each county (the county income tax—that assess state taxes “county tax”) at a rate set by the county against what has come to be known as the within the range allowed by statute; and “dormant Commerce Clause.” (3) a tax on those subject to State income tax but not the county tax (the Although the Maryland Tax Court ruled in “Special Non–Resident Tax” or favor of the Comptroller, the Circuit Court “SNRT”) at a rate equal to the lowest for Howard County reversed that decision county tax. and held that the statute's failure to allow Thus, all individual taxpayers are subject to such a credit violated the dormant the State tax and either the county tax or the Commerce Clause. For the reasons that SNRT. These taxes are all collected by the follow, we find merit in the taxpayers' Comptroller; the proceeds of the county tax contentions and affirm the judgment of the are distributed to the relevant county. Circuit Court. Credit for Income Taxes Paid to Other Background States State Income Taxes State law allows for an individual subject to A state may tax the income of its residents, the Maryland income tax to take a credit regardless of where that income is earned. A against the State tax for similar taxes paid to state may also tax a nonresident on income other states. In particular: earned within the state. Both of these propositions are consistent with the Due a resident may claim a credit only Process Clause of the Fourteenth against the State income tax for a Amendment. However, they raise the taxable year in the amount determined possibility of what might be termed “double under [TG § 10–703(c) ] for State tax on income paid to another state for the taxation” when both the state of the year. There are various exceptions to taxpayer's residence and the state where the this credit, none of which are pertinent income was generated tax the same income. to this case. In general, the credit is

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designed to ensure that Maryland other states do not and require an S receives, at a minimum, the Maryland corporation to pay income tax directly. The income tax due on the taxpayer's Maryland income tax law incorporates, for income that is attributable to Maryland, the most part, the definitions of income regardless of the another state's method or rate of taxation. under the Internal Revenue Code. Accordingly, the income of an S corporation No credit is given against the county tax for “passes through” and is attributed to its income taxes paid in other states. As this shareholders for purposes of the Maryland Court outlined in Blanton, a credit had income tax law. previously applied with respect to the county tax. However, in 1975, the Legislature The Wynnes and Maxim Healthcare amended the tax code to eliminate that Services credit. The underlying facts are undisputed. The S Corporations and Income Taxes taxpayers are Brian and Karen Wynne (“the Wynnes”), a married couple with five A Subchapter S corporation or “S children residing in Howard County. During corporation” is a corporation—often a the 2006 tax year, Brian Wynne was one of relatively small business—that meets certain seven owners of Maxim Healthcare requirements set forth in the Internal Services, Inc. (“Maxim”), a company that Revenue Code and makes an election to pass does a national business providing health through its income and losses, for federal tax care services, and owned 2.4% of its stock. purposes, to its shareholders. Each Maxim had made an election under the shareholder reports his or her share of the S Internal Revenue Code to be treated as an S corporation's income and losses on their corporation. As a result of that election, individual tax returns and is assessed federal Maxim's income was “passed through” to its income tax at the shareholder's individual owners for federal income tax purposes, and rate. In that way, the income that the S the Wynnes reported a portion of the corporation generates for its owners is taxed corporation's income on their individual at one level—similar to the taxation of a federal income tax return. partnership—rather than at two levels (corporate and shareholder) as is otherwise Because Maryland accords similar pass- typically the case. To accomplish this, the through treatment to the income of S character of any item of income or loss of an corporations, the Wynnes also reported pass- S corporation “passes through” to its owners through income of Maxim on their 2006 “as if that item were realized directly from Maryland tax return. A substantial portion of the source from which realized by the the pass-through income had been generated corporation, or incurred in the same manner in other states and was taxed by those states as incurred by the corporation.” for the 2006 tax year. Some states accord similar pass-through In particular, for the 2006 tax year, Maxim treatment to the income of an S corporation; filed state income tax returns in 39 states.

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Maxim allocated to each shareholder a pro Court for further factual development and rata share of taxes paid to the various states. “an appropriate credit for out-of-state The returns did not indicate payments of income taxes paid” on Maxim's income. An income taxes to any county or local entity in appeal was noted to the Court of Special other states. The Wynnes claimed their pro Appeals on July 22, 2011. Prior to hearing rata share of such income taxes paid to other and decision in the intermediate appellate states as a credit pursuant to TG § 10– court, this Court granted certiorari. 703(c) against their 2006 Maryland Discussion individual income tax, reflected on Standard of Review Maryland Form 502. The Tax Court is “an adjudicatory Assessment and Appeal administrative agency in the executive The Comptroller made a change in the branch of state government.” A decision of computation of the local tax owed by the the Tax Court is subject to the same Wynnes and revised the credit for taxes paid standards of judicial review as contested to other states on the Wynnes' 2006 cases of other administrative agencies under Maryland Form 502. The net result was a the State Administrative Procedure Act. In deficiency in the Maryland taxes paid by the undertaking such review, this Court directly Wynnes, and the Comptroller issued an evaluates the decision of the agency—in this assessment, which the Wynnes appealed. case, the Tax Court. On October 6, 2008, the Hearings and When the Tax Court interprets Maryland tax Appeals Section of the Comptroller's Office law, we accord that agency a degree of affirmed the assessment, although it revised deference as the agency that administers and it slightly. The Wynnes then appealed to the interprets those statutes. In this case, the Tax Maryland Tax Court where they argued, for Court's decision required the application and the first time, that the limitation of the credit analysis of cases interpreting the United to the State tax for tax payments made to States Constitution. Because our review of other states discriminated against interstate its analysis turns on a question of commerce in violation of the Commerce constitutional law, we do not defer to the Clause of the United States Constitution. agency's determination. The Tax Court rejected that argument and The Dormant Commerce Clause affirmed the assessment on December 29, 2009. The Wynnes do not contest the State's authority to tax their income, wherever The Wynnes then sought judicial review in earned, under the Due Process the Circuit Court for Howard County. Clause. Rather, they base their challenge to Following a hearing on the appeal, the the Comptroller's assessment on what has Circuit Court reversed the Tax Court in a come to be known as the “dormant decision issued on June 29, 2011. The Commerce Clause” of the United States Circuit Court remanded the case to the Tax Constitution. The dormant Commerce

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Clause is a restriction on State power that is through its subdivisions any more than it not explicitly articulated in the Constitution may at the state level. but that has been derived as a necessary Much recent case law concerning the corollary of a power specifically conferred dormant Commerce Clause has been “driven on Congress by the Constitution. by concern about economic protectionism— The Commerce Clause provides Congress that is, regulatory measures designed to with the power to “regulate Commerce with benefit in-state economic interests by foreign Nations, and among the several burdening out-of-state competitors.” While States, and with the Indian many cases construing the dormant Tribes.” “Though phrased as a grant of Commerce Clause concern state taxation, regulatory power to Congress, the “[t]he dormant Commerce Clause protects [Commerce] Clause has long been markets and participants in markets, not understood to have a ‘negative’ aspect that taxpayers as such.” Therefore, the dormant denies the States the power unjustifiably to Commerce Clause will not affect the discriminate against or burden the interstate application of a tax unless there is actual or flow of articles of commerce.” This prospective competition between entities in negative aspect of the Commerce Clause is an identifiable market and state action that an “implied limitation on the power of state either expressly discriminates against or and local governments to enact laws places an undue burden on interstate affecting foreign or interstate commerce.” commerce. This impact must be more than incidental. We assess first whether the dormant Commerce Clause is implicated by the The Comptroller argues that the county county tax and, if so, whether the failure to income tax is not directed at interstate provide a credit for out-of-state taxes commerce and that the Wynnes have failed violates the dormant Commerce Clause. to identify any interstate commercial activity affected by a failure to allow a credit against Does the Application of the County Tax that tax for tax payments to other without a Credit Implicate the Dormant states. However, application of the dormant Commerce Clause? Commerce Clause is not limited to Although each of the three components of circumstances where physical goods enter the State income tax has its own label and is the stream of commerce. For example, a created by different code provisions, each is state tax exemption related to the movement for federal constitutional purposes a state of people across state borders for economic income tax. In any event, whether the tax is purposes has been held to implicate nominally a state or county tax is irrelevant interstate commerce and violate the dormant for purposes of analysis under the dormant Commerce Clause. Moreover, even when a Commerce Clause because a state may not state tax is imposed on an intrastate activity, unreasonably burden interstate commerce if that tax substantially affects interstate

291 commerce, the tax is subject to scrutiny activities in other states with income taxes. under the Commerce Clause. Thus, the operation of the credit with respect to the county tax may affect the interstate The Comptroller asserts that the Wynnes are market for capital and business investment subject to Maryland income taxes because of and, accordingly, implicate the dormant their status as Maryland residents and not Commerce Clause. because of their activities in intrastate or interstate commerce. But this is a false Does Application of the County Tax dichotomy. In fact, they are subject to the without a Credit Violate the Dormant income tax because they are Maryland Commerce Clause? residents and because they have income The Supreme Court has held that a state may derived from intrastate and interstate tax interstate commerce without offending activities; other states may also tax some of the dormant Commerce Clause so long as that same income because it derives from the tax satisfies a four-prong test. Under that activities in those state. This case concerns test, a state tax survives a challenge under the constitutional constraint on the otherwise the dormant Commerce Clause if it: overlapping power to tax such income. (1) applies to an activity with a In making his argument based on a state's substantial nexus with the taxing state; power to tax its own residents, the Comptroller relies on several cases from (2) is fairly apportioned; other states that fail to distinguish the (3) is not discriminatory towards constraints on state taxation imposed by the interstate or foreign commerce; and dormant Commerce Clause from those (4) is fairly related to the services imposed by the Due Process Clause or that provided by the State. are otherwise distinguishable from the case. The Wynnes apparently do not dispute that Those cases are not persuasive. the application of the county tax in this case The limitation of the credit for payments of has a substantial nexus to Maryland or that it out-of-state income taxes to the State portion is fairly related to services provided by the of the Maryland income tax can result in State. Thus, for purposes of the present significantly different treatment for a controversy, we focus on the remaining two Maryland resident taxpayer who earns prongs of the Complete Auto test: the substantial income from out-of-state requirement of fair apportionment and the activities when compared with an otherwise prohibition against discrimination against identical taxpayer who earns income entirely interstate commerce. from Maryland activities. In particular, the first taxpayer may pay more in total state (1) Is the county tax without a credit fairly apportioned? and local income taxes than the second. This creates a disincentive for the taxpayer—or The purpose of the apportionment the S corporation of which the taxpayer is an requirement is to ensure that each state taxes owner—to conduct income-generating only its fair share of an interstate

292 transaction. “It is a commonplace of without a credit in the context of a tax constitutional jurisprudence that multiple scheme identical to that of Maryland, would taxation may well be offensive to the interstate commerce be disadvantaged Commerce Clause. In order to prevent compared to intrastate commerce? multiple taxation of interstate commerce, the The answer is yes. In this scenario, TG § Court has required that taxes be apportioned 10–703 (or its hypothetical equivalent in among taxing jurisdictions, so that no other states) would grant a credit against a instrumentality of commerce is subjected to taxpayer's home state income tax but not more than one tax on its full value.” “The against the home county income tax for rule which permits taxation by two or more income taxes paid to other states. As a states on an apportionment basis precludes result, taxpayers who earn income from taxation of all of the property by the state of activities undertaken outside of their home the domicile.... Otherwise there would be states would be systematically taxed at multiple taxation of interstate operations.” higher rates relative to taxpayers who earn The dormant Commerce Clause does not income entirely within their home state. mandate the adoption of a particular income Those higher rates would be the result of allocation formula for apportionment. In multiple states taxing the same income. order to assess the fairness of apportionment This is illustrated by the following example. courts look to whether a tax is “internally consistent” as well as “externally • Tax rates. Assume each state imposes a consistent.” state tax of 4.75% on all the income of its residents, a county tax of 3.2% on all the (a) Is the county tax without a credit income of residents, and a SNRT of 1.25% internally consistent? on the income of non-residents earned “Internal consistency is preserved when the within the state. imposition of a tax identical to the one in • Credit. Assume that each state allows a question by every other State would add no credit for income taxes paid to other states burden to interstate commerce that intrastate that operates in the same fashion as TG § commerce would not also bear. This test 10–703—i.e., the formula for the credit and asks nothing about the degree of economic application of the credit take only the home reality reflected by the tax, but simply looks state “state tax” into account. to the structure of the tax at issue to see whether its identical application by every • Taxpayer with in-state income only. Mary state in the Union would place interstate lives in Maryland and earns $100,000, commerce at a disadvantage as compared entirely from activities in Maryland. with commerce intrastate.” Mary owes $4,750 in Maryland state Internal consistency is thus measured by the income tax (.0475 x $100,000), $3,200 answer to the following hypothetical in Maryland county income tax (.032 x $100,000) for a total Maryland tax question: If each state imposed a county tax of $7,950.

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• Taxpayer with multi-state income. John other states. In effect, it acts as an extra tax lives in Maryland and earns $100,000, half on interstate income-earning activities. It ($50,000) from activities in Maryland and fails the internal consistency test. half ($50,000) from activities in While it is true that a failure to pass the Pennsylvania. internal consistency test does not always Because John is a resident of Maryland, signal a constitutional defect in a state tax all of his income is subject to both the scheme, the circumstances under which the Maryland “state tax” and the “county courts have tolerated a lack of internal tax” applicable to his county. Before the consistency do not pertain here. One such application of any credit, John owes $4,750 in Maryland state income tax case concerned a flat $100 annual fee (.0475 x $100,000), $3,200 in Maryland imposed by Michigan upon trucks engaged county income tax (.032 x $100,000) in intrastate commercial hauling. The for a total Maryland tax of $7,950. petitioners in that case challenged the fee on Because half of John's income was the ground that it discriminated against generated in Pennsylvania, John also interstate carriers and unconstitutionally owes $2,375 in Pennsylvania state burdened interstate trade because the fee income tax (.0475 x $50,000) and $625 was flat but trucks carrying both interstate with respect to the Pennsylvania SNRT and intrastate loads engaged in less intrastate (.0125 x $50,000) for a total business than trucks carrying only intrastate Pennsylvania tax of $3,000. loads. The Supreme Court held that the fee John receives a credit in the amount of did not violate the dormant Commerce $2,375 with respect to his Maryland Clause. In analyzing the internal consistency state income tax pursuant to credit of the tax, the Court concluded that, if every formula set forth in TG § 10–703(c). state imposed such a fee, an interstate This reduces his Maryland income tax to $5,575. trucker doing local business in multiple states would have to pay hundreds or Thus, John owes a combined total thousands of dollars in fees if it of $8,575 in state income taxes. As the supplemented its interstate business by above example demonstrates, a taxpayer carrying local loads in many other states, with income sourced in more than one state thus an internal inconsistency. The Court will consistently owe more in combined nonetheless found no Commerce Clause state income taxes than a taxpayer with the violation because a business would have to same income sourced in just the taxpayer's incur such fees only because it engaged in home state. This may discourage Maryland local business in all those states. “An residents from engaging in income-earning interstate firm with local outlets normally activity that touches other states. In the expects to pay local fees that are uniformly context of S corporations, it may encourage assessed upon all those who engage in local Maryland residents to invest in purely local business, interstate and domestic firms businesses, and discourage businesses from alike.” Such a fee, in effect a toll on in-state seeking to operate both in Maryland and in activity, is factually distinguishable from the

294 present case involving business performed beyond that portion of value that is fairly and income earned outside of Maryland. attributable to economic activity within the Moreover, we are not aware of an instance taxing state.” “[T]he threat of real multiple in which a court has upheld an taxation (though not by literally identical unapportioned income tax on the authority statutes) may indicate a state's impermissible of American Trucking. overreaching.” The Comptroller advances an alternative Thus, to test for external consistency one argument. Because an individual can only be asks: Does tax liability under the Maryland a resident of one county in the universe, income tax code reasonably reflect how even if every taxing jurisdiction adopted income is generated? Because no credit is Maryland's tax structure, the individual given with respect to the county tax for would only be required to pay a county tax income earned out-of-state, the Maryland once. This, argues the Comptroller, tax code does not apportion income subject precludes the possibility of multiple taxation to that tax even when that income is derived by operation of the county tax. However, entirely from out-of-state sources. Thus, this analysis appears to be inconsistent with when income sourced to out-of-state the logic underlying this Court's holding activities is subject to the county tax, there is in Frey that the Maryland SNRT is a state a potential for multiple taxation of the same tax for constitutional purposes. Moreover, income. In those circumstances, the under dormant Commerce Clause analysis, operation of the county tax appears to create there are generally only two levels of external inconsistency. This is further regulation, state and federal. The indication that the application of the tax in Comptroller's analysis posits a third level, these circumstances without application of the local level, such that a local tax need an appropriate credit violates the dormant only be considered in the light of local taxes Commerce Clause. in other jurisdictions. But there appears to be (2) Does the County Tax Discriminate no authority in the case law for this position. against Interstate Commerce? (b) Is the county tax without a credit Under the third prong of the Complete externally consistent? Auto test, a tax must not discriminate against The next question is whether the current interstate commerce. Even if a tax is fairly county tax scheme is externally apportioned, it “may violate the Commerce consistent. For this test, one must assess Clause if it is facially discriminatory, has a “whether the State has taxed only that discriminatory intent, or has the effect of portion of the revenues from the interstate unduly burdening interstate commerce.” A activity which reasonably reflects the in- state tax may not discriminate against a state component of the activity being taxed.” transaction because the transaction has an This test looks to a state's “economic interstate element or because the transaction justification” for its claim on the value taxed or incident crosses state lines. A taxing “to discover whether a state's tax reaches scheme that encourages interstate businesses

295 to conduct more of their business activities state pass-through income without within the taxing state may be found to be application of a credit for out-of-state discriminatory. Facially discriminatory state income taxes on the same income means taxes are subject to the strictest scrutiny, and that Maryland shareholders—the Wynnes in the “burden of justification is so heavy that this case—may be taxed at a higher rate on ‘facial discrimination by itself may be a fatal income earned through Maxim's out-of-state defect.’ ” There is no “de minimis ” activities than on income earned though its justification if a tax is found to actually Maryland activities. This would appear to discriminate against interstate commerce. favor businesses that do business primarily Discriminatory effect may lie in the tax in Maryland over their competitors who do itself, but it may also arise from interactions business primarily out-of-state—at least in with other states' taxes. the context of ownership of a Subchapter S corporation. The only difference Particularly pertinent to the present case is between Fulton and the present case is one the Supreme Court's analysis of a North of form. Whereas in Fulton it was North Carolina tax in Fulton Corp. v. Faulkner, Carolina's own tax rate that varied, in the supra. North Carolina imposed an present case it is the imposition of an “intangibles tax” on the value of corporate additional tax, the tax set by the state where stock owned by North Carolina residents. the income was earned—and the failure to The tax was computed as a fraction of the provide a credit for it in Maryland—that value of the stock, with the tax rate reduced creates the discrimination. Nonetheless, the to the extent that the corporation's income effect is the same. was subject to tax in North Carolina. This resulted in a North Carolina stockholder While the failure to allow a credit is at the being taxed at a higher rate for holdings in heart of the discrimination in this case, not companies that did not do business in North every denial of a deduction or credit for Carolina and at lower rates for holdings in taxes paid to another jurisdiction results in a companies that did business in North violation of the dormant Commerce Clause. Carolina. The Supreme Court held that the In Amerada Hess v. New Jersey Dept. of the tax violated the dormant Commerce Clause Treasury, the Supreme Court evaluated the because it discriminated against interstate constitutionality of a New Jersey statute that commerce. In striking down the tax, the denied to oil-producing companies a Court stated: “[A] regime that taxes stock deduction for amounts paid under the federal only to the degree that its issuing windfall profits tax. Holding that the tax did corporation participates in interstate not violate the Commerce Clause, the Court commerce favors domestic corporations noted, “a deduction denial does not unduly over their foreign competitors in raising burden interstate commerce just because the capital among North Carolina residents....” deduction denied relates to an economic activity performed outside the taxing State.” This case presents a similar situation. The application of the county tax to the out-of-

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Amerada Hess is distinguishable from the application of an appropriate credit, present case however. At issue in Amerada discriminates against interstate commerce. Hess was a state deduction for a federal Conclusion income tax—a tax that a business would be subject to no matter where it was located in For the reasons explained above, the failure the United States, whether within New of the Maryland income tax law to allow a Jersey or elsewhere. By denying a tax credit credit against the county tax for a Maryland in that case, New Jersey treated all similarly- resident taxpayer with respect to pass- situated taxpayers equally because a through income of an S corporation that business was subject to the same rate arises from activities in another state and regardless of whether the windfall profits that is taxed in that state violates the were earned within New Jersey or dormant Commerce Clause of the federal elsewhere. By contrast, the failure to provide Constitution. a credit against the county tax in this case As for relief, the Wynnes suggest in their penalizes investment in a Maryland entity brief that the Maryland county income tax, that earns income out-of-state: an the credit, or some part of the Maryland tax investment in such a venture incurs both scheme be “struck down.” In fact, the out-of-state taxes and the Maryland county county income tax itself is not tax on the same income; a similar venture unconstitutional. Nor is the credit, which that does all its business in Maryland incurs serves to ensure that the Maryland income only the county tax. tax scheme operates within constitutional The tax at issue in this case is also similar to constraints. Nor is the Maryland income tax the one in Halliburton Oil Well Co. v. Reily. law generally. What is unconstitutional is There, a Louisiana statute had the the application—or lack thereof—of the discriminatory effect of imposing a greater credit to the county income tax. As this tax on goods manufactured outside Court explained in some detail in Blanton, a Louisiana than on goods manufactured credit previously applied to the county within that state, thereby creating an income tax in these circumstances. The incentive to locate the manufacturing county income tax was only eliminated from process within Louisiana. Although the the computation and application of the credit mechanism is different, the application of by a 1975 amendment of the tax code. the credit in Maryland's income tax law has Chapter 3, Laws of Maryland 1975. It is that a similar discriminatory effect. The more a amendment, when applied to the particular Maryland business can locate its value- circumstances of taxpayers like the Wynnes, creating activities within Maryland the less that contravenes the Constitution. On it will be taxed. remand from the Circuit Court, the Tax Court should recalculate the Wynnes' tax Thus, the application of the county tax to liability in a manner consistent with this pass-through S corporation income sourced opinion. in other states that tax that income, without

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JUDGMENT OF THE CIRCUIT other states to the Wynnes' state tax, and not COURT FOR HOWARD COUNTY their county tax, does not run afoul of the AFFIRMED WITH DIRECTION TO federal Constitution's dormant Commerce REMAND TO THE TAX COURT FOR Clause. FURTHER PROCEEDINGS The Wynnes live in Howard County where CONSISTENT WITH THIS OPINION. they benefit from the services provided by COSTS TO BE SHARED EQUALLY BY that county. To pay for these services, THE PARTIES. Howard County, like every county in BATTAGLIA and GREENE, JJ., dissent. Maryland, including Baltimore City, assesses a tax. As the Majority notes, TG § GREENE, J., dissenting, in 10–703 does not permit the Wynnes to apply which BATTAGLIA, J., joins. a credit for taxes paid in other states to I disagree with the Majority's conclusion reduce the Howard County tax. Rather, as that the federal Constitution's dormant we said in Comptroller v. Blanton, residents Commerce Clause requires Maryland to of a Maryland county are required to pay for reduce the Wynnes' county taxes. Since the that county's services by paying the county early Nineteenth Century, the law has been: tax without the credit. Otherwise, “if the taxpayers were allowed to pay a lesser [T]he power of taxation is one of vital importance ... retained by the states.... amount of county income tax, it ‘would have [T]he power of taxing the people and the possible absurd result of the [taxpayers] their property[ ] is essential to the very paying little or no local tax for services existence of government, and may be provided by the county while a neighbor legitimately exercised on the objects to with similar income, exemptions, and which it is applicable, to the utmost deductions might be paying a substantial extent to which the government may local tax to support those services.’ ” choose to carry it. The only security against the abuse of this power, is found The Majority acknowledges that Maryland in the structure of the government itself. law prohibits the Wynnes from applying a In imposing a tax, the legislature acts credit for taxes paid to other states to reduce upon its constituents. This is, in general, a sufficient security against erroneous their county taxes. The Majority, however, and oppressive taxation. concludes that imposing a county tax without allowing for a credit pursuant to TG The Wynnes may not agree that they should § 10–703 violates the dormant Commerce pay the Howard County tax without a credit Clause because Maryland's taxing scheme pursuant to TG § 10–703. This, however, is fails two prongs of the Complete Auto four- an issue for the elected officials of Howard part test, namely that it is not fairly County and the State, not this Court. “It is apportioned, and it discriminates against not a purpose of the Commerce Clause to interstate commerce. As we have said protect state residents from their own state before, however: taxes.” The Maryland General Assembly's decision to apply a credit for taxes paid in

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Declaring a statute enacted by the burden upon interstate commerce. General Assembly to be Therefore, the Wynnes have failed to prove unconstitutional and therefore that the dormant Commerce Clause is unenforceable is an extraordinary act. implicated. Statutes are generally presumed to be Constitutional and are not to be held The Howard County tax, assessed without a otherwise unless the Constitutional credit, does not expressly discriminate impediment is clear. We have said against interstate commerce. As the many times that since every presumption favors the validity of a Comptroller argues, the Howard County tax statute, it cannot be stricken down as is directed at income earned by residents of void, unless it plainly contravenes a Howard County, not interstate provision of the Constitution. commerce. And while, as the Majority Because of this presumption, a heavy burden notes, the dormant Commerce Clause “is not is on the Wynnes to prove that this Court limited to circumstances where physical should not enforce Maryland law as it is goods enter the stream of commerce[,]” the written. other cases the Majority relies on all involve situations where, unlike the present case, the The Majority states that before this Court law was facially discriminatory. The can decide whether the dormant Commerce Majority looks to Camps Clause has been violated, we must “assess Newfound/Owatonna v. Town of Harrison, first whether the dormant Commerce Clause Edwards v. California, Boston Stock is implicated by the county tax....” Contrary Exchange v. State Tax Comm'n, and Fulton to the Majority's conclusion, however, it Corp. v. Faulkner to conclude that the appears that the Wynnes have failed to meet dormant Commerce Clause is implicated. In their burden of showing that the dormant all four of those cases, the challenged tax

Commerce Clause is implicated. law facially discriminated against interstate States have the power to impose taxes that commerce by either first distinguishing may result in some overlap in taxation of between organizations and businesses that income. As the Majority notes, “[T]he were involved in interstate business and dormant Commerce Clause will not affect those organizations and businesses that were the application of a tax unless there is actual only involved with intrastate business, and or perspective competition between entities then imposing a disadvantage upon those in an identifiable market and state action involved in interstate transactions, or, in the that either expressly discriminates against or case of Edwards, placing a restriction upon places an undue burden on interstate people moving in interstate commerce itself. commerce. This impact must be more than In Camps Newfound/Owatonna, the incidental.” In the present case, the Wynnes challenged Maine tax law granted a general have failed to prove that requiring them to exemption from real estate and personal pay a county tax without a credit either property taxes for charities incorporated in expressly discriminates against interstate Maine, but limited that exemption for commerce or places more than an incidental

299 organizations that mostly served non-Maine between income earned in intrastate residents. The law, thereby, distinguished commerce and income earned in interstate between groups that served people traveling commerce pursuant to these two laws is that in interstate commerce and those that only a benefit is bestowed upon interstate served Maine residents and explicitly commerce through the credit that is applied benefitted the latter. In Edwards, the to state taxes. This can hardly be interpreted challenged law directly implicated interstate as discriminating against interstate commerce and travel by prohibiting the commerce on the face of the law. transportation of indigent persons across The fact that Maryland's tax scheme is not state lines. In Boston Stock Exchange, the facially discriminatory is critical to the challenged New York tax law distinguished dormant Commerce Clause analysis. As the between sales of securities made within New Majority notes, “[f]acially discriminatory York and those made outside New York, state taxes are subject to the strictest and then imposed a lower tax rate and a cap scrutiny, and the ‘burden of justification is on taxes for in-state sales and a higher tax so heavy that “facial discrimination by itself rate and no cap on taxes for out-of-state may be a fatal defect.” ’ ” In other words, sales. Finally, in Fulton Corp., North when a court is examining a law that, on its Carolina imposed a tax on investments in face, draws a distinction between interstate corporations but allowed stockholders to and intrastate commerce and imposes a reduce their tax liability based on the disadvantage to the former, the burden of business the corporation did in North proving that the law expressly discriminates Carolina. In Fulton Corp., the United States against interstate commerce and that the Supreme Court noted that the tax facially dormant Commerce Clause is implicated is discriminated against interstate commerce, met. In this case, there is no facial and North Carolina “practically concede[d] discrimination against interstate commerce, as much.” and thus, the burden of proving that the In the present case, nothing on the face of dormant Commerce Clause is implicated the Maryland tax laws imposing a county requires a higher level of proof. tax, TG § 10–103, or the Maryland tax law As noted above, the Wynnes have the limiting credits for taxes paid in other states burden of proving that interstate commerce to state taxes, TG § 10–703, discriminates is implicated. The Wynnes, however, fail to against interstate commerce. TG § 10– meet this burden with the arguments they 103 imposes a county tax on all residents present. In arguing that the dormant with no distinction drawn based upon the Commerce Clause is implicated, the Wynnes source of the income. And, TG § 10–703, on primarily rely on two lines of arguments, its face, provides a benefit to interstate both of which are inapplicable to the present commerce by applying a credit to reduce the case. amount of Maryland state taxes paid by residents who earned income in interstate First, the Wynnes rely on our decision commerce. The only distinction drawn in Frey where we concluded that the

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“Special Nonresident Tax,” or SNRT, the dormant Commerce Clause. Maryland's implicated the dormant Commerce Clause. tax scheme, which is not facially The SNRT is applied to nonresidents doing discriminatory, however, does not business in Maryland. On its face, the SNRT necessarily implicate the dormant singles out income from interstate Commerce Clause. Therefore, like Camps commerce and applies a tax on that income. Newfound/Owatonna and Fulton Corp., the It is thus a “facially discriminatory state tax[ conclusion that the law ],” and subject to “the strictest scrutiny[.]” in Chapman implicated the dormant The county tax, on the other hand, draws no Commerce Clause is inapplicable to the distinction between income earned in present case. interstate and intrastate commerce and is not In the absence of facial or express facially discriminatory. Therefore, unlike the discrimination, an undue burden on SNRT, the county tax does not expressly interstate commerce must be shown. discriminate against interstate commerce In Amerada Hess Corp. v. Dir., Div. of and our conclusion in Frey that the SNRT Taxation, New Jersey, the Supreme Court, in implicated the dormant Commerce Clause is considering New Jersey's denial of a state inapplicable to the present case. tax deduction for federal windfall profit tax Second, the Wynnes rely on Camps payments, observed that “in the absence of Newfound/Owatonna, Fulton Corp., and a discriminatory intent or a statute directed case from the Minnesota Supreme specifically at economic activity that occurs Court, Chapman v. Comm'r of Revenue. As only in a particular location ... a deduction noted above, Camps denial does not unduly burden interstate Newfound/Owatonna and Fulton Corp. commerce just because the deduction denied address facially discriminatory laws. relates to an economic activity performed Likewise, Chapman addresses a facially outside the taxing State.” The Wynnes, in discriminatory law. The law in question failing to prove discriminatory intent or allowed Minnesota taxpayers to take a tax unacceptable statutory geographical deduction for contributions to charities specificity, have demonstrated neither an “located in and carrying on substantially all undue burden on interstate commerce nor an of its activities within [Minnesota],” but did implication of the dormant Commerce not allow a tax deduction for contributions Clause. to non-Minnesota charities. The Minnesota The Blanton decision conclusively Supreme Court stated that “[o]n its face, the established that Maryland law applies TG § statute treats contributions to in-state 10–703's tax credit only to state taxes, not charitable organizations differently from county taxes. The Wynnes asked this Court contributions to out-of-state charitable to conclude that settled Maryland law is organizations,” and concluded that it was unconstitutional under the dormant “facially discriminatory.” As noted above, a Commerce Clause. The presumption has law that facially discriminates against always been that Maryland law is interstate commerce necessarily implicates

301 constitutional, and the Wynnes, as through treatment to S corporation income, challengers of the Maryland tax law, have but rather taxes the income of such a failed to overcome that presumption by corporation in the same way that it taxes the proving that Maryland's tax scheme income of a C corporation. The parties did expressly discriminates against or unduly not brief, and we did not consider, the ways burdens interstate commerce such that the in which other states may treat S corporation dormant Commerce Clause is implicated. income other than as pass-through personal The Wynnes may believe that it is bad income of the corporation's shareholders. policy to require them to pay the Howard Our opinion does not foreclose different County tax without a tax credit; however, treatment in Maryland of income taxes paid they have failed to prove that it is in in other states that are not based on pass violation of the dormant Commerce Clause. through personal income. Accordingly, I respectfully dissent. (2) A state may avoid discrimination against Judge BATTAGLIA joins in the views interstate commerce by providing a tax expressed herein. credit, or some other method of apportionment, to avoid discriminating Opinion on Motion for Reconsideration against interstate commerce in violation of by McDONALD, J. the dormant Commerce Clause. The The Comptroller has filed a Motion for Comptroller interprets a footnote in our Reconsideration and, Alternatively, a earlier opinion to hold that a state must Motion for Stay of Enforcement of the provide a tax credit. While the footnote Judgment. The Wynnes opposed that might have been worded more elegantly, it motion. The parties filed memoranda of law referred primarily to the method used by the and other materials in support of their Legislature in the Maryland income tax; we respective positions. did not mean to preclude other methods that might be utilized in other contexts. It appears appropriate to clarify two points raised in the papers submitted by the parties: The Motion for Reconsideration is DENIED; however, we shall STAY the (1) The Comptroller raised the question of effective date of the mandate pending the whether he could deny application of a disposition of a timely petition for certiorari credit to the Wynnes for income taxes paid filed by the Comptroller with the United by an S corporation, such as Maxim, in States Supreme Court. another state that does not accord pass-

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“Supreme Court Agrees to Hear Landmark Case on Whether States May Tax Income Earned in Other States” Forbes Kelly Phillips Erb May 28, 2014

The Supreme Court had a busy day on of its residents — wherever earned — by Tuesday. When the dust settled, however, it mandating a credit for taxes paid on had only granted one new case – but it was a income earned in other states? big one. The nation’s highest Procedurally, the question found its way to court granted certiorari to Comptroller v. the Supreme Court after the Court of Wynne, setting the stage for a fight that Appeals of Maryland “reached the could rewrite tax laws in states across the unprecedented conclusion” that a state is in country. violation of the Commerce Clause in the As noted before, lawyers and judges like to U.S. Constitution if it collects income taxes use Latin. Granting certiorari (or “granting from its residents when the income was cert” for the really cool hipster lawyers) earned from sources in another state and is means that the Supreme Court will hear the subject to tax by the other state. matter. In this case, a married couple, the Wynnes, Some cases have what’s called “original reported taxable net income of jurisdiction” in the Supreme Court; those approximately $2.7 million. More than half cases, which are defined by statute (28 of that amount represented a share of U.S.C. § 1251) go straight to the Supreme earnings in an S corporation with operations Court. The typical case associated with in several states. The Wynnes claimed a original jurisdiction would be a dispute credit on their Maryland tax returns for taxes between the states. Most cases, however, paid to 39 other states but not for any county don’t go that route. To be heard at the or local government taxes. The State of Supreme Court level without having original Maryland denied the credits and issued a jurisdiction requires the losing party at the notice of deficiency and the Wynnes appellate level to file a petition seeking a appealed. At a hearing, the assessment was review of the case. If the Supreme Court affirmed. grants the petition and decides to hear the Eventually, the Wynnes amended their matter, it’s called a writ of certiorari. And petition to claim that the tax credit statute that’s what happened here. was in violation of the Commerce Clause of The question presented in the Petition for the United State Constitution. That claim Certiorari in Wynne is: was rejected. At appeal, the Wynnes argued that the state of Maryland was Does the United States Constitution constitutionally required to extend the credit prohibit a state from taxing all the income for taxes paid to other states to the county as

303 well as the state, raising the question of not.” The result, if the Wynne decision whether a state had the unconditional right holds, according to the state is that “any to tax all income based on residency. The jurisdiction taxing its residents’ entire Circuit Court agreed with the Wynnes. income will face needless uncertainty about the viability of its tax system and its On appeal by the state, the Court of Appeals potential exposure to onerous refund agreed with the Circuit Court. The Court claims.” wrote that, based on its belief that the Constitution prohibits “double taxation” of In other words, an affirmation could cost income earned in interstate commerce, a local and state governments millions of state may not tax all the income of its dollars. residents, wherever earned. The loss shouldn’t matter, according to That decision, it was argued by the state, Dominic Perella, a lawyer with Hogan conflicted with a number of “fundamental Lovells who is representing the Wynnes. He precepts” involving the “well-established said, about the case: “Maryland’s approach principle” that “a jurisdiction… may tax all is unfair to people who make money in more the income of its residents, even income than one state.” earned outside the taxing jurisdiction.” The question is big enough for the feds to However, in Wynne, the Court of Appeals weigh in. The Obama administration issued concluded that the Commerce Clause an amicus curiae brief in April of this year, imposes restrictions on a state’s power to tax supporting the petitioner’s position. Amicus its own residents: in other words, Maryland curiae is Latin (yes, more Latin) for “friend was not allowed to tax all of its residents’ of the court” and describes an argument income if the resident paid taxes on that made by someone who is not a specific party income to another State. to the proceedings but believes that the The state argued that this finding was court’s decision may affect its interest. inconsistent with prior law and was, in a Under the Rules of the Supreme Court of the word, wrong. The consequences, according U.S., “An amicus curiae brief that brings to to the state’s petition, could be the the attention of the Court relevant matter not “significant loss of revenue that will amount already brought to its attention by the parties to tens of millions of dollars annually.” may be of considerable help to the Court. An amicus curiae brief that does not serve And that’s why you should care. Not only this purpose burdens the Court, and its filing does this decision have consequences for is not favored.” Maryland but it “has potential repercussions beyond Maryland,” according to the The feds argued in their brief that “though petitioner. The reply brief for the petitioner States often choose to grant tax credits to specifically notes that “while most states their residents for income taxes paid in other provide full credits for income taxes paid to States, nothing in the Commerce Clause other states, many local jurisdictions do compels a State to offer such credits or

304 otherwise defer to other States in the believes that the petitioner is correct: the taxation of its own residents’ income.” regular court rules apply. There will be Further, “[t]he decision… may lead to arguments and more (!) briefs before the challenges to similar tax schemes in other Court reaches a decision. jurisdictions; and is inconsistent with These matters do not move quickly: you statements made by the highest courts in shouldn’t expect oral arguments on this other States.” matter until fall of this year. But expect The U.S. Supreme Court clearly agreed that plenty of speculation – and interest – before this was a matter that needed to be resolved. then. Granting cert doesn’t mean that the court

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“Supreme Court to Hear Maryland Double Taxation Case” Tax Foundation Joseph Henchman May 27, 2014

The U.S. Supreme Court has announced that state. Otherwise, states would be able to it will hear the appeal in Comptroller v. subject the same income to double-, triple-, Wynne, on whether states must provide a quadruple-, etc. levels of taxation. The net credit against its own taxes for taxes a result of this would be to strongly resident pays to another state. Maryland discourage interstate investment and allows such a credit against its state income commerce of the type the Wynnes tax but not against its local county and city undertook, since only by investing within income taxes. Maryland would income not be subject to gargantuan levels of taxation. The taxpayers in the case, Mr. and Mrs. Wynne, owned 2.4 percent of a company Analyzing whether Maryland's tax is doing business in 39 states. Maryland constitutional is a two-step process. First, residents, they paid $123,434 in income tax one must ask whether the state has the to Maryland, after applying a credit of authority to impose the tax on income. This $84,550 for taxes paid to other states on is fairly well-settled, with the statute income earned outside Maryland's borders. authorizing the tax and numerous court Maryland disallowed the credit to the extent precedents allowing states to tax their that it offset the county income tax. The Tax residents however they wish, with any Court upheld the assessment, a Maryland credits or deductions a matter of legislative circuit court reversed and sided with the grace. Second, though, one must ask Wynnes, and Maryland's highest court (the whether the tax discriminates against Court of Appeals) agreed, ruling the tax interstate commerce. This has been unconstitutional without a credit. The state sometimes described as an "internal has now appealed to the Supreme Court. consistency test" -- if every state had such a tax, would the result be discrimination It's hard to think of a more blatant example against interstate commerce? The answer of impermissible state taxation of interstate here is unequivocally yes. The state (and the commerce than Maryland's tax here. U.S. Solicitor General, who was asked for Maryland certainly has the authority to tax his views) performed step one of this the Wynnes -- they are Maryland residents -- analysis but did not do step two. Their but gets into constitutional trouble when it arguments would get an F grade in any state asserts the power to tax income earned taxation class as incomplete. outside Maryland. Until this case, it has generally been undisputed by scholars that 17 states have local income taxes, and while such a tax is only permissible if the state most provide a credit for taxes paid to credits the taxpayer for taxes paid to another another state, they probably do so because

306 they think they have to, constitutionally. An agreed to hear it, the Court should take a adverse ruling here will quickly result in strong stand against states using their tax taxpayers being taxed on the state income systems to discriminate against interstate over and over by any state with any tax commerce. We will make such an argument authority over them. Although this case in our amicus brief. (Both the Maryland relates to local income taxes, there is no Attorney General and Wynne cited our 2011 logical reason why the rule should be local income tax study in their briefs to the different for state income taxes. Court.) It would have been best if the Court declined The case is No. 13-485, Comptroller of the to hear the case and let the Maryland Court Treasury of Maryland v. Brian Wynne, et ux. of Appeals ruling stand. As they have now

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“The Resident Income Tax Credit: Did Maryland Misapply the Commerce Clause?” TaxAnalysts Robert J. Firestone June 2, 2014

I. Introduction commerce. The dormant commerce clause, therefore, shouldn't be construed so broadly If a resident individual of State A seeks as to nullify the privileges and immunities employment in State B, or owns income- clause, an express constitutional provision producing property or opens a business in long construed to protect nonresident State B, does that individual's status as individuals. nonresident, standing alone, constitute interstate commerce subjecting State B's Also, do the two constitutional provisions nonresident income tax to the strictest really cover the same subjects? Does the scrutiny under the U.S. Constitution's scope of the dormant commerce clause, dormant commerce clause? Or does the which protects an interstate business in its privileges and immunities clause of Article choice of where to locate its business

IV apply, with its heightened "substantial operations, also extend to the personal equality" level of scrutiny? choices of nonresident individuals who choose to work, or otherwise earn their It is clear that both constitutional provisions income, in a state different from where they cannot apply in that instance. If the mere live? status of an individual as a nonresident It is well established that the dormant constitutes interstate commerce and invokes commerce clause protects from the stricter protections of the dormant discrimination interstate business commerce clause, then the privileges and transactions and business location decisions, immunities clause would be eclipsed and that is, "a State may not tax a transaction or effectively nullified in every instance. The incident more heavily when it crosses state substantial equality standard of review lines than when it occurs entirely within the would never apply when the issue involves State." By contrast, an individual's choice of discrimination against nonresident where to live is a personal decision. Federal individuals. income tax rules, for instance, treat the cost Under basic principles of legal construction, of commuting from home to work as a express language generally controls over personal and not a deductible business language that is implied. The dormant expense. commerce clause is not an express Thus, while the decision to locate constitutional provision, but has been manufacturing operations in one state implied as a means of delineating the federal instead of another is protected by the and state powers to regulate interstate dormant commerce clause, the privileges

308 and immunities clause of Article IV protects with equally defensible claims to that nonresident individuals from discrimination, income. that is, the personal choice to live in one A state's taxing jurisdiction over its state and work in another. residents, based on the special privileges of In Maryland v. Wynne, the Maryland Court citizenship, is over the person, and extends of Appeals held that when an individual, a to all of the resident's income, regardless of resident of Maryland, earns income in other where it is earned. A state's taxing states, the mere status of being a nonresident jurisdiction over nonresidents is narrower -- in those other states, within the jurisdiction limited to the nonresidents' income- of those other states' nonresident income tax producing activities and property within the laws, constitutes interstate commerce, state. A resident who earns income in implicating the dormant commerce clause. another state that imposes a nonresident Although Wynne concerned the taxpayer's income tax will always be taxed twice, by investment in an S corporation, its reasoning the state of residence and by the state in extends to all income within the scope of a which the income was earned. Neither state's nonresident income tax, including wages jurisdictional claim is superior to the other, and salaries earned in the course of nor would favoring one state over the other commuting from home to work. be fair. For example, requiring the state of residence to credit taxes paid to other states On May 27 the U.S. Supreme Court granted would forfeit the state of residence's just the state's petition for writ of certiorari. If claim to that revenue, and would treat the the Court upholds Wynne, it will essentially state of residence unfairly. nullify the privileges and immunities clause of Article IV. Every discrimination claim The due process clause of the 14th based on nonresidency will be easily Amendment does not bar the double taxation restated as a dormant commerce clause of income. In sum, the dormant commerce claim. States will have far less latitude in clause does not apply here because (1) it structuring their personal income tax laws, would be an unprecedented expansion of its which will no longer be subject to the scope, from protecting interstate business substantial equality standard, but to the transactions and business location decisions, strictest scrutiny. The federal-state balance to protecting the personal choices of will significantly change. individuals who earn income in a state different from where they live, and (2) it Although the issue in Wynne concerns tax would completely eclipse the privileges and credits, it has far broader implications. Most immunities clause of Article IV, rendering it states grant their residents personal income a nullity, and change the federal-state tax credits for other states' nonresident balance in favor of lessening the states' income taxes. They do so for political power to tax nonresidents. reasons, so their voting residents will not see their incomes and personal wealth II. The Facts of Wynne diminished by two separate tax jurisdictions

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The Wynnes were 2.4 percent shareholders The Wynnes conceded Maryland's in a corporation, Maxim Healthcare Services jurisdiction, under the due process clause, to Inc., which was engaged in a multistate tax all of their income, regardless of where it healthcare business. Maxim made an was earned. The sole issue before the election under the Internal Revenue Code to Maryland Appeals Court was whether be taxed as an S corporation. As a result, Maryland's failure to grant a tax credit Maxim paid no federal income tax, and its against its county income tax for taxes paid income was passed through to its to other states violated the dormant shareholders and subject to federal income commerce clause. tax at the shareholder level. As an initial matter, the court considered For the 2006 tax year, Maxim filed state whether the dormant commerce clause corporate income tax returns in 39 states, applies to individuals who maintain their and it allocated to each shareholder a pro personal residences in Maryland, but earn rata share of the taxes paid to each of those income in other states that impose states. The Wynnes claimed their pro rata nonresident income taxes. The comptroller share of Maxim's corporate income taxes argued that the Wynnes were subject to the paid to other states as a credit against their Maryland income tax on individuals because Maryland resident state and county income of their status as Maryland residents, and not taxes. The Maryland comptroller denied the because of their activities in Maryland or in portion of the Wynnes' credit that applied to other states. the resident county income tax. The The court rejected that argument, holding resulting tax deficiency was affirmed by the that the Wynnes were subject to the Hearings and Appeals Bureau of the Maryland income tax both because they Comptroller's Office. were Maryland residents and "because they The Wynnes appealed to the Maryland Tax have income derived from intrastate and Court, where they argued that the failure to interstate activities." Because of their grant a credit for income taxes paid to other interstate activities, "other states may also states against the county income tax tax some of that income because it derives discriminated against interstate commerce, from activities in those states." However, it in violation of the dormant commerce is well established that a state's power to tax clause. The tax court rejected that argument persons residing within the state is based and affirmed the assessment. The Wynnes solely on their status as citizens or residents appealed to the circuit court, which reversed and is without regard to their activities or to the tax court. The case was eventually the source of their income. appealed to the Maryland Court of Appeals. The Maryland court thus mischaracterized III. The Maryland Appeals Court the Maryland resident income tax on Decision individuals as a tax on the individual's activities. To the contrary, Maryland's taxing power over persons residing within its

310 jurisdiction is based only on their residency necessarily pay more in state and local taxes status. When Maryland taxes its residents, it than the second taxpayer. Not every state is taxing them in their person, not their imposes a personal income tax. Thus, if the activities, whether conducted out-of-state or first taxpayer earns substantial income in a otherwise. If not for the Wynnes' status as state that does not impose a nonresident residents, Maryland would be powerless to income tax, then it will pay the same amount tax them on their out-of-state activities, of state and local taxes as the taxpayer who which would be outside of Maryland's earns income entirely from Maryland taxing jurisdiction. To the extent that the activities. Maryland court's reasoning depended on its While the factual basis for that comparison characterization of the resident income tax is speculative, it raises a greater concern -- as a tax on interstate activities, its the comparison between the two conclusion that the resident tax implicates hypothetical taxpayers residing in Maryland interstate commerce was erroneous. depends entirely on another state's tax law, If Maryland isn't taxing activities in other which is beyond the control of the Maryland states, but merely the persons within its General Assembly and in which Maryland power, it is difficult to see how the resident has no sovereign interest. The U.S. Supreme income tax implicates interstate commerce. Court has made it clear that the In concluding that it does, the Maryland constitutionality of one state's tax laws can court compared a Maryland resident "who never depend on the tax laws in other earns substantial income from out-of-state states. If Maryland has full jurisdiction to activities" with "an otherwise identical tax its individual residents in their person on taxpayer" who earns all of his income in all of their income, regardless of where it Maryland. The court explained that "the first was earned, does Maryland have to forfeit taxpayer may pay more state and local that power to another state having an equally income taxes than the second. That creates a founded jurisdiction over their activities, if disincentive for the taxpayer -- or the S that state imposes a nonresident income tax? Corporation of which the taxpayer is an Under the court's reasoning, the state of owner -- to conduct income-generating residency and the source state would not be activities in other states with income taxes." treated as coequal sovereigns, elevating the power of the source state to the detriment of The Maryland Court of Appeals makes the state of residency. Moreover, the tax several assumptions here that are speculative laws of the state of residency would be at best and that raise several concerns. In dependent on the tax laws of the source comparing a Maryland resident individual state. The state of residency would forfeit its who earns substantial income from out of taxing power if that other state's legislature state with an identical taxpayer who earns enacts a nonresident income tax. income entirely from Maryland activities, even the court realizes, by its use of the word "may," that the first taxpayer will not

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IV. The Maryland Resident Income Tax In order to conclude that a Maryland Credit Doesn't Affect Interstate resident pays a higher tax if it earns income Commerce in another state, the Maryland court had to look past the Maryland resident income tax In concluding that Maryland's resident to the nonresident income tax imposed by income tax creates a disincentive for the another jurisdiction. Again, the taxpayer to conduct income-generating constitutionality of Maryland's tax laws can't activities in other states with income taxes, depend on the tax laws of other states. the Maryland court relied on Fulton Corp. v. Faulkner. Fulton involved a credit under Unlike the intangibles tax in Fulton, the North Carolina's intangibles property tax Maryland resident income tax doesn't create that decreased as the stock issuer did a a disincentive for the taxpayer to conduct greater proportion of its business outside the income-generating activities in other states. state. The Fulton Court held that "the The result in Fulton didn't depend on the tax intangibles tax facially discriminates against laws in effect in other states, but only on the interstate commerce" because a "regime that discriminatory effect of North Carolina's taxes stock only to the degree that its issuing intangibles tax standing alone. Standing corporation participates in interstate alone, Maryland's resident income tax commerce favors domestic corporations doesn't affect interstate commerce. The over their foreign competitors in raising court's contrary conclusion was based on a capital among North Carolina residents and reading of the dormant commerce clause tends, at least, to discourage domestic long rejected by the U.S. Supreme Court. corporations from plying their trades in V. The Maryland Resident Income Tax interstate commerce." Doesn't Affect Interstate Travel The tax credit in Fulton operated as a classic A Maryland resident who travels to another tariff, benefiting corporate stock issuers that state to earn income pays the same amount do most of their business within North of Maryland resident income tax as a Carolina by burdening issuers that do most Maryland resident who earns all of his of their business outside of the state. The income in Maryland. Notwithstanding the Maryland court erred by comparing Maryland court's contrary conclusion, Maryland's individual income tax on Maryland's resident income tax, standing residents to the intangibles tax in Fulton. alone, doesn't implicate "the movement of Unlike the intangibles tax credit, which people across state borders for economic decreased as the issuer corporation purposes." expanded its business in interstate commerce, the resident income tax remains The court of appeals appears to have the same, regardless of whether a Maryland read Camps Newfound v. Town of Harrison resident earns $100,000 of income in as a case that applies the dormant commerce Maryland or the same amount of income in clause to individuals who travel or commute another state. across state lines to earn income in another

312 state.Camps Newfound, however, wasn't a Camps Newfound, however, does not hold right of travel case but concerned an export that Maine's property tax exemption tariff on services. In Camps Newfound, interfered with the campers' right to freely Maine's real property tax exemption for enter and leave the state, burdening the charitable organizations was limited to campers' right of travel. That wasn't the charities that principally served Maine issue before the Court. The Court concluded residents. The taxpayer, a Christian Science that Maine's property tax exemption was summer camp that aggressively marketed its functionally equivalent to an "export tariff" picturesque Maine facilities around the and that its practical effect was to country, generated 95 percent of its business discriminate against the interstate sale of from campers residing in other states. camp services to nonresident consumers. Because the camp mainly served The Court's reference to the interstate travel nonresidents, Maine denied the camp's of the campers was one of several facts property tax exemption. identified by the Court to underscore the interstate nature of the transactions burdened The U.S. Supreme Court invalidated Maine's by the exemption. property tax exemption on the grounds that "it functionally serves as an export tariff that The Maryland court's reading of Camps targets out-of-state consumers by taxing the Newfound as a right of travel case conflicts businesses that principally serve them." The with U.S. Supreme Court precedent holding camp had aggressively reached out to that the right isn't protected by the dormant consumers in other states, from which it commerce clause. In Bray v. Alexandria received practically all of its campers; the Women's Health Clinic, the Court held that discriminatory exemption had the practical the individual right of interstate travel "does effect of an export tariff on services, sharing not derive from the negative commerce the same fate as an export tariff on goods. clause, or else it could be eliminated by Congress." In concluding that Camps Newfound is a right of travel case, the Maryland Court of Saenz v. Roe divided the right of travel into Appeals apparently focused on a single three components: (1) the right to enter and sentence responding to an argument made leave the state; (2) the right of a citizen of by the town of Harrison that the property tax one state who travels to another state exemption does not affect interstate intending to return home, to enjoy the same commerce. Referring to the nonresident "Privileges and Immunities of the Citizens campers who attended the camp, the U.S. of the several States" that she visits; and (3) Supreme Court observed that "[t]he when the traveler doesn't intend to return attendance of these campers necessarily home, the right to be treated like other generates the transportation of persons citizens of that state. across state lines that has long been It is the second component of the right of recognized as a form of 'commerce.'" travel that is at issue in Wynne. Saenz stated that right isn't subject to the strict scrutiny of

313 the dormant commerce clause, but to the described in due process terms. In formulary lesser substantial equality standard under the apportionment cases, the commerce clause privileges and immunities clause. generally plays a secondary role to due process, in the sense that a formula that The Maryland court, therefore, was incorrect taxes extraterritorial values and thus violates in holding that the fact that an individual due process, also results in multiple taxation resident of one state earns income in another violating the commerce clause. state that imposes a nonresident income tax implicates the dormant commerce clause. In limited circumstances, a corporation's Rather, the privileges and immunities clause state of commercial domicile may tax the protects from discrimination nonresident corporation on 100 percent of its income, individuals who seek employment or but only if that income was earned in otherwise seek to earn income in another activities unrelated to its unitary state. The court's holding to the contrary is business. Otherwise, the income of a an unwarranted expansion of the dormant multistate corporation derived from a commerce clause beyond its present scope, unitary business must be apportioned "on which changes the federal-state balance the basis of a formula taking into account under our system of federalism to the objective measures of the corporation's detriment of the states, subjecting state activities within and without the individual income tax laws to the strictest jurisdiction." scrutiny, while lessening the states' authority It might be tempting to extend the limitation to tax nonresident individuals. on a state's power to tax corporate income to VI. Distinguishing Commercial Domicile the personal income tax, thus prohibiting From Individual Residency states from taxing the income of individuals who reside there but earn their living in Under the unitary business principle, a state another state. Proponents of this approach may not tax a corporation engaged in a believe it is consistent with the dormant multistate business on 100 percent of the commerce clause. This reading of the clause corporation's income. The requirement that a requires that when two states have state must apportion the income of a jurisdiction to tax an individual, the state of corporation derived from business residence over the person and another state conducted in other states is grounded in both over the individual's activities, the state the due process and commerce clauses of the having jurisdiction over the activities should U.S. Constitution. take precedent. Although the commerce clause plays a role The rationale for requiring the state where in apportionment, limiting multiple taxation an individual resides to yield its taxing by requiring a state's apportionment formula power to the state where the individual earns to be internally consistent, it is plain that the his income appears to be based on three constitutional restrictions on assumptions: (1) that there is no reason to apportionability are almost entirely treat the taxation of individuals based on

314 personal residence differently from the they receive as citizens and residents of their taxation of corporations based on home state. commercial domicile; (2) that individuals As explained above, extending the dormant who work or otherwise earn income in other commerce clause to the individual income states acquire the equivalent of a business tax would completely eclipse the privileges situs there, which should prevail in any and immunities clause of Article IV and conflict with the individual's domicile; and render it a nullity. That issue does not arise (3) although the due process clause doesn't in the area of corporate income taxation prohibit the double taxation of income, the because the privileges and immunities requirement that a multistate corporation clause does not apply to corporations, which apportion its income to other states is are not citizens. dictated by the commerce clause. I will consider each in turn. The legal fiction that a corporation is a person capable of having a domicile within a The notion that a corporation is a person state derives from the property tax. Under capable of acquiring a domicile within a the doctrine mobilia sequuntur personam, particular state is a legal fiction that is given intangible property is assigned a situs at the relatively little weight under the corporate place of the owner's domicile under the income tax, generally yielding to the state in assumption that the owner controls the which the income is earned under the property from that location. Nevertheless, unitary business principle. Consistent with once the intangible acquires a business situs that legal fiction is the reality that a in another state, that other state also has corporation is, in every respect, a business jurisdiction to tax the intangible. Invoking and no aspect of its legal existence can be the commerce clause, it is argued that the deemed personal. state where the property acquired a business Individuals, on the other hand, are real situs has the superior claim. persons. When a state exercises its That may be, but the reasoning doesn't jurisdiction to tax individuals who maintain extend to the personal income taxation of their homes within the state, send their individual residents who commute to work, children to schools, and receive the benefits or otherwise earn income, in other states. A of "police and fire protection . . . and the state's power to tax an individual citizen or advantages of living in a civilized resident in his person isn't a legal fiction but society," the state justifiably calls on those one of three jurisdictional bases for a state to individuals in their strictly personal aspect to exert its taxing power -- over the persons, share the cost of providing those services. If property, or activities within its borders. those individuals happen to commute to When an individual maintains a home in one work in other states, which also have a just state and works in another, the home state claim to tax a portion of their income, that retains its power to demand that the should not relieve those individuals of their individual contribute to the cost of obligation to pay for all of the many services

315 government, regardless of the source of his contribute their fair share to the cost of income. schools, police and fire protection, sanitation, and other services they benefit As explained above, the requirement that a from as citizens and residents of their home multistate corporation apportion its income state. is dictated primarily by the due process clause. That is evident by the "minimal VII. Conclusion connection" and "rational relationship" Wynne represents a significant and language, which is exclusively due process unwarranted expansion of the dormant language that appears in every unitary commerce clause. Currently, it protects from business case. The only additional discrimination interstate business limitation, derived exclusively from the transactions and business location commerce clause, is the requirement that an decisions. Wynne extends this protection to apportionment formula be internally new territory previously the domain of the consistent to avoid multiple taxation. privileges and immunities clause of Article The commerce clause does not restrict state IV -- protecting the personal choices of apportionment formulas, except to require individuals who earn income in a state that they must be internally consistent. The different from where they reside. If the main restriction on state apportionment dormant commerce clause is extended to the formulas derives from due process, which personal income taxation of resident requires that the income apportioned to a individuals, it would completely eclipse the state must be rationally related to in-state privileges and immunities clause of Article activity. When two states have equal IV, render it a nullity, and change the jurisdiction, one over the individual, the federal-state balance by reducing the states' other over the individual's activity, the power to tax nonresidents. It would also commerce clause does not pose an deprive the home state of its ability to call additional barrier to the home state's on its residents to pay their fair share of the jurisdiction over its individual residents. cost of government and for the many Any other rule would deprive the home state services they enjoy as state residents. of its ability to call on resident individuals to

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Department of Transportation v. Association of American Railroads 13-1080

Ruling Below: Association of American Railroads v. United States Department of Transportation, 721 F.3d 666 (D.C. Cir. 2013), cert granted, 134 S.Ct. 285 (2014).

Railroad association sued the Department of Transportation and others, claiming that a section of the Passenger Railroad Investment and Improvement Act of 2008 (PRIIA) requiring the Federal Railroad Administration (FRA) and a federally chartered corporation providing intercity and commuter train services to “jointly” develop standards to evaluate the performance of the corporation's intercity passenger trains was unconstitutional. The United States District Court for the District of Columbia, James E. Boasberg, J., granted summary judgment for government. Association appealed.

Question Presented: Whether Section 207 of the Passenger Rail Investment and Improvement Act of 2008, which requires the Federal Railroad Administration (FRA) and Amtrak to “jointly . . . develop” the metrics and standards for Amtrak’s performance that will be used in part to determine whether the Surface Transportation Board (STB) will investigate a freight railroad for failing to provide the preference for Amtrak’s passenger trains that is required by federal law, and provides for the STB to appoint an arbitrator if the FRA and Amtrak cannot agree on the metrics and standards within 180 days, effects an unconstitutional delegation of legislative power to a private entity.

ASSOCIATION OF AMERICAN RAILROADS, Appellant v. UNITED STATES DEPARTMENT OF TRANSPORTATION, et al., Appellees

United States Court of Appeals, District of Columbia Circuit Decided on July 2, 2013

[Excerpt, some footnotes and citations omitted]

BROWN, Circuit Judge: Constitutional? The Department of Transportation seems to think so. Imagine a scenario in which Congress has given to General Motors the power to Next consider a parallel statutory scheme— coauthor, alongside the Department of the one at issue in this case. This time, Transportation, regulations that will govern instead of General Motors, it is Amtrak all automobile manufacturers. And, if the (officially, the “National Railroad Passenger two should happen to disagree on what form Corporation”) wielding joint regulatory those regulations will take, then neither will power with a government agency. This new have the ultimate say. Instead, an stipulation further complicates the issue. unspecified arbitrator will make the call. Unlike General Motors, Amtrak is a curious

317 entity that occupies the twilight between the Amtrak, which would “employ[ ] innovative public and private sectors. And the operating and marketing concepts so as to regulations it codevelops govern not the fully develop the potential of modern rail automotive industry, but the priority freight service in meeting the Nation's intercity railroads must give Amtrak's trains over passenger transportation requirements.” The their own. Whether the Constitution permits act also made railroad companies Congress to delegate such joint regulatory languishing under the prior regime an offer authority to Amtrak is the question that they could not refuse: if these companies confronts us now. consented to certain conditions, such as permitting Amtrak to use their tracks and Section 207 of the Passenger Rail other facilities, they could shed their Investment and Improvement Act of 2008 cumbersome common carrier obligation to empowers Amtrak and the Federal Railroad offer intercity passenger service. Pursuant to Administration (FRA) to jointly develop statute, Amtrak negotiates these performance measures to enhance arrangements with individual railroads, the enforcement of the statutory priority terms of which are enshrined in Operating Amtrak's passenger rail service has over Agreements. Today, freight railroads own other trains. The Appellant in this case, the roughly 97% of the track over which Association of American Railroads (AAR), Amtrak runs its passenger service. is a trade association whose members include the largest freight railroads (known Naturally, sharing tracks can cause in the industry as “Class I” freight railroads), coordination problems, which is why some smaller freight railroads, and—as it Congress has prescribed that, absent an happens—Amtrak. Challenging the statutory emergency, Amtrak's passenger rail “has scheme as unconstitutional, AAR brought preference over freight transportation in suit on behalf of its Class I members against using a rail line, junction, or crossing.” More the four Appellees—the Department of recently, this same concern prompted Transportation, its Secretary, the FRA, and enactment of the Passenger Rail Investment its Administrator (collectively, the and Improvement Act of 2008 (“PRIIA”). “government”). We conclude § 207 At issue in this case is the PRIIA's § 207, constitutes an unlawful delegation of which directs the FRA and Amtrak to regulatory power to a private entity. “jointly ... develop new or improve existing metrics and minimum standards for I measuring the performance and service A quality of intercity passenger train To reinvigorate a national passenger rail operations, including cost recovery, on-time system that had, by mid-century, grown performance and minutes of delay, ridership, moribund and unprofitable, Congress passed on-board services, stations, facilities, the Rail Passenger Service Act of 1970. equipment, and other services.” If Amtrak Most prominently, the legislation created the and the FRA disagree about the composition passenger rail corporation now known as of these “metrics and standards,” either

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“may petition the Surface Transportation attracted criticism, with much vitriol Board to appoint an arbitrator to assist the directed at three metrics formulated to parties in resolving their disputes through measure on-time performance: “effective binding arbitration.” “To the extent speed” (the ratio of route's distance to the practicable,” Amtrak and its host rail average time required to travel it), “endpoint carriers must incorporate the metrics and on-time performance” (the portion of a standards into their Operating Agreements. route's trains that arrive on schedule), and “all-stations on-time performance” (the Though § 207 provides the means for degree to which trains arrive on time at each devising the metrics and standards, § 213 is station along the route). AAR, among the enforcement mechanism. If the “on-time others, derided these metrics as “unrealistic” performance” or “service quality” of any and worried that certain aspects would intercity passenger train proves inadequate create “an excessive administrative and under the metrics and standards for two financial burden.” The FRA responded to consecutive quarters, the STB may launch the comments, and a final version of the an investigation “to determine whether and metrics and standards took effect in May to what extent delays or failure to achieve 2010. minimum standards are due to causes that could reasonably be addressed by a rail AAR filed suit on behalf of its Class I carrier over whose tracks the intercity freight railroad members, asking the district passenger train operates or reasonably court to declare § 207 of the PRIIA addressed by Amtrak or other intercity unconstitutional and to vacate the passenger rail operators.” Similarly, if promulgated metrics and standards. The “Amtrak, an intercity passenger rail complaint asserted two challenges: that § operator, a host freight railroad over which 207 unconstitutionally delegates to Amtrak Amtrak operates, or an entity for which the authority to regulate other private Amtrak operates intercity passenger rail entities; and that empowering Amtrak to service” files a complaint, the STB “shall ” regulate its competitors violates the Fifth initiate such an investigation. Should the Amendment's Due Process Clause. The STB determine the failure to satisfy the district court rejected these arguments, metrics and standards is “attributable to a granting summary judgment to the rail carrier's failure to provide preference to government and denying it to AAR. AAR Amtrak over freight transportation as renews these constitutional claims on required,” it may award damages or other appeal. relief against the offending host rail carrier. II B AAR's argument takes the following form: Following § 207's mandate, the FRA and Delegating regulatory authority to a private Amtrak jointly drafted proposed metrics and entity is unconstitutional. Amtrak is a standards, which they submitted to public private entity. Ergo, § 207 is comment on March 13, 2009. The proposal unconstitutional. This proposed syllogism is

319 susceptible, however, to attacks on both its agency make its regulatory decisions, for validity and soundness. In other words, does “[t]he Constitution has never been regarded the conclusion actually follow from the as denying to the Congress the necessary premises? And, if it does, are both premises resources of flexibility and practicality” that true? Our discussion follows the same path. such schemes facilitate. Yet precisely how much involvement may a private entity have A in the administrative process before its We open our discussion with a principle advisory role trespasses into an upon which both sides agree: Federal unconstitutional delegation? Discerning that lawmakers cannot delegate regulatory line is the task at hand. authority to a private entity. To do so would Preliminarily, we note the Supreme Court be “legislative delegation in its most has never approved a regulatory scheme that obnoxious form.” This constitutional so drastically empowers a private entity in prohibition is the lesser-known cousin of the the way § 207 empowers Amtrak. True, § doctrine that Congress cannot delegate its 207 has a passing resemblance to the legislative function to an agency of the humbler statutory frameworks in Currin v. Executive Branch. This latter proposition Wallace and Sunshine Anthracite Coal Co. finds scarce practical application, however, v. Adkins. In Currin Congress circumscribed because “no statute can be entirely precise,” its delegations of administrative authority— meaning “some judgments, even some in that case, by requiring two thirds of judgments involving policy considerations, regulated industry members to approve an must be left to the officers executing the law agency's new regulations before they took and to the judges applying it.” All that is effect. Adkins, meanwhile, affirmed a required then to legitimate a delegation to a modest principle: Congress may formalize government agency is for Congress to the role of private parties in proposing prescribe an intelligible principle governing regulations so long as that role is merely “as the statute's enforcement. an aid” to a government agency that retains Not so, however, in the case of private the discretion to “approve [ ], disapprove[ ], entities to whom the Constitution commits or modif[y]” them. Like the private parties no executive power. Although objections to in Currin, Amtrak has an effective veto over delegations are “typically presented in the regulations developed by the FRA. And like context of a transfer of legislative authority those in Adkins, Amtrak has a role in filling from the Congress to agencies,” we have the content of regulations. But the reaffirmed that “the difficulties sparked by similarities end there. The industries such allocations are even more prevalent in in Currin did not craft the regulations, while the context of agency delegations to private Adkins involved no private check on an individuals.” Even an intelligible principle agency's regulatory authority. Even more cannot rescue a statute empowering private damningly, the agency in Adkins could parties to wield regulatory authority. Such unilaterally change regulations proposed to entities may, however, help a government it by private parties, whereas Amtrak enjoys

320 authority equal to the FRA. Should the FRA body of the standards.” Not only that, § 207 prefer an alternative to Amtrak's proposed directs “Amtrak and its host carriers” to metrics and standards, § 207 leaves it include the metrics and standards in their impotent to choose its version without Operating Agreements “[t]o the extent Amtrak's permission. No case prefigures the practicable.” The STB's involvement is no unprecedented regulatory powers delegated safe harbor from AAR's constitutional to Amtrak. challenge to § 207. The government also points out that the As far as we know, no court has invalidated metrics and standards themselves impose no a scheme like § 207's, but perhaps that is liability. Rather, they define the because no parallel exists. Unprecedented circumstances in which the STB will constitutional questions, after all, lack clear investigate whether infractions are and controlling precedent. We nevertheless attributable to a freight railroad's failure to believe Free Enterprise Fund v. Public Co. meet its preexisting statutory obligation to Accounting Oversight Board offers accord preference to Amtrak's trains. We are guidance. There the Supreme Court deemed not entirely certain what to make of this it a violation of separation of powers to argument. Taken to its logical extreme, it endow inferior officers with two layers of would preclude all preenforcement review good-cause tenure insulating them from of agency rulemaking, so it is probably removal by the President. Two principles unlikely the government is pressing so from that case are particularly resonant. To immodest a claim. If the point is merely that begin with, just because two structural the STB adds another layer of government features raise no constitutional concerns “oversight” to Amtrak's exercise of independently does not mean Congress may regulatory power, this precaution does not combine them in a single statute. Free alter the analysis. Government enforcement Enterprise Fund deemed invalid a regime power did not save the rulemaking authority blending two limitations on the President's of the private coal companies in Carter removal power that, taken separately, were Coal, nor the power of private landowners unproblematic: the establishment of in Washington ex rel. Seattle Title Trust Co. independent agencies headed by principal v. Roberge to impose a zoning restriction on officers shielded from dismissal without a neighbor's tract of land. As is often the cause, and the protection of certain inferior case in administrative law, the metrics and officers from removal by principal officers standards lend definite regulatory force to an directly accountable to the President. So otherwise broad statutory mandate. The even if the government is right that § 207 preference for Amtrak's traffic may predate merely synthesizes elements approved the PRIIA, but the metrics and standards are by Currin and Adkins, that would be no what channel its enforcement. Certainly the proof of constitutionality. FRA and Amtrak saw things that way, As for the second principle, Free Enterprise responding to one public comment by noting Fund also clarifies that novelty may, in the STB “is the primary enforcement

321 certain circumstances, signal and standards within 180 days of the unconstitutionality. That double good-cause PRIIA's enactment. Amtrak could have tenure, for example, lacked an antecedent in “petition[ed] the Surface Transportation the history of the administrative state was Board to appoint an arbitrator to assist the one reason to suspect its legality: parties in resolving their disputes through binding arbitration.” And nothing in the “Perhaps the most telling indication of statute precludes the appointment of a the severe constitutional problem with the PCAOB is the lack of historical private party as arbitrator. That means it precedent for this entity. Neither the would have been entirely possible for majority opinion nor the PCAOB nor metrics and standards to go into effect that the United States as intervenor has had not been assented to by a single located any historical analogues for this representative of the government. Though novel structure. They have not that did not in fact occur here, § 207's identified any independent agency other than the PCAOB that is appointed by arbitration provision still polluted the and removable only for cause by rulemaking process over and above the other another independent agency.” defects besetting the statute. As a formal matter, that the recipients of illicitly In defending § 207, the government delegated authority opted not to make use of revealingly cites no case—nor have we it is no antidote. It is Congress's decision to found any—embracing the position that a delegate that is unconstitutional. As a private entity may jointly exercise practical matter, the FRA's failure to reach regulatory power on equal footing with an an agreement with Amtrak would have administrative agency. This fact is not meant forfeiting regulatory power to an trivial. Section 207 is as close to the arbitrator the agency would have had no blatantly unconstitutional scheme in Carter hand in picking. Rather than ensuring Coal as we have seen. The government Amtrak would “function subordinately” to would essentially limit Carter Coal to its the FRA, this backdrop stacked the deck in facts, arguing that “[n]o more is favor of compromise. Even for government constitutionally required” than the agencies, half an apple is better than none at government's “active oversight, all. participation, and assent” in its private partner's rulemaking decisions. This We remain mindful that the Constitution proposition—one we find nowhere in the “contemplates that practice will integrate the case law—vitiates the principle that private dispersed powers into a workable parties must be limited to an advisory or government.” But a flexible Constitution subordinate role in the regulatory process. must not be so yielding as to become twisted. Unless it can be established that To make matters worse, § 207 fails to meet Amtrak is an organ of the government, even the government's ad hoc standard. therefore, § 207 is an unconstitutional Consider what would have happened if delegation of regulatory power to a private Amtrak and the FRA could not have reached party. an agreement on the content of the metrics

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B managed as a for-profit corporation” and “is not a department, agency, or instrumentality Now the crucial question: is Amtrak indeed of the United States Government.” We have a private corporation? If not—if it is just one previously taken Congress at its word and more government agency—then the relied on this declaration in deciding regulatory power it wields under § 207 is of whether the False Claims Act applies to no constitutional moment. Amtrak. Amtrak agrees: “The National Many of the details of Amtrak's makeup Railroad Passenger Corporation, also known support the government's position that it is as Amtrak, is not a government agency or not a private entity of the sort described establishment [but] a private corporation in Carter Coal. Amtrak's Board of Directors operated for profit.” And, somewhat includes the Secretary of Transportation (or tellingly, Amtrak's website is www.amtrak. his designee), seven other presidential com—not www.amtrak.gov. appointees, and the President of Amtrak. How to decide? Since, in support of its The President of Amtrak—the one Board claim that Amtrak is a public entity, the member not appointed by the President of government looks past labels to how the the United States—is in turn selected by the corporation functions, it is worth examining eight other members of the Board. Amtrak is what functional purposes the public-private also subject to the Freedom of Information distinction serves when it comes to Act. Amtrak's equity structure is similarly delegating regulatory power. We identify suggestive. As of September 30, 2011, four two of particular importance. First, common stockholders owned 9,385,694 delegating the government's powers to outstanding shares, which they acquired private parties saps our political system of from the four railroads whose intercity democratic accountability. This threat is passenger service Amtrak assumed in 1971. particularly dangerous where both Congress At the same time, however, the federal and the Executive can deflect blame for government owned all 109,396,994 shares unpopular policies by attributing them to the of Amtrak's preferred stock, each share of choices of a private entity. This worry is which is convertible into 10 shares of certainly present in the case of § 207, since common stock. And, all that stands between Congress has expressly forsworn Amtrak's Amtrak and financial ruin is congressional status as a “department, agency, or largesse. instrumentality of the United States That being said, Amtrak's legislative origins Government.” Dislike the metrics and are not determinative of its constitutional standards Amtrak has concocted? It's not the status. Congress's power to charter private federal government's fault—Amtrak is a corporations was recognized early in our “for-profit corporation.” nation's history. And, as far as Congress was Second, fundamental to the public-private concerned, that is exactly what it was doing distinction in the delegation of regulatory when it created Amtrak. As Congress authority is the belief that disinterested explained it, Amtrak “shall be operated and

323 government agencies ostensibly look to the Agreements. So to summarize: Amtrak must public good, not private gain. For this negotiate contracts that will maximize its reason, delegations to private entities are profits; those contracts generally must, by particularly perilous. Carter law, include certain terms; and Amtrak has Coal specifically condemned delegations the power to define those terms. Perverse made not “to an official or an official body, incentives abound. Nothing about the presumptively disinterested, but to private government's involvement in Amtrak's persons whose interests may be and often operations restrains the corporation from are adverse to the interests of others in the devising metrics and standards that inure to same business.” Partly echoing the its own financial benefit rather than the Constitution's guarantee of due process, this common good. And that is the very essence principle ensures that regulations are not of the public-private distinction when a dictated by those who “are not bound by any claim of unconstitutional delegation arises. official duty,” but may instead act “for No discussion of Amtrak's status as a private selfish reasons or arbitrarily.” More recent or public institution would be complete, decisions are also consistent with this view. however, without an examination of the Amtrak may not compete with the freight Supreme Court's decision in Lebron v. railroads for customers, but it does compete National Railroad Passenger Corp. There with them for use of their scarce track. Like the Court held that Amtrak “is part of the the “power conferred upon the majority ... to Government for purposes of the First regulate the affairs of an unwilling minority” Amendment.” Otherwise, the majority in Carter Coal, § 207 grants Amtrak a cautioned, the government could “evade the distinct competitive advantage: a hand in most solemn obligations imposed in the limiting the freight railroads' exercise of Constitution by simply resorting to the their property rights over an essential corporate form.” What the Court did not do resource. in Lebron was conclude that Amtrak Because Amtrak must “be operated and counted as part of the government for all managed as a for-profit corporation,” the purposes. On some questions—Does the fact that the President has appointed the bulk Administrative Procedure Act apply to of its Board does nothing to exonerate its Amtrak? Does Amtrak enjoy sovereign management from its fiduciary duty to immunity from suit?—Congress's disclaimer maximize company profits. Also consistent of Amtrak's governmental status is with this purpose, “Amtrak is encouraged to dispositive. This makes sense: Congress has make agreements with the private sector and the power to waive certain governmental undertake initiatives that are consistent with privileges, like sovereign immunity, that are good business judgment and designed to within its legislative control; but it cannot maximize its revenues and minimize circumvent the Bill of Rights by simply Government subsidies.” Yet § 207 directs dubbing something private. Amtrak and its host carriers to incorporate the metrics and standards in their Operating

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Whether § 207 effects an unconstitutional Constitution's structural provisions are the delegation is a constitutional question, not a source of Congress's power to act in the first statutory one. But just place. And, generally speaking, these because Lebron treated Amtrak as a provisions authorize action without government agency for purposes of the First mandating it. Congress's power to regulate Amendment does not dictate the same result interstate commerce, for example, does not with respect to all other constitutional dictate the enactment of this or that bill provisions. To view Lebron in this way within its proper scope. By contrast, entirely misses the point. In Lebron, viewing individual rights are “affirmative Amtrak as a strictly private entity would prohibitions” on government action that have permitted the government to avoid a become relevant “only where the constitutional prohibition; in this case, Government possesses authority to act in the deeming Amtrak to be just another first place.” While often phrased in terms of governmental entity would allow the an affirmative prohibition, Congress's government to ignore a constitutional inability to delegate government power to obligation. Just as it is impermissible for private entities is really just a function of its Congress to employ the corporate form to constitutional authority not extending that sidestep the First Amendment, neither may far in the first place. In other words, rather it reap the benefits of delegating regulatory than proscribing what Congress cannot do, authority while absolving the federal the doctrine defines the limits of what government of all responsibility for its Congress can do. And, by designing Amtrak exercise. The federal government cannot to operate as a private corporation—to seek have its cake and eat it too. In any profit on behalf of private interests— event, Lebron 's holding was comparatively Congress has elected to deny itself the narrow, deciding only that Amtrak is an power to delegate it regulatory authority agency of the United States for the purpose under § 207. of the First Amendment. It did not opine on We therefore hold that Amtrak is a private Amtrak's status with respect to the federal corporation with respect to Congress's government's structural powers under the power to delegate regulatory authority. Constitution—the issue here. Though the federal government's This distinction is more than academic. involvement in Amtrak is considerable, When Lebron contrasted “the constitutional Congress has both designated it a private obligations of Government” from “the corporation and instructed that it be ‘privileges of the government,’ ” it was not managed so as to maximize profit. In drawing a distinction between questions that deciding Amtrak's status for purposes of are constitutional from those that are not. congressional delegations, these declarations Any “privilege” of the federal government are dispositive. Skewed incentives are must also be anchored in the precisely the danger forestalled by Constitution. As our federal government is restricting delegations to government one of enumerated powers, the instrumentalities. And as a private entity,

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Amtrak cannot be granted the regulatory separate argument that Amtrak's power prescribed in § 207. involvement in developing the metrics and standards deprived its members of due III process. Accordingly, the judgment of the We conclude § 207 of the PRIIA district court is impermissibly delegates regulatory authority Reversed. to Amtrak. We need not reach AAR's

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“Supreme Court to Review Amtrak Role in Setting Rail Regulations: High Court to Hear Challenge by Freight Railroads” The Wall Street Journal Brent Kendall June 23, 2014

The U.S. Supreme Court on Monday said it argued that Congress violated the would decide whether Amtrak should be Constitution by delegating authority to a allowed to participate in the development of private entity. rail performance measures with a A federal appeals court in Washington, government agency. D.C., agreed. Congress set up the arrangement in a 2008 The appeals court acknowledged that law that allowed Amtrak to work with the Amtrak "is a curious entity" that straddles Federal Railroad Administration to set the public and private sectors, but it noted metrics and minimum standards for that Amtrak was a for-profit corporation. It assessing the performance of the passenger struck down the arrangement as rail service. Those standards are supposed to unconstitutional, suggesting the unusual be incorporated into Amtrak's operating setup wasn't much different than giving agreements with the freight railroad General Motors authority to help write companies, which host Amtrak trains on government regulations that would govern their tracks. all auto makers. Freight railroads potentially can be The Justice Department asked the Supreme penalized if Amtrak fails to meet Court to review the case, saying the performance standards because the freights government retained sufficient control over didn't give Amtrak trains priority use of the the Amtrak performance standards to avoid rail lines. any constitutional concerns. The railroads found the adopted The Supreme Court will consider the case, performance metrics to be unrealistic and Department of Transportation v. Association said the law's grant of authority to Amtrak of American Railroads, during its next term, was unprecedented and untenable. They which begins in October.

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“Supreme Court to Consider USDOT vs. AAR re: Amtrak” RailwayAge William C. Vantuono June 24, 2014

In 2008, Congress passed PRIIA (Passenger At the request of the U.S. Department of Rail Improvement and Investment Act). Justice, the U.S. Supreme Court will Among its many provisions, it allows consider the case, Department of Amtrak to work with the Federal Railroad Transportation vs. Association of American Administration to set metrics and minimum Railroads, during its next term, which standards for assessing passenger rail begins in October. DOJ said the government service performance. Those standards are should retain sufficient control over Amtrak meant to be incorporated into Amtrak's performance standards to avoid any operating agreements with its host freight constitutional concerns. railroads. “The issue in the case is whether PRIIA Freight railroads can be penalized if Amtrak Section 207, which required the FRA and fails to meet its own performance standards, Amtrak to jointly develop metrics, is an particularly if Amtrak trains have not been unconstitutional delegation of Congress’ given priority on the freight rights-of-way it legislative power to a private entity,” says uses. The Association of American Kevin Sheys, a railroad attorney with Railroads strongly objected, calling the law Nossaman LLP of Washington, D.C. “The unrealistic and saying that giving authority metrics have many purposes, but the to Amtrak to participate in the development important one for this case is that they could of rail performance measures with a be used to measure whether the freights government agency was unprecedented and were meeting their statutory obligation to untenable. They argued that Congress give preference to Amtrak’s passenger violated the Constitution by delegating trains.” authority to a private entity. “The Supreme Court will need to grapple A federal DC Circuit appeals court in with whether Amtrak is a private entity for Washington D.C. agreed, calling Amtrak “a purposes of PRIIA Section 207 and, if so, curious entity” that straddles the public and whether Amtrak had too much influence private sectors, but still a for-profit over the development of the metrics,” Sheys corporation. It struck down the PRIIA observes. “The USDOT will argue that provision as unconstitutional, suggesting the Amtrak is not a private entity for 207 unusual setup was equivalent to giving purposes and in any case it did not have too General Motors authority to help write much influence over the development of the government regulations that would govern metrics. The freights, represented by the all auto makers. AAR, believe the DC Circuit properly decided the case and probably will make a

328 second argument (not reached by the DC Amendment due process rights.” Circuit) that the metrics violate their Fifth

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“Amtrak Barred From Regulating Freight Railroads on Delays” Bloomberg Angela Greiling Keane & Tom Schoenberg July 3, 2013

Amtrak, the U.S. long-distance passenger freight-train interference as the most railroad, lost its power to assess blame when common type of delay over the past 12 its trains are delayed and to have a say in months. whether freight railroads causing those During April, it said, such interference was holdups are penalized. responsible for about 55,000 minutes of The U.S. Court of Appeals in Washington delays, or 14.9 percent of the total. yesterday ruled the taxpayer-supported Canadian National Railway Co. (CNI) was service is a private company to which held responsible for the most delays in the Congress improperly gave regulatory power 12 months ending in April. over freight railroads such as Union Pacific Corp. (UNP) and Warren Buffett’s General Motors Burlington Northern Santa Fe. If Amtrak trains don’t meet the on-time The court threw out a law passed to enforce performance standards set by the company a requirement, dating to Amtrak’s creation and its regulators, the U.S. Surface in 1970, that freight trains give priority to Transportation Board can investigate the passenger trains on tracks they share, which railroads whose tracks they use and assess they do in most of the U.S. damages. “If freight railroads perceive they no longer The court ruled the law unconstitutional for face penalties for giving freight trains giving Amtrak a say in setting the metrics priority over passenger trains, and the that could lead to penalties. U.S. Circuit passenger-train delays are extensive, the Judge Janice Rogers Brown said that was result could be a de-facto imploding of akin to the government giving General Amtrak,” said Frank Wilner, a transportation Motors Co. (GM) the power to regulate economist and author of “Amtrak: Past, automobile manufacturers. Present and Future,” published last year. “It appears that the current metrics and The case involves on-time performance standards are invalid until Congress rewrites standards and enforcement mechanisms the law,” said Ross Capon, president of the established under the Passenger Rail National Association of Railroad Investment and Improvement Act of 2008. Passengers, a Washington-based advocacy group, in an interview. Amtrak, based in Washington, tracks and publishes, in monthly reports on its website, Steve Kulm, a spokesman for Amtrak, how many minutes its trains are delayed declined to comment. each month and assigns causes. It cited

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Delays Reduced business operations, at times by delaying their own freight traffic. The U.S. Federal Railroad Administration, which wrote the standards, said they’ve been Bilateral Contracts a useful tool to reduce Amtrak delays. The rail association, based in Washington, “Since the establishment of the metrics and hailed the ruling. standards in 2010, delays have been reduced “Freight railroads recognize Amtrak wants each successive year, culminating in a to run trains on time, and they work closely historic best for Amtrak in 2012,” said with Amtrak to help make this happen,” Ed Kevin Thompson, a spokesman for the Hamberger, the group’s chief executive agency. “But there is still need for additional officer, said in an e-mailed statement. improvement.” “However, freight railroads believe setting The Transportation Department inspector and measuring schedules and on-time general in 2008 found Amtrak’s on-time performance metrics should not be done performance of 30 percent on long-distance through a one-size-fits all approach at the routes in 2006 reduced the railroad’s federal level, but addressed jointly through revenue and increased the demand for private bilateral contracts that take into taxpayer subsidies. account the facts and circumstances of The Association of American Railroads, particular routes.” whose members include freight railroads The case is Association of American and Amtrak, sued the U.S. Transportation Railroads v. U.S. Department of Department in 2011 arguing that the Transportation, 12-5204, U.S. Court of standards, which Amtrak drafted with Appeals for the District of Columbia Federal Railroad Administration, forced (Washington). freight railroads to substantially alter their

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“A New Private Delegation Doctrine?” Reason Foundation Alexander Volokh August 1, 2013

On July 2, 2013, in Ass’n of American Third, in holding, based on a multi-factor Railroads v. DOT, the D.C. Circuit struck analysis, that Amtrak is a private actor, it down a delegation of authority to Amtrak in provides yet another example of how the § 207 of the Passenger Rail Investment and public-private distinction is fuzzy, and an Improvement Act of 2008, holding that the entity that is public for one reason might be statute unconstitutionally delegated private for another. regulatory power to a private party. This is a Amtrak, formally called the National significant case for several reasons. Railroad Passenger Corporation, was created First, it’s potentially significant in terms of by statute in 1970. Faced with competition constitutional doctrine. In holding that from other modes of transport, railroads that private delegations of regulatory authority offered passenger service had been incurring are illegitimate, the case seems to go against heavy losses; many of these railroads had the conventional wisdom, which is that there petitioned the Interstate Commerce is no special doctrine for private delegations Commission, which at the time regulated by Congress: the Nondelegation Doctrine railroads, for permission to stop providing applies equally to public and private passenger service. With the passage of the recipients of delegated congressional statute, a railroad could transfer its authority by Congress. Moreover, this passenger service responsibilities to Amtrak conventional wisdom is probably right. The if it agreed to a number of conditions, one of D.C. Circuit’s decision may yet be correct which was to grant Amtrak the use of its under the Due Process Clause, but the D.C. tracks and other facilities. The statute Circuit deliberately refused to choose provides that, except in an emergency, an whether this delegation implicated the Amtrak passenger car has precedence over Nondelegation Doctrine or the Due Process another railroad's freight car when they both Clause. need to use the same facilities. Most railroads agreed to these conditions, which Second, it's potentially significant in terms were enshrined in a series of bilateral of its real-world effect on delegations to operating agreements. private parties—though, again, much depends on precisely why the delegation is Fast forward a few decades, to when unconstitutional. If the decision rests on the Congress passed the Passenger Rail Nondelegation Doctrine, it only affects Investment and Improvement Act of 2008. federal delegations; but if it rests on the Due One section of the new statute, § 207, Process Clause, it also affects the much required the Federal Railroad broader set of state delegations. Administration (FRA) and Amtrak to

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“jointly . . . develop new or improve existing First, the D.C. Circuit noted, “[f]ederal metrics and minimum standards for lawmakers cannot delegate regulatory measuring the performance and service authority to a private entity.” The quality of intercity passenger train Nondelegation Doctrine states that when operations, including cost recovery, on-time Congress delegates power to a government performance and minutes of delay, ridership, agency, all that’s required is that Congress on-board services, stations, facilities, provide an “intelligible principle” to limit equipment, and other services.” These the agency’s discretion. But, said the D.C. performance measures aren’t of merely Circuit, “[e]ven an intelligible principle academic interest. Amtrak and its cannot rescue a statute empowering private contractual partners are required to parties to wield regulatory authority.” To incorporate the measures into their operating illustrate this point, the D.C. Circuit cited agreements “[t]o the extent practical.” Carter v. Carter Coal Co. (1936). The New Perhaps more seriously, if “on-time Deal-era Congress had established a performance” or “service quality” is National Bituminous Coal Commission and substandard for two consecutive quarters, required the organization of 23 “coal the Surface Transportation Board (STB), an districts.” Within each coal district, all coal independent agency housed in the producers would be bound by any collective Department of Transportation, is allowed to bargaining agreements agreed to by a start an investigation (and is required to do majority of producers (representing two- so, if a complaint is filed) to check whose thirds of total tonnage) and representatives fault it is, and can assess damages against of a majority of workers. In other words, 2/3 the host railroad if the problems are due to of the coal industry could, by its collective the railroad’s failure to grant preference to bargaining activity, legally bind the Amtrak trains. remaining 1/3 of the industry. (This reliance on massive binding industry self-regulation These metrics and standards are supposed to was classic New Deal procedure.) The be developed “jointly” by Amtrak and the Supreme Court struck this down: “The FRA. If they can’t agree, they can petition power conferred upon the majority is, in the STB to appoint an arbitrator, whose effect, the power to regulate the affairs of an decision will be binding. Amtrak thus has unwilling minority. This is legislative equal authority with the FRA on this issue; delegation in its most obnoxious form; for it the FRA has to get Amtrak’s consent in is not even delegation to an official or an developing the metrics and standards (or it official body, presumptively disinterested, has to abide by the decision of an arbitrator, but to private persons whose interests may who might also end up being private). The be and often are adverse to the interests of Association of American Railroads sued, others in the same business. The delegation charging that this sort of private delegation is clearly arbitrary, and clearly a denial of is invalid; and the D.C. Circuit agreed. rights safeguarded by the due process clause of the Fifth Amendment.”

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To the D.C. Circuit, the question thus private actor could control the regulations became: “precisely how much involvement that governed the rest of the railroad may a private entity have in the industry, choosing a set of performance administrative process before its advisory measures that would tend to make it look role trespasses into an unconstitutional good relative to its competitors—and if the delegation?” The court distinguished two FRA refused to accede to Amtrak’s relatively old cases where the Supreme demands, the regulations would be written Court had upheld private by an arbitrator chosen by the STB who delegations: Currin v. Wallace (1939) could, for all we know, also be a private and Sunshine Anthracite Coal Co. v. party. Adkins (1940). In Currin, an agency wrote Not so fast, though; one might legitimately regulations for tobacco auction markets, but argue that Amtrak isn’t private. The hazard they wouldn’t take effect unless two-thirds with all such doctrines that draw a bright of the industry approved. The Supreme line between public and private is that, in Court held that this was unobjectionable, reality, the line is somewhat fuzzy, because (unlike in Carter Coal) private especially in an age where contracting out of parties did no more than hold the on-off government services and pervasive switch for regulations that were written by regulation of the private sector are the government. In Adkins, the fact pattern widespread. was reminiscent of Carter Coal: in fact, Congress had reenacted the same statute that So let’s tally up the indicia of privateness the Supreme Court had struck down and publicness. On the public side, Amtrak’s in Carter Coal, with the exception that now Board of Directors has nine members, one of the government agency wrote the whom is the Secretary of Transportation and regulations for the industry based on the seven of whom are presidential appointees; industry’s recommendation. The Supreme the ninth, the President of Amtrak, is elected Court upheld this scheme, since now the by the other eight. Amtrak has some private industry was merely subordinate to the shareholders, but almost all its stock is government agency. (The possible reality preferred stock held by the federal that the agency might just rubber-stamp the government. The D.C. Circuit noted that industry’s recommendations was irrelevant Amtrak gets substantial subsidies from the to the analysis: what was important was that federal government—though the amount of the agency had the legal authority to modify government money one gets generally isn’t the recommendations if it wanted to.) relevant to whether one is public or private. The Amtrak case, though, went far Notably, still on the public side, there’s a beyond Currin or Adkins and was more Supreme Court case, Lebron v. National similar to Carter Coal: Amtrak had an Railroad Passenger Corp. (1995). “effective veto” over FRA regulations and, In Lebron, Amtrak was sued, mostly on First in fact, enjoyed “authority equal to the Amendment grounds, for refusing to display FRA.” This really was a case where a a political advertisement in New York’s

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Penn Station. First Amendment rights, like democratic accountability, because when many other constitutional rights, only apply power is delegated to a private organization, against “state actors,” so the question was the government is no longer blamed for that whether Amtrak was a state actor. The organization’s decisions. (Perhaps; but if Supreme Court held that “where, as here, the something goes wrong, why can’t the voters Government creates a corporation by special blame the government for the initial decision law, for the furtherance of governmental to delegate?) Another purpose is the objectives, and retains for itself permanent distinction between the public good and authority to appoint a majority of the private gain: public recipients of delegated directors of that corporation, the corporation power are “presumptively disinterested” and is part of the Government for purposes of are bound by “official duty,” whereas the First Amendment.” private recipients may act “for selfish reasons or arbitrarily.” (Perhaps; but doesn’t On the private side, the 1970 statute this display an overly optimistic view of the specifies that Amtrak “is not a department, motivations of public employees?) In the agency, or instrumentality of the United D.C. Circuit’s view, these considerations cut States Government.” The statute also in favor of treating Amtrak as private: the commands that Amtrak “shall be operated statutory command that it be “managed as a and managed as a for-profit corporation.” for-profit corporation” requires that it seek Relatedly, by statute, “Amtrak is encouraged its private good, not the public good, and to make agreements with the private sector Congress’s and Amtrak’s consistent labeling and undertake initiatives that are consistent of Amtrak as private tends to distance with good business judgment and designed Amtrak’s decisions from democratic to maximize its revenues and minimize accountability. (The court distinguished Government subsidies.” Amtrak itself Lebron on the grounds that being a state announces that it’s “not a government actor for First Amendment purposes doesn’t agency or establishment [but] a private mean one is a state actor for all purposes.) corporation operated for profit.” The D.C. Section 207 thus delegates regulatory power Circuit attaches some significance to a private party, and is thus invalid. (“somewhat tellingly”) to the fact that Amtrak’s URL is amtrak.com—not One interesting aspect of Ass’n of American amtrak.gov—but this doesn’t really seem all Railroads v. DOT is the idea that Amtrak that telling, as one could make a similar can be private for the purposes of structural claim about the U.S. Postal Service at provisions like the Nondelegation Doctrine, usps.com. even though it is public for the purposes of individual-rights provisions like the First To decide the issue, the D.C. Circuit looked Amendment. This is possible, though the to “what functional purposes the public- D.C. Circuit’s multi-factor analysis isn’t private distinction serves when it comes to exactly overwhelming. delegating regulatory power.” One purpose is accountability: a private delegation dilutes

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A more interesting aspect of the case is what But reading Carter Coal as a Due Process the court relegates to a footnote and refuses opinion, and likewise grounding the Amtrak to decide. Recall the Carter Coal precedent challenge in the Due Process Clause, makes from 1936, where giving businesses the more sense. The focus of a nondelegation power to regulate their competitors was challenge should be on how much power characterized as “legislative delegation in its Congress has given up—has it actually most obnoxious form.” Carter Coal is, given up legislative power, or has it merely unfortunately, less than crystal-clear on the allowed someone to fill gaps and precise source of the unconstitutionality. ambiguities?—not on the identity of the Since it mentions “legislative delegation,” recipient of the delegation. The Due Process one could think of it (as the D.C. Circuit Clause, on the other hand, is concerned with did) as a Nondelegation Doctrine decision. fair treatment, and the idea that financially Nondelegation challenges rest on the biased decisionmakers (whether public or Vesting Clause of Article I of the federal private) are illegitimate has been a staple of constitution, which vests all legislative Due Process doctrine for a long time. Claims power in Congress (“All legislative powers of bias, whether it’s a public official who herein granted shall be vested in a Congress has prejudged an issue or a private of the United States.”). Congress must organization that can lose money depending exercise its own legislative power, but it’s on how it wields its power, thus fit more allowed to delegate limited authority as long naturally into a Due Process framework than as the delegation is accompanied by some into a nondelegation framework. “intelligible principle” to limit the agency’s Moreover, the distinction matters for future discretion. cases. A nondelegation holding based on But Carter Coal also says that the Article I’s Vesting Clause would enforce delegation is “clearly a denial of rights the federal separation of powers by safeguarded by the due process clause of the preventing Congress from getting rid of Fifth Amendment” (“[N]or shall any person some of its legislative authority, and so it . . . be deprived of life, liberty, or property, would only govern federal delegations. without due process of law”). These separation of powers constraints are irrelevant for the states. The federal So is this a Nondelegation Doctrine decision constitution doesn’t require that states have or a Due Process Clause decision? The D.C. the same separation of powers as the federal Circuit wasn’t that interested in precisely government: states could adopt what part of the Constitution was being parliamentary democracy or engage in any violated. It wrote, in a footnote, that “the number of structural experiments forbidden distinction evokes scholarly interest,” but to the federal government, provided they the parties in this case didn’t press the point, comply with certain minimal guarantees like and “neither court nor scholar has suggested “one-person, one-vote” or having a a change in the label would effect a change “republican form of government.” in the inquiry.”

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A Due Process challenge would be quite violated, the relevant inquiry would be the different: like the First Amendment and extent of Amtrak’s financial bias. And given most other Bill of Rights provisions, the Due the statutory command that Amtrak act to Process Clause now applies against the maximize its profits, one could legitimately states, so a Due Process holding would also conclude that it couldn’t, without an constrain state delegations and would unconstitutional conflict of interest, regulate therefore have a much wider sweep. Under the rest of the railroad industry—thus the Due Process Clause, the court wouldn’t arriving at the same bottom line as the D.C. do the public/private inquiry that was on Circuit. display here; rather, it would look to The D.C. Circuit thus seems incorrect when whether Amtrak was a state actor using the it says that public delegations of regulatory substantial body of state action doctrine. But authority are merely evaluated by the this question was already resolved in 1995 “intelligible framework” test while private by the Lebron case: yes, Amtrak is a state delegations are per se illegitimate. Rather, actor. (Lebron arose in a First Amendment all federal delegations (public or private) are context, but it turns out that the Due Process evaluated by the “intelligible principle” test, Clause, as well as various other individual- while all delegations of any kind (state or rights provisions, turns on the same state federal, public or private) are scrutinized for action question, so any finding of state conflicts of interest under the Due Process action for First Amendment purposes carries Clause, and perhaps private delegations over directly to the Due Process Clause.) might be more vulnerable because conflicts Finding that Amtrak is a state actor doesn’t of interest are more likely to arise there. mean there’s a Due Proces violation; it’s only a threshold step that means that Due This, then, is the open issue at the heart of Process protections apply. To find out the D.C. Circuit’s opinion. The true reach of whether the Due Process Clause was this decision is yet to be determined.

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Direct Marketing Association v. Brohl

13-1032

Ruling Below: Direct Marketing Association v. Barbara Brohl, 735 F.3d 904 (10th Cir. 2013), cert granted, 134 S.Ct. 2901 (2014).

Association of mail and online retailers brought action against Executive Director of Colorado Department of Revenue, challenging the constitutionality of notice and reporting requirements that state imposed on retailers that did not collect taxes on sales to Colorado purchasers. The United States District Court for the District of Colorado, Robert Blackburn, J., granted summary judgment to association and permanently enjoined enforcement of requirements on ground that they violated Commerce Clause. Defendant appealed.

Question Presented: Whether the Tax Injunction Act, which provides that “[t]he district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State,” bars federal court jurisdiction over a suit brought by non-taxpayers to enjoin the informational notice and reporting requirements of a state law that neither imposes a tax, nor requires the collection of a tax, but serves only as a secondary aspect of state tax administration.

DIRECT MARKETING ASSOCIATION, Plaintiff-Appellee, v. Barbara BROHL, in her capacity as Executive Director, Colorado Department of Revenue, Defendant-Appellant, and Multistate Tax Commission, Amicus-Curiae.

United States Court of Appeals, Tenth Circuit

Decided on August 20, 2013

[Excerpt; some footnotes and citations omitted.]

MATHESON, Circuit Judge. Colorado purchasers ("non-collecting retailers"), Most, if not all, of these non- This appeal arises from Colorado's efforts to collecting retailers sell products to Colorado collect sales and use taxes during the purchasers by mail or online. expansion of e-commerce. Appellee Direct Marketing Association Appellant Barbara Brohl, Executive Director ("DMA") — a group of businesses and of the Colorado Department of Revenue (the organizations that market products via "Department"), appeals from an order catalogs, advertisements, broadcast media, enjoining the enforcement of state notice and the Internet — urges us to uphold the and reporting requirements imposed on district court's determination that Colorado's retailers who do not collect taxes on sales to notice and reporting obligations are

338 unconstitutional. The district court "prevent[] consumers of retail products from concluded that Colorado's requirements for purchasing out of state in order to avoid non-collecting retailers discriminated paying a Colorado sales tax." against and placed undue burdens on interstate commerce, in violation of the Although Colorado's sales and use taxes Commerce Clause of the United States have equivalent rates, they are collected Constitution. It therefore entered a differently. Whereas retailers with a physical permanent injunction prohibiting presence in the state must collect and remit enforcement of the state requirements. sales tax to the Department, the onus is on the purchaser to report and pay use tax. This The issue in this appeal is whether difference results from the Supreme Court's Colorado's notice and reporting obligations bright-line rule in Quill Corp. v. North for non-collecting retailers violate the Dakota. In Quill, the Court reaffirmed that it Commerce Clause. However, we do not is unconstitutional under the "negative" or reach that merits question. Because the Tax "dormant" aspect of the Commerce Clause Injunction Act, 28 U.S.C. § 1341, deprived for a state to require a retailer with no in- the district court of jurisdiction to enjoin state physical presence to collect the state's Colorado's tax collection effort, we remand sales or use taxes. Because Quill prohibits to the district court to dismiss DMA's Colorado from forcing retailers with no in- Commerce Clause claims. state physical presence to collect and remit taxes on sales to Colorado consumers, the I BACKGROUND state requires its residents to report and pay A. Colorado's Sales and Use Taxes use taxes to the Department with their Colorado imposes a 2.9 percent tax on the income tax returns. The failure to report and sale of tangible goods within the state. pay use tax is a criminal offense. Retailers with a physical presence in the Nonetheless, use tax collection is elusive. state are required by law to collect sales tax Most Colorado residents do not report or from purchasers and remit it to the remit use tax despite the legal obligation to Department. The sales tax statute imposes do so. A 2010 report submitted as part of additional duties on Colorado retailers such this litigation estimated that Colorado state as recordkeeping, and penalties for deficient and local governments would lose $172.7 remittance of sales tax. million in 2012 because of residents' failure If Colorado purchasers have not paid sales to pay use tax on e-commerce purchases tax on tangible goods — as occurs in some from out-of-state, non-collecting retailers. online and mail-order purchases from B. Notice and Reporting Requirements retailers with no in-state physical presence — they must pay a 2.9 percent use tax "for To increase use tax collection, in 2010 the the privilege of storing, using, or Colorado legislature enacted statutory consuming" the goods in Colorado. The use requirements for non-collecting retailers. tax complements the sales tax and is The statute and its implementing regulations

339 impose three principal obligations on non- they have a duty to "file a sales or use tax collecting retailers whose gross sales in return at the end of every year" in Colorado Colorado exceed $100,000; they must (1) and must inform customers that the retailer provide transactional notices to Colorado is required to report to the Department the purchasers, (2) send annual purchase customers' total purchase amounts from the summaries to Colorado customers, and (3) preceding calendar year. According to the annually report Colorado purchaser Department, the annual summary "arms the information to the Department. consumer with accurate information to facilitate reporting and paying the use tax." Under the first requirement, non-collecting retailers must "notify Colorado purchasers Third, non-collecting retailers must annually that sales or use tax is due on certain report information on Colorado purchasers purchases . . . and that the state of Colorado to the Department. The annual report shall requires the purchaser to file a sales or use include purchasers' names, billing addresses, tax return." The notice must be included in shipping addresses, and total purchase every transaction with a Colorado purchaser, amounts for the previous calendar year. and shall inform the purchaser that (1) the According to the Department, this customer retailer has not, collected sales or use tax, information report "allows [it] to pursue (2) the purchase is not exempt from audit and collection actions against Colorado sales or use tax, and (3) Colorado taxpayers who fail to pay the tax" and "is law requires the purchaser to file a sales or designed to increase voluntary consumer use tax return and to pay tax owed. compliance with state tax laws because According to the Department, the consumers know that a third party has transactional notice "serves to educate reported their taxable activity to the taxing consumers about their state use tax liability authority." with the aim of increasing voluntary compliance." Non-collecting retailers who do not comply with any one of Colorado's notice and Under the second requirement, non- reporting obligations are subject to penalties. collecting retailers must mail annual notices Alternatively, retailers may choose to collect to Colorado customers who purchased more and remit sales tax from Colorado than $500 in goods from them in the purchasers to forgo the notice and reporting preceding calendar year. The summary must obligations. be sent by January 31 of each year and the envelope containing it must be "prominently C. Procedural History marked with the words 'Important tax In June 2010, DMA sued the Department's document enclosed.'" The summary must executive director, challenging the inform Colorado consumers of purchase constitutionality of Colorado's notice and dates, items bought, and the amount of each reporting requirements. Claims I and II of purchase made in the preceding calendar DMA's complaint alleged that Colorado's year. The annual summary tells purchasers statutory and regulatory obligations are

340 unconstitutional under the Commerce retailers that "are inextricably related in kind Clause because they (1) discriminate against and purpose to the burdens condemned in interstate commerce ("Discrimination Quill" These burdens, the district court Claim"), and (2) impose undue burdens on concluded, would unconstitutionally interstate commerce ("Undue Burden interfere with interstate commerce. Claim"). In the same order, the court entered a The district court granted DMA a permanent injunction prohibiting preliminary injunction prohibiting the enforcement of the notice and reporting enforcement of the notice and reporting requirements. In granting injunctive relief, requirements. The parties then agreed to an the district court said DMA had achieved expedited process for resolving the two actual success on the merits because the Commerce Clause claims and filed cross- court had granted summary judgment on the motions for summary judgment on those Discrimination and Undue Burden Claims. claims. Because DMA's non-Commerce Clause On March 30, 2012, the district court claims remained unresolved, the district granted DMA's motion for summary court said it would "address in a separate judgment and denied the Department's order the parties' request that [it] certify this motion for summary judgment. On the order as a final judgment under Fed.R.Civ.P. Discrimination Claim, the court concluded 54(b)," from which the Department could that the notice and reporting requirements appeal. However, the Department filed its facially discriminate against interstate notice of appeal before the district court commerce. It held these requirements are certified the order as final under unconstitutional because "[t]he record Fed.R.Civ.P. 54(b). We nevertheless may contains essentially no evidence to show that consider the Department's appeal from the the legitimate interests advanced by the district court's entry of a permanent [Department] cannot be served adequately injunction under 28 U.S.C. § 1292(a)(1) by reasonable nondiscriminatory (providing jurisdiction over interlocutory alternatives." orders granting injunctions).

On the Undue Burden Claim, the district II. DISCUSSION court relied on Quill's bright-line rule that state governments cannot constitutionally The issue on appeal is whether Colorado's require businesses without an in-state notice and reporting requirements for non- physical presence to collect and remit sales collecting retailers violate the dormant or use taxes. The district court Commerce Clause. Before addressing that acknowledged that Colorado's notice and issue, however, we must determine whether reporting requirements do not obligate out- the Tax Injunction Act ("TLA") precludes of-state retailers to collect and remit taxes. federal jurisdiction over DMA's claims. We But it reasoned that the notice and reporting conclude that it does and do not reach the requirements place burdens on out-of-state merits of this appeal.

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A. Tax Injunction Act but requires only that they be enforced in a state court rather than a federal court." The TIA provides that "district courts shall not enjoin, suspend or restrain the In its brief, DMA argues the TIA does not assessment, levy or collection of any tax preclude federal jurisdiction here because under State law where a plain, speedy and DMA (1) is not a taxpayer seeking to avoid efficient remedy may be had in the courts of a tax, and (2) challenges notice and such State." " The statute has its roots in reporting requirements, not a tax equity practice, in principles of federalism, assessment. and in recognition of the imperative need of a State to administer its own fiscal a. Non-taxpayer lawsuits operations." It therefore serves as a "broad DMA argues it is not a taxpayer seeking to jurisdictional barrier" that "limit[s] avoid state taxes and thus the TIA does not drastically federal district court jurisdiction apply. Its argument rests on Hibbs v. Winn, to interfere with so important a local where the Supreme Court stated that the TIA concern as the collection of taxes." Because is triggered when "state taxpayers seek the TIA is a jurisdictional limitation, we federal-court orders enabling them to avoid must determine whether it prohibits our paying state taxes." Relying on our consideration of this appeal regardless of precedent interpreting Hibbs, we disagree whether it was raised in the district court. that the TIA applies only when taxpayers The TIA prohibits our jurisdiction if (1) seek to avoid a state tax in federal court DMA's action seeks to "enjoin, suspend or The plaintiffs in Hibbs were Arizona restrain the assessment, levy or collection of taxpayers who brought an Establishment any tax under State law," and (2) "a plain, Clause challenge in federal court to a state speedy and efficient remedy may be had in tax credit for contributions to "school tuition the courts of such State," id. We address organizations." The plaintiffs did not these issues in turn. challenge a tax imposed on them, but a tax benefit to others. The Supreme Court 1. Does DMA seek to enjoin, suspend, or restrain the assessment, levy or collection determined the TIA did not bar such a lawsuit. of a state tax?

The TIA divests federal district courts of The Court observed that Congress enacted jurisdiction over actions that seek to "enjoin, the TIA to "direct[] taxpayers to pursue suspend or restrain the assessment, levy or refund suits instead of attempting to restrain collection of any tax under State law." This [state tax] collections" through federal broad language prohibits federal courts from lawsuits. "In short," the Court said, interfering with state tax administration "Congress trained its attention on taxpayers through injunctive relief, declaratory relief, who sought to avoid paying their tax bill by or damages awards. The TIA "does not limit pursuing a challenge route other than the any substantive rights to enjoin a state tax one specified by the taxing authority."

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Beyond this discussion of taxpayer lawsuits, Oklahoma's specialty license plate scheme the Hibbs Court explained that the TIA imposed revenue-generating charges, which applies to federal court relief that "would . . . we viewed as taxes. To enjoin the "entire operate[] to reduce the flow of state tax specialty plate regime . . . or even to enjoin a revenue" — i.e., federal lawsuits that would portion of it," we said, "would deny inhibit state tax assessment, levy, or Oklahoma the use of significant funds" used collection. According to the statute's for a variety of state initiatives. Such a result legislative history, Congress enacted the "would implicate exactly the sort of TIA with "state-revenue-protective federalism problems the TIA was designed objectives," including prohibiting to ameliorate." "taxpayers, with the aid of a federal injunction, from withholding large sums, The plaintiffs in Hill argued that, under thereby disrupting state government Hibbs, the TIA did not apply because they finances." The Court noted that the Hibbs did not "challenge an assessment imposed plaintiffs did not challenge a state-revenue- on them, but rather assessments imposed on producing measure — they sought to and paid by other persons or entities" — i.e., invalidate a tax credit the state gave to they were not taxpayers trying to avoid a taxpayers — and that nothing in the TIA tax. We disagreed with this reading of prohibited a third party from challenging a Hibbs. We saw "[n]othing in the language of state tax benefit in federal court.. the TIA indicat[ing] that our jurisdiction to hear challenges to state taxes can be turned Although Hibbs states that the TIA applies like a spigot, off when brought by taxpayers to "cases in which state taxpayers seek challenging their own liabilities and on federal-court orders enabling them to avoid when brought by third parties challenging paying state taxes," we have not interpreted the liabilities of others." it as holding that the TIA applies only to taxpayer suits. For instance, in Hill v. Kemp, We acknowledged that in Hibbs the Court we applied the TIA outside the context of a "did point out that TIA cases typically taxpayer seeking to avoid taxes. In Hill, involve challenges brought by state Oklahoma motorists and abortion-rights taxpayers seeking to avoid their own state supporters sought to enjoin Oklahoma's tax liabilities." But we noted that some statutory scheme for specialty vehicle lower-court cases applied the TIA to suits by license plates. The plaintiffs argued that third parties who sought to disrupt state tax Oklahoma unconstitutionally discriminated collection and that the Hibbs Court did not against their viewpoint by giving more criticize these decisions. We interpreted favorable terms and conditions to drivers Hibbs as holding that the "essential problem who wanted specialty plates with anti- with the defendant's assertion that the TIA abortion messages. barred the suit . . . lay in the fact that the plaintiff[s] . . . simply did not seek to enjoin We agreed with the district court that the the levy or collection of any tax . . . but TIA barred the plaintiffs' challenge because instead sought to challenge the provision of

343 a tax credit." The upshot of Hibbs, we said, In enacting the TIA, Congress chose to is that "giving away a tax credit is a very prohibit three forms of interference with different thing than assessing, levying or state tax collection: "enjoin[ing], collecting a tax." The nature of the plaintiff suspend[ing], or restrain[ing.]" Its use of the was not the "essential and dispositive disjunctive "or" suggests each term has a distinction under the Supreme Court's distinct meaning. The terms "enjoin" and teaching in Hibbs." "suspend" suggest entirely arresting tax collection, but "restrain" has a broader Accordingly, we have not interpreted Hibbs ordinary meaning. as holding that the TIA applies only when taxpayers seek to avoid a state tax. Rather, Under most definitions, "restrain" means to the key question is whether the plaintiff's limit, restrict, or hold back. We accept this lawsuit seeks to prevent "the State from ordinary meaning of "restrain," cognizant of exercising its sovereign power to collect . . . the Supreme Court's instruction that the TIA revenues." This interpretation adheres to is a broad jurisdictional prohibition. Hibbs's instruction that the primary purpose of the TIA is to "shield[] state tax A lawsuit seeking to enjoin state laws collections from federal-court restraints." enacted to ensure compliance with and increase use tax collection, like DMA's Contrary to DMA's position, it cannot avoid challenge here, would "restrain" state tax the TIA merely because it is not a taxpayer collection. Such a lawsuit, if successful, challenging tax payment. would limit, restrict, or hold back the state's chosen method of enforcing its tax laws and b. Notice and reporting obligations generating revenue. Federalism concerns, DMA next argues that it seeks to avoid which the TIA seeks to avoid, arise not only notice and reporting obligations, not a tax. It when a state tax is challenged in federal insists that "[t]he fact that such obligations court, but also when the means for collecting relate to use tax owed by Colorado a state tax are targeted there. The TIA's use consumers does not bring the DMA's suit . . of the term "restrain" allows federal courts . under the umbrella of the TIA as a suit to weed out lawsuits, such as DMA's, that seeking to enjoin the collection of a state attempt to undermine state tax collection. tax." Although DMA does not directly challenge But the TIA bars more than suits that would a tax, it contests the way Colorado wishes to enjoin tax collection. It also prohibits federal collect use tax. This court has said that the lawsuits that would "restrain the . . . TIA "cannot be avoided by an attack on the collection" of a state tax. The issue is administration of a tax as opposed to the whether DMA's attack on Colorado's notice validity of the tax itself." In making this and reporting obligations would "restrain" statement, we agreed with Czajkowski v. Colorado's tax collection. Illinois, which applied the TIA to a challenge to state cigarette tax enforcement, i. Suits that restrain tax collection even though it was "arguable that plaintiffs

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[were] only seeking to enjoin the state from requirements is apparent because out-of- using unconstitutional methods and state retailers who voluntarily collect tax on procedures to collect the taxes, rather than Colorado purchases are exempt. the collection of taxes itself." The purposes of the TIA apply both to a We acknowledge that DMA's suit is unlike lawsuit that would directly enjoin a tax and TIA cases in which a plaintiff asks a federal one that would enjoin a procedure required court to invalidate and enjoin a state tax. by the state's tax statutes and regulations that Even if DMA's constitutional attack on the aims to enforce and increase tax collection. notice and reporting obligations were Either action interferes with state revenue successful, Colorado consumers would still collection and falls within the "traditional owe use taxes by law. But the state-chosen heartland of TIA cases" that dismiss federal method to secure those taxes would be lawsuits to protect state coffers. compromised, curbing Colorado's ability to collect revenue. The inquiry under the TIA Other courts have applied the TIA to attacks is whether DMA's lawsuit would restrain on tax collection methods, rather than taxes state tax collection. Although DMA's themselves. In Gass v. County of Allegheny, lawsuit differs from the prototypical TIA the Third Circuit held that the TIA barred a case, its potential to restrain tax collection lawsuit challenging a state tax appeals triggers the jurisdictional bar. procedure. Although the appellant argued that its lawsuit did not affect the state's DMA suggests that the obligations imposed ability to collect tax, the appellate court on non-collecting retailers merely "relate to concluded that the "appeal process is use tax owed by Colorado consumers." We directed to the . . . ultimate goal and disagree with DMA's characterization and responsibility of determining the proper attempt to distance the notice and reporting amount of tax to assess" and thus fell within obligations from the collection of a state tax. the TIA. Colorado enacted the notice and reporting obligations to increase taxpayers' Similarly, the Ninth Circuit has applied the compliance with use tax laws and thereby TIA to bar a suit that would have prohibited increase use tax collection. Even the title of disclosure of tax information to state taxing the bill that later became law reflects its tax authorities. The lawsuit sought to withhold collection purpose: "An Act Concerning the "earnings records and other tax related Collection of Sales and Use Taxes on Sales information to the Idaho and Montana taxing Made by Out-of-State Retailers." One of the authorities." As here, the taxpayer would challenged requirements, the annual have continued to owe tax, but the states customer information reports sent to the would have been deprived of the means to Department, would aid the Department's calculate and collect it. The Ninth Circuit auditing of taxpayers, a significant tax said, "[t]he fact that the injunction would collection mechanism. Indeed, the tax restrain assessment indirectly rather than collection goal of the notice and reporting directly does not make the [TIA] inapplicable." The Ninth Circuit has since

345 explained that whether the TIA applies by the laws of Puerto Rico shall be depends on "the effect of federal litigation maintained in the United States District on the state's ability to collect revenues, and Court for the District of Puerto Rico." UPS will only bar the adjudication of a federal challenged Puerto Rico's statutory scheme constitutional claim in federal court if a prohibiting an interstate carrier from judgment for the plaintiffs will hamper a delivering a package unless the recipient state's ability to raise revenue." We have presented a certificate of excise tax little problem concluding that DMA's payment. Alternatively, interstate carriers lawsuit would hamper Colorado's ability to could prepay excise tax and seek raise revenue. reimbursement from package recipients, but this option imposed expensive and ii. DMA's additional arguments burdensome statutory and regulatory DMA responds that the Supreme Court has obligations. cautioned that the TIA is not a "sweeping The First Circuit determined the Butler Act congressional direction to prevent federal- did not bar UPS's action. It reasoned that court interference with all aspects of state "UPS sought to enjoin only those provisions tax administration." We have acknowledged . . . that prohibit or interfere with the this point, and continue to do so here. But in delivery of packages. UPS did not challenge making this pronouncement, the Supreme the amount or validity of the excise tax, nor Court was distinguishing between federal the authority of the Secretary to assess or lawsuits that would not curb state revenue collect it." The court also said that Puerto collection, and therefore would not fall Rico's package "delivery ban targets third within the TIA, and "[f]ederal-court relief parties instead of those who owe the tax." It [that] . . . [would] reduce the flow of state found that Puerto Rico's laws produced tax revenue," and thus trigger the TIA. excise tax revenue "indirectly through a DMA's Commerce Clause claims fall within more general use of coercive power" and did the latter category. not create "a system of tax collection within DMA also cites two federal circuit court the meaning of the Butler Act." cases to argue that our interpretation of the Even if UPS counsels against applying the TIA is overly broad: United Parcel Service TIA here, we decline to follow it. Much of Inc. v. Flores-Galarza ("UPS"), and Wells v. UPS's reasoning conflicts with our own Malloy. binding case law. For instance, UPS found it In UPS, the First Circuit addressed whether important that the plaintiff did "not the Butler Act, a close relative of the TIA, challenge the amount or validity of the deprived it of jurisdiction over a challenge excise tax," but we have said the TIA to Puerto Rico's interstate package delivery "cannot be avoided by an attack on the scheme. The Butler Act provides that "[n]o administration of a tax as opposed to the suit for the purpose of restraining the validity of the tax itself." The UPS court assessment or collection of any tax imposed also declined to apply the Butler Act

346 because Puerto Rico's laws targeted third punitive "general use of coercive power" to parties, not taxpayers. But, as discussed entice tax payment from individuals who above, we recognized in Hill that the TIA admittedly refuse to pay, and we therefore can apply to third-party lawsuits that enjoin, do not think Wells applies here. suspend, or restrain tax collection. Indeed, much of the reasoning in UPS would have Finally, we mention one recent counseled against applying the TIA to the development. After oral argument in this license plate lawsuit in Hill. case, this court considered the application of the Anti-Injunction Act ("AIA"), in Hobby DMA also cites Wells v. Malloy. In Wells, Lobby Stores, Inc. v. Sebelius. Using the plaintiff sought to enjoin a Vermont somewhat similar language to the TIA, the provision that required suspension of his AIA states that "no suit for the purpose of driver's license for failure to pay motor restraining the assessment or collection of vehicle taxes. The plaintiff did not dispute any tax shall be maintained in any court by owing taxes. The district court determined any person, whether or not such person is the TIA barred the action, but the Second the person against whom such tax was Circuit disagreed. assessed." Whereas the TIA protects state tax measures, the AIA "protects the [federal] The court concluded the plaintiff was not Government's ability to collect a consistent seeking to restrain the collection of a tax. It stream of revenue, by barring litigation to said, '"Collection,' of course, could be read enjoin or otherwise obstruct the collection of broadly to include anything that a state has taxes." determined to be a likely method of securing payment." But the court interpreted In Hobby Lobby, two corporations "collection" to mean "methods similar to challenged a federal requirement that they assessment and levy . . . that would produce provide employees with health insurance money or other property directly, rather than coverage for certain contraceptive methods. indirectly through a more general use of Failure to comply with the federal coercive power." requirement exposed the corporations to a "tax" under 26 U.S.C. § 4980. We Like Wells, we do not interpret the TIA as considered whether the AIA barred the applying to any action challenging a state corporations' action because their suit might law that could possibly secure tax payment. enjoin a tax on them for non-compliance But here DMA challenges laws enacted to with the health care coverage requirement. notify consumers of their duty to pay use tax and to garner information on consumer We explained that the corporations were purchases to ensure tax compliance through "not seeking to enjoin the collection of taxes audits. Its lawsuit targets measures that or the execution of any IRS regulation; they attempt to ensure tax compliance in the first [were] seeking to enjoin the enforcement, by instance, not sanctions imposed after a whatever method, of one HHS regulation" taxpayer has admittedly refused to pay regarding contraceptive coverage. The "tax taxes. Colorado's laws are not a reactive and [was] just one of many collateral

347 consequences" of noncompliance with the foreclosed by the Supreme Court's decision federal contraceptive-coverage requirement. in Quill. Having determined that DMA's Moreover, "[t]he statutory scheme ma[de] action falls within the TIA's prohibition on clear that the tax at issue [was] no more than federal lawsuits that would "enjoin, suspend a penalty for violating regulations . . . and or restrain the assessment, levy or collection the AIA does not apply to the exaction of a of any tax under State law," we proceed to purely regulatory tax." the statute's second element.

Our position in this appeal is consistent with 2. Does DMA have a plain, speedy, and the analysis in Hobby Lobby. The efficient remedy in Colorado? corporations in Hobby Lobby challenged a health insurance regulation and a possible For the TIA to apply, DMA must also have a penalty for failing to comply with that "plain, speedy and efficient remedy . . . in regulation. To the extent that the penalty the courts of [Colorado]." This part of the constituted a "tax" under the AIA, an issue TIA requires that Colorado law offer a "full that this court seemed to doubt in Hobby hearing and judicial determination" on its Lobby, it was a "more general use of claims. We must be convinced that Colorado coercive power," and fell outside the bounds law provides DMA with sufficient process of the AIA. to challenge the notice and reporting requirements. Here, DMA challenges notice and reporting requirements in Colorado's sales and use tax As previously discussed, Congress intended statutory scheme. These requirements are for the TIA to impose a "broad jurisdictional not a coercive use of power or punitive in barrier" that "limit[s] drastically federal nature — they are the state's chosen means district court jurisdiction to interfere with so of enforcing use tax collection in the first important a local concern as the collection instance. And the state's use tax is of taxes." The TIA's "plain, speedy and indisputably a "tax" under the TIA. The efficient remedy" provision is therefore revenue-generating, non-punitive purpose of interpreted "narrowly" to "be faithful to the notice and reporting obligations places [this] congressional intent." Our narrow them squarely within the TIA's protection. inquiry asks only whether the "state-court remedy . . . meets certain minimal DMA's action seeks to restrain the collection procedural criteria." The TIA does not of sales and use taxes in Colorado. The require that the state provide the best or state's notice and reporting obligations, speediest remedy. And "the likelihood of [a] while not taxes themselves, were enacted plaintiff's success in the state court is not a with the sole purpose of increasing use tax factor . . . when determining whether the collection. Indeed, the obligations for non- jurisdictional prohibition of [the TIA] collecting retailers are a substitute for applies." requiring these same retailers to collect sales and use taxes at the point of sale, an DMA does not challenge the process approach the Colorado legislature deemed available to it in Colorado. Colorado state

348 courts can and do grant relief in cases Thus, in Hill, the plaintiffs could seek a challenging the constitutionality of tax remedy under specific state tax laws. This measures. Further, Colorado courts have was consistent with Hibbs in that these considered Commerce Clause challenges remedies were not available to the universe involving taxes. Circuit courts have of plaintiffs suing the state. Accordingly, we routinely said that such available process in address whether Colorado's tax laws state court satisfies the TIA's "plain, speedy similarly provide a more specific remedy to and efficient remedy" element. DMA: How can DMA or the remote retailers it represents challenge Colorado's We are hesitant, however, to stop our statutory scheme outside of filing an action analysis there. The Supreme Court in Hibbs in state court for injunctive or declaratory suggested that the TIA does not refer to relief? general process available in state court. The Court said that a "plain, speedy and efficient DMA complains that Colorado's laws force remedy" under 28 U.S.C. § 1341 is "not one remote retailers to choose between obeying designed for the universe of plaintiffs who the notice and reporting requirements and sue the State. Rather, it [is] a remedy remitting sales tax to the Department. Much tailormade for taxpayers." It then cited to like a taxpayer who seeks to challenge a decisions in which taxpayers were allowed state tax but must first pay the tax and seek a to protest taxes in state court after first refund under state law, a remote retailer seeking a refund under state administrative could choose to remit sales tax and then seek law. Although the Hibbs Court was not a refund. Colo.Rev.Stat. § 39-26-703(2.5)(a) deciding any issue specifically dealing with allows retailers to "file any claim for refund the "plain, speedy and efficient remedy" with the executive director of the department language of the TIA, its brief discussion of revenue." In pursuing the refund, the suggests that the statutory language may retailer could argue that Colorado laws contemplate something more than the unconstitutionally coerce it to choose general availability of a remedy to "the between collecting a sales tax and universe of plaintiffs who sue the State." complying with the notice and reporting requirements, the same Commerce Clause As discussed earlier, in Hill v. Kemp, this argument it brings here. The director then court determined that the TIA may bar third- would "promptly examine such claim and . . party non-taxpayer lawsuits, despite the . make a refund or allow a credit to any Hibbs Court's discussion of taxpayer [retailer] who establishes that such [retailer] lawsuits. In Hill, the plaintiffs had a "plain, overpaid the tax due." If the retailer is speedy and efficient" remedy in state court "aggrieved at the final decision," it may seek because Oklahoma tax statutes provided "a review in the state district courts. general right to protest taxes before the Tax Commission," as well as a right of action to Another remedy for a remote retailer is to remedy grievances for any state tax law that challenge any penalties it incurs for failing is contrary to federal law or the Constitution. to comply with the notice and reporting

349 obligations. Under Colo. Rev. Stat § 39-21- for hearings and appeals to state court, as 103, a taxpayer may dispute a tax owed to well as ultimate review in the United States the Department after receiving a notice of Supreme Court. Whether DMA or a remote deficiency and may request a hearing. retailer it represents files a similar lawsuit in Although this provision discusses tax state court seeking injunctive and deficiencies, it also contemplates disputes declaratory relief, or whether it follows involving penalties owed to the Department. Colorado's administrative tax procedures, a This provision also contemplates the plain, speedy, and efficient remedy is taxpayer and the executive director agreeing available in Colorado. that "a question of law arising under the United States or Colorado constitutions" is III. CONCLUSION implicated in the dispute, bypassing a The TIA divested the district court of hearing, and going "directly to the district jurisdiction over DMA's Commerce Clause court." claims, and we therefore have no We are satisfied that Colorado provides jurisdiction to reach the merits of this avenues for remote retailers to Challenge the appeal. We remand for the district court to scheme allegedly forcing them to choose dismiss DMA's Commerce Clause claims between collecting sales tax and complying for lack of jurisdiction, dissolve the with the notice and reporting requirements. permanent injunction entered against the Colorado's administrative remedies provide Department, and take further appropriate action consistent with this opinion

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“High Court to Hear Appeal Over Colorado 'Amazon Tax' Law”

Law360 Drew Singer July 1, 2014

The Supreme Court on Tuesday agreed to The DMA filed a complaint challenging the hear a case challenging Colorado’s so-called constitutionality of Colorado’s law shortly Amazon tax law, taking up the issue of after it was adopted, arguing that the new whether federal judges have the power to regulations, which don't apply to retailers decide whether states may impose reporting located in Colorado, discriminate against requirements on out-of-state retailers as part out-of-state retailers. U.S. District Judge of their tax laws. The closely watched case Robert E. Blackburn agreed, ruling that gives Supreme Court justices the chance to Colorado's reporting requirements strained clarify the scope of the Tax Injunction Act’s interstate commerce in violation of the U.S. jurisdiction. The TIA, in general, prevents Constitution's Commerce Clause. federal courts from interfering with state tax collection regimes. The Direct Marketing But, on appeal, the Tenth Circuit overturned Association, a trade association of direct- the decision on procedural grounds. The marketing retailers, asked the high court in appeals court said Judge Blackburn was February to review the Tenth Circuit’s use precluded from considering the merits of of the law. DMA's complaint because the district court lacked jurisdiction under the TIA. “Jurisdictional cases are always important because it's essential for the appellate court “The TIA divested the district court of system, and ultimately the Supreme Court, jurisdiction over DMA’s Commerce Clause to indicate when you can go to federal claims, and we therefore have no court,” association attorney George S. jurisdiction to reach the merits of this Isaacson of Brann & Isaacson said in March. appeal,” the Tenth Circuit said. The appeals “And when you have [a court] expanding court, citing a lack of jurisdiction, directed the scope of the TIA without any clear Judge Blackburn to throw out DMA's guidance, it's unsettling to businesses who Commerce Clause claims. want to be able to have certainty in pursuing Now before the Supreme Court, the DMA claims in federal court.” says in its petition that the constitutional The dispute stems from a 2010 Colorado question presented in its complaint does not law requiring remote retailers selling to in- fall under the purview of the TIA because it state customers to comply with a number of is not challenging Colorado's tax per se. notice and reporting obligations intended to Instead, DMA argues, its challenge avoids beef up the state's use-tax collections. the tax question and targets only the state law's reporting requirements.

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“It is the nontax, notice and reporting Third, the law requires out-of-state retailers obligations imposed on noncollecting to file an annual report with the Colorado retailers under the act that place the DMA's Department of Revenue that shows the total challenge outside the scope of the TIA,” amount of purchases Colorado buyers made DMA says in its petition. during the preceding calendar year, known as customer information reports. Isaacson said jurisdictional questions over the TIA were not originally raised in the Retailers are fined if they fail to comply state's appeal. He said the appeals court with the requirements — $5 per decision conflicts with prior rulings in the transactional notice violation, capped at First and Second circuits. $50,000 per retailer; $10 per violation of the annual purchase summary requirement, Colorado's regulations require three things: capped at $100,000 per retailer; and $10 per First, out-of-state retailers must send violation of the customer information report “transactional notices” to their Colorado requirement, also capped at $100,000 per buyers notifying them that they must file retailer. state sales- or use-tax returns declaring items purchased from those retailers. DMA is represented by George S.Isaacson and Matthew P. Schaefer of Brann & Second, an out-of-state retailer must send an Isaacson LLP. annual report to each Colorado buyer itemizing the total amount of purchases the The case is Direct Marketing Association v. buyer made from that particular retailer. The Brohl et al., case number 13-1032, in the report, known as an annual purchase Supreme Court of the United States. summary, must also remind the buyer that he or she is responsible for filing a Colorado sales or use tax return.

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“Supreme Court to Hear DMA Privacy Suit, Review Colorado Web Tax Sales Statute”

Bloomberg Alexander Ripps July 7, 2014

The U.S. Supreme Court July 1 agreed to said the case involves constitutional hear a case challenging a Colorado law questions that are important to retailers who requiring out-of-state retailers to report to offer their products in multiple states. the state the names, addresses and total annual purchases of their Colorado Disputes over the release of customer customers. purchase information from online retailers, such as Amazon.com, haven't been limited The court July 1 said it will review a case to Colorado. North Carolina's Department of brought by the Direct Marketing Association Tax Revenue was one of the first state tax (DMA), which seeks to overturn a ruling by agencies to face legal challenges over the U.S. Court of Appeals for the Tenth demands for Web customer data. Circuit that held that the Tax Injunction Act (TIA) barred federal court jurisdiction to Court Challenges enjoin the enforcement of the Colorado law. The DMA initially brought its lawsuit in the “We are pleased that the Supreme Court has U.S. District Court for the District of agree to hear this important case,” Peggy Colorado, challenging a reporting Hudson, the DMA's senior vice president of requirement imposed on out-of-state vendors government affairs, said in a July 1 DMA that don't collect and remit state sales and statement. “DMA began this fight four years use taxes. The law requires those vendors to ago with the goal of protecting consumer provide their customers' purchase history privacy by safeguarding businesses from information to the state, the DMA explained being forced to divulge their customers' in its statement. purchase history to the state of Colorado. Along the way, the fight has broadened to “In the lawsuit, DMA contends that the encompass not only issues of privacy, but Colorado law constitutes an unprecedented also fundamental constitutional questions invasion of consumer privacy and unfairly about access to federal courts.” discriminates against interstate commerce by targeting solely out-of-state merchants,” the The DMA's lead attorney, George S. DMA said. Isaacson of Brann & Isaacson in Lewiston, Maine, told Bloomberg BNA July 1 that In 2012, that court ruled in favor of the “the DMA is pleased the Supreme Court has DMA, calling the “Amazon law” decided to address the scope of the TIA.” He unconstitutional for violating the dormant

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Commerce Clause of the U.S. Constitution. Oswald noted that the Supreme Court's The court imposed a permanent injunction decision could have implications beyond preventing the state from executing the law. Colorado, particularly in states considering similar schemes such as Michigan and The U.S. Court of Appeals for the Tenth Colorado. Circuit reversed the decision and dismissed the case, citing the lack of federal Should the Supreme Court rule in the jurisdiction due to the TIA, 28 U.S.C. § DMA's favor, Oswald said he feels 1341. An attempt by the DMA to have the confident about the DMA's chances of case reconsidered en banc was denied. succeeding on the merits of the case.

After failing to get a full review from the “The underlying question of whether the Tenth Circuit, the case was removed to notice and reporting requirements are Colorado state court where the DMA won a constitutional or not is something we won preliminary injunction. Briefs for summary on in federal district court. We also won a judgment in that case are due the week of preliminary injunction in state court. So we July 7, Isaacson and Christopher Oswald, feel pretty confident,” he said. the DMA's vice president of state affairs, told Bloomberg BNA July 1. George S. Isaacson and Matthew P. Schaefer of Brann & Isaacson, in Lewiston, Maine, Notice, Reporting Requirements represented the DMA. John Suthers, Daniel D. Domenico, Melanie J. Snyder and Grant Oswald said the main issues in the case are to Sullivan of the Colorado State Attorney the notice and reporting aspects of the General's Office, in Denver, represented the Colorado law. “Those requirements are director of the Colorado Department of separate and apart from the taxation Revenue. element,” he said.

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“Tenth Circuit: Tax Injunction Act Precluded Federal Jurisdiction in Colorado’s E-Commerce Use Tax Reporting Requirements Case”

CBA Legal Connection Ellen Buckley August 29, 2013

The Tenth Circuit Court of Appeals placed undue burdens on interstate published its opinion in Direct Marketing commerce, in violation of the Commerce Ass’n v. Brohl on Tuesday, August 20 2013. Clause and entered a permanent injunction prohibiting enforcement of the state Colorado imposes a 2.9% use tax on requirements. The Department appealed. tangible goods stored, used, or consumed in the state when no sales tax has been paid. The Tenth Circuit did not reach the Because the dormant Commerce Clause Commerce Clause issue on appeal because it prohibits Colorado from forcing retailers held that the Tax Injunction Act (TIA) with no in-state physical presence to collect precluded federal jurisdiction over DMA’s and remit taxes on sales to Colorado claims. The TIA provides that “district consumers, the state requires its residents to courts shall not enjoin, suspend or restrain report and pay use taxes to the Department the assessment, levy or collection of any tax with their income tax returns. In 2010 the under State law where a plain, speedy and Colorado legislature enacted statutory efficient remedy may be had in the courts of requirements for non-collecting retailers. such State.” The statute and its implementing regulations impose three principal obligations on non- The DMA argued that it sought to avoid collecting retailers whose gross sales in notice and reporting obligations, not a tax, Colorado exceed $100,000: they must (1) so the TIA did not apply. The court provide transactional notices to Colorado disagreed. “The purposes of the TIA apply purchasers, (2) send annual purchase both to a lawsuit that would directly enjoin a summaries to Colorado customers, and (3) tax and one that would enjoin a procedure annually report Colorado purchaser required by the state’s tax statutes and information to the Department. regulations that aims to enforce and increase tax collection.” The court also found that a The Direct Marketing Association (DMA) plain, speedy and efficient remedy is sued the Department of Revenue’s executive available to retailers subject to the Colorado director, challenging the constitutionality of law. the state’s new notice and reporting requirements. The district court concluded The court remanded to the district court to that Colorado’s requirements for non- dismiss DMA’s Commerce Clause claims collecting retailers discriminated against and for lack of jurisdiction and to dissolve the permanent injunction.

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Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter 12-1497

Ruling Below: United States ex rel. Benjamin Carter c. Halliburton Co., 710 F.3d 171 (4th Cir. 2013), cert granted, 134 S.Ct. 2899 (2014).

Relator brought qui tam action against government contractor under the False Claims Act (FCA), alleging the contractor falsely billed the United States for services performed in Iraq. The United States District Court for the Eastern District of Virginia, James C. Cacheris, Senior District Judge, dismissed the complaint. Relator appealed.

Questions Presented: (1) Whether the Wartime Suspension of Limitations Act – a criminal code provision that tolls the statute of limitations for “any offense” involving fraud against the government “[w]hen the United States is at war,” and which this Court has instructed must be “narrowly construed” in favor of repose – applies to claims of civil fraud brought by private relators, and is triggered without a formal declaration of war, in a manner that leads to indefinite tolling; and (2) whether, contrary to the conclusion of numerous courts, the False Claims Act’s so-called “first-to-file” bar – which creates a race to the courthouse to reward relators who promptly disclose fraud against the government, while prohibiting repetitive, parasitic claims – functions as a “one case- at-a-time” rule allowing an infinite series of duplicative claims so long as no prior claim is pending at the time of filing.

UNITED STATES ex rel. Benjamin CARTER, Plaintiff-Appellant, v. HALLIBURTON CO.; Kellogg Brown & Root Services, Inc.; Service Employees International, Inc.; KBR, Inc., Defendants-Appellees. United States Court of Appeals, Fourth Circuit

Decided on March 18, 2013

[Excerpt; some footnotes and citations omitted.]

FLOYD, Circuit Judge.

Reversed and remanded by published Appellant Benjamin Carter appeals the opinion. Judge FLOYD wrote the majority district court's dismissal of his complaint opinion, in which Judge WYNN joined. with prejudice. The matter was initiated Judge WYNN wrote a separate concurring upon Carter's filing of a qui tarn lawsuit opinion. Judge AGEE wrote a separate under the False Claims Act (FCA). The opinion concurring in part and dissenting in subject matter underlying this case involves part. Appellees' — Halli-burton Company; KBR, Inc.; Kellogg Brown & Root Services, Inc.;

356 and Service Employees International, Inc. allege that KBR "knowingly made, used, or (collectively KBR) — alleged fraudulent caused to be made or used, false records or billing of the United States for services statements to get false or fraudulent claims provided to the military forces serving in paid or approved by the Government" in Iraq. The district court concluded that it violation of 31 U.S.C. § 3729(a)(2). lacked subject matter jurisdiction over Carter's claims because of the False Claims KBR provided logistical services to the Act's first-to-file bar. The district court also United States military in Iraq under a held that Carter's complaint had been filed government contract. Carter worked for beyond the six-year statute of limitations in KBR as a reverse osmosis water purification the FCA and was not tolled by the Wartime unit (ROWPU) operator at two camps in Suspension of Limitations Act (WSLA), Iraq from mid-January 2005 until April which the court ruled does not apply to non- 2005. Carter was hired to test and purify intervened qui tam cases. Accordingly, the water for the troops in Iraq. Carter claims district court dismissed Carter's complaint that KBR was in fact not purifying water with prejudice. Because we conclude that during the time period but was repeatedly the district court had subject matter misrepresenting to the United States that it jurisdiction and find that the WSLA applies was. Carter submits that water purification to this action, we reverse. Further, because it did not actually begin until May 2005. may be appropriate for the district court to Further, Carter maintains that he and his make factual findings to consider the public fellow employees were instructed to submit disclosure claim urged by KBR, we remand time sheets for twelve-hour days for work so the district court can consider this issue. that they performed on ROWPU functions. During this time, Carter states that he was I. actually not working any hours on ROWPU functions. Carter also contends as part of an In his complaint, Carter brings a qui tam overall scheme by KBR to overbill the action under the False Claims Act. The FCA government for labor charges, that all trade allows the United States to bring suit to employees were required to submit time recover funds and also allows, through the sheets totaling exactly twelve hours per day Act's qui tam provisions, for a private and eighty-four hours per week and that it plaintiff (relator) to sue in place of the was "routine practice" of the employees to government and keep a share of the do so regardless of actual hours worked. As proceeds. Carter alleges that KBR falsely a result, according to Carter, the United billed the United States for services States paid KBR for work not actually performed in Iraq. Specifically, Carter performed. alleges that KBR "knowingly presented to an officer or employee of the United States Carter filed his original complaint under seal Government false or fraudulent claims for on February 1, 2006, in the United States payment or approval in violation of 31 District Court for the Central District of U.S.C. § 3729(a)(1)." Carter goes on to California. After over two years of

357 investigation into the matter, the action was action under FCA § 3730(b)(5). In response, unsealed in May 2008. Shortly thereafter, Carter argued that Thorpe was materially the case was transferred to the Eastern different from his case because he focused District of Virginia in October 2008, at on KBR's alleged fraudulent which point Carter amended his complaint. misrepresentation to the government that The district court dismissed Carter's first KBR was actually performing water services amended complaint without prejudice in for which it was submitting bills. January 2009 for failure to plead fraud with particularity. Carter then amended his The district court rejected Carter's complaint for a second time and refiled his characterization, reasoning that he must complaint in January 2009 (Carter 2009). show that KBR employees were reporting KBR then moved to dismiss Carter's second hours that they did not work and the fact that amended complaint under Rules 9(b) and KBR was not performing water services is 12(b)(6) of the Federal Rules of Civil merely evidence that the time sheets were Procedure, which the district court granted false. The district court dismissed Carter in part. The district court, however, refused 2009 without prejudice on May 10, 2010. to dismiss counts 1 and 4. Count 1 alleged a Carter appealed the dismissal on July 13, scheme by KBR to submit fraudulent claims 2010. for payment to the government, and count 4 Thereafter, the United States District Court alleged fraudulent statements knowingly for the Central District of California made to the government to receive claims dismissed the Thorpe action on July 30, for payment. At this point, KBR answered 2010. In response, Carter refiled his the remaining allegations and the case complaint (Carter 2010) in the United States proceeded through discovery, which closed District Court for the Eastern District of in March 2010. Virginia while his appeal was still pending. In March 2010, one month before the When Carter refiled his complaint, he also scheduled trial date, the parties were sought to dismiss his appeal in the 2009 contacted by the United States Department action. This Court granted Carter's motion to of Justice, who informed them of the dismiss his appeal on February 14, 2011. existence of a False Claims Act case Meanwhile, Carter 2010 proceeded in the containing similar allegations filed under district court and, on May 24, 2011, the seal in December 2005, in the United States district court dismissed Carter's complaint District Court for the Central District of without prejudice, on the grounds that Carter California. Thorpe also alleges that KBR's had filed Carter 2010 while Carter 2009 was standard operating procedure was billing still pending on appeal, thereby creating his twelve hours per day, without regard to the own jurisdictional bar under the FCA's first- actual hours worked to perpetuate a scheme to-file provision. Carter chose not to appeal to overbill the government. In April 2010, this ruling. KBR filed a motion to dismiss Carter 2009, However, Carter refiled his complaint arguing that Thorpe constituted a "related" (Carter 2011) on June 2, 2011. The district

358 court unsealed the complaint on August 24, The district court granted KBR's motion and 2011. The complaint in this case is identical dismissed the complaint with prejudice on to the earlier 2010 complaint as well the November 29, 2011, ruling that the case was second amended complaint filed in 2009. related to Duprey and the Texas action. The After the complaint was unsealed, KBR court also found that Duprey was "pending" moved to dismiss the action, arguing that the for purposes of the first-to-file bar, because complaint was barred by two related actions, it had not been dismissed at the time Carter that the case was time barred, and that the 2011 was filed. The court considered case was barred by the public disclosure whether the Texas action was also "pending" provision of the FCA. as to bar Carter 2011, but ultimately concluded that it need not decide the issue At the time Carter 2011 was filed, two because at least one case — Duprey — was allegedly related cases were pending: United pending. The district court also held that States ex rel. Duprey, and another action — Carter 2011 had been filed beyond the that is under seal — filed in Texas in 2007. FCA's six-year statute of limitations and Duprey and the Texas action allege that would be time barred should it be refiled. KBR "knowingly presented, or caused to be Because of this reason, the court dismissed presented, to an officer or employee of the the case with prejudice. The district court United States Government, false or further held that Carter's action was not fraudulent claims for payment or approval in tolled by the WSLA. The district court held violation of 31 U.S.C. § 3729(a)(1)." Since that the WSLA does not apply to claims at least March 2003, KBR provided shipping under the FCA brought by private relators. and transportation support in Iraq for the Finding ample grounds to dismiss the action, United States military. The Duprey relator the district court did not consider whether was employed by KBR as a truck driver in the complaint was barred by the public Iraq from March 27, 2005, to January 15, disclosure provision of the FCA. Carter 2006. The Texas relators were also truck timely appealed. We have jurisdiction drivers in Iraq, and at least one relator was pursuant to 28 U.S.C. § 1291. present in Iraq during the period of September 2003 to March 15, 2004. Both II. complaints allege substantially similar claims, namely that KBR had a policy that We review de novo the district court's legal its drivers enter time sheets reflecting a rulings, such as its granting of KBR's twelve hour workday and an eighty-four motion to dismiss. To the extent that the hour work week, without regard to actual decisions below involved legal conclusions hours worked. The relators alleged that this based upon factual determinations, we practice was widespread throughout KBR's review the factual findings for clear error, operations in Iraq and elsewhere. Duprey viewing the evidence in the light most was subsequently voluntarily dismissed in favorable to Carter. October 2011, and the Texas action was III. voluntarily dismissed in March 2012.

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We first address Carter's contention that the When the United States is at war the WSLA tolls his action and there-fore, that running of any statute of limitations his claims are not time barred under the applicable to any offense (1) involving fraud or attempted fraud FCA. against the United States . . . shall be A. suspended until three years after the termination of hostilities as First, as a general matter, qui tarn actions proclaimed by the President or by a must be brought within six years after the concurrent resolution of Congress. date on which the alleged violation In 2008, the Wartime Enforcement of Fraud occurred. The WSLA was enacted in 1942 Act (WEFA) amended the WSLA to expand to extend the time for prosecution to bring its times of operation to "[w]hen the United charges relating to criminal fraud offenses States is at war or Congress has enacted against the United States during times of specific authorization for the use of the war. When enacted, the law applied to Armed Forces, as described in section 5(b) "offenses involving the defrauding or of the War Powers Resolution (50 U.S.C. attempts to defraud the United States . . . and 1544(b))." Additionally, the suspension now indictable under any existing statutes." period was extended until "5 years after the When amended in 1944, the phrase "now termination of hostilities as proclaimed by a indictable" was deleted. The WSLA was Presidential proclamation, with notice to later codified, and is now to be used Congress, or by a concurrent resolution of whenever the country is at war. Congress."

The Fifth Circuit has determined that the Courts are in disagreement as to which WSLA has three components: "(1) a version of the WSLA applies to offenses triggering clause ("When the United States that occurred before the amendments of is at war the running of [the applicable 2008. Additionally, courts are in conflict as statute of limitations] shall be suspended . . to whether the pre-amendment WSLA .') (2) a suspension period ('three years'), and requires a formal declaration of war or (3) a termination clause ('suspended until . . . whether the authorized use of military force after the termination of hostilities as shall suffice. proclaimed by the President or by a concurrent resolution of Congress.')." The B. Supreme Court has held that the WSLA Carter contends that the conflict in Iraq in applies only to offenses committed after the 2005 is sufficient to trigger WSLA's "at triggering clause and before the termination war" status under either version of the of hostilities. The running of the limitations WSLA. KBR however, urges us not to apply period then begins when hostilities are the post-amendment WSLA because it terminated. believes that the post-amendment WSLA Prior to October 4, 2008, the WSLA implicates its constitutional due process provided:

360 rights in that the Act may allow a statute of where the United States engages in massive limitations to run indefinitely. military campaigns resulting in enormous expense and widespread bloodshed without The question presented is the meaning of "at declaring a formal war. In fact, the United war" as it appears in the WSLA. As with all States has not declared war since World War questions of statutory construction, we begin II. However, there have been extensive by examining the statute's language. military engagements in Vietnam, Korea, "[W]hen a statute speaks with clarity to an Kosovo, Afghanistan, and twice in Iraq. issue[,] judicial inquiry into the statute's Indeed, the Supreme Court has found that meaning, in all but the most extraordinary the laws of war apply to non-declared wars, circumstance, is finished." In interpreting a for example the war in Afghanistan. Surely statute we "must presume that a legislature these circumstances result in situations in says in a statute what it means and means in which fraud can easily be perpetuated a statute what it says there." against the United States just as much as a Although the meaning of "at war" may formally declared war. The purpose of the appear unambiguous at first glance, its WSLA — to combat fraud at times when the meaning in the context of the WSLA is not United States may not be able to act as so clear. As the Supreme Court has noted, quickly because it is engaged in "war" — "Congress in drafting laws may decide that would be thwarted were we to find that the the Nation may be`at war' for one purpose, United States must be involved in a declared and`at peace' for another." Therefore, we war for the Act to apply. must determine what Congress meant by "at With these principles in mind, we now war" in the context of the WSLA. address the specific conflict in Iraq. On As an initial matter, we find it un-necessary October 11, 2002, Congress authorized the to decide which version of the WSLA President to use military force to "defend the applies because we find that the Act does national security of the United States against not require a formal declaration of war. the continuing threat posed by Iraq" and Therefore, under either version of the Act, "enforce all relevant United Nations the United States was at war when the acts Security Council resolutions regarding Iraq." at issue occurred. We find that the Act does Although not a formal recognition of war, not require a formal declaration of war for the AUMF signaled Congress's recognition several reasons. First, had Congress of the President's power to enter into armed intended the phrase "at war" to encompass hostilities. Based on the foregoing analysis, only declared wars, it could have written the we find that the United States was "at war" limitation of "declared war" into the Act as in Iraq from the date of the AUMF issued by it has in numerous statutes. Congress on October 11, 2002.

Next, we believe that requiring a declared We now turn to when — and if — the war would be an unduly formalistic hostilities in Iraq terminated. The Fifth approach that ignores the realities of today, Circuit recently considered this issue in

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Pfluger. There the court determined that However, when amended in 1944, the termination clause of the WSLA required phrase "now indictable" was deleted. The compliance with the formal requirements set WSLA was then applicable to all actions out in the clause because the language of the involving fraud against the United States. clause was plain and unambiguous. We Further, all but one court, United States v. agree. The pre-amendment and post- Weaver, to have considered the issue of amendment WSLA both specify that whether the WSLA applies to civil claims termination shall not occur until the Act's have found that it applies. formalities have been met. In the pre- amendment WSLA, termination occurs Had Congress intended for "offense" to when "proclaimed by the President or by a apply only to criminal offenses, it could concurrent resolution by Congress." In the have done so by not deleting the words post-amendment WSLA, termination "now indictable" or it could have replaced happens when "proclaimed by a Presidential that phrase with similar wording. However, proclamation, with notice to Congress, or by Congress did not include any limiting a concurrent resolution of Congress." language and it is our opinion that in failing Neither Congress nor the President had met to do so it chose for the Act to apply to all the formal requirements of the Act for offenses involving fraud against the United terminating the period of suspension when States. Therefore, because we find the text the claims at issue were presented for of the WSLA, the 1944 amendments, and payment. We therefore conclude that the the legislative history persuasive, we find United States was at war during the relevant that the WSLA applies to civil claims. time period for purposes of the WSLA. D.

C. The district court found that even if the KBR next argues that the WSLA does not WSLA was applicable to civil cases, it apply to Carter's claims because the WSLA remains inapplicable to actions where the by its plain terms applies only to criminal United States is not a party. The district cases. KBR bases its argument on the court relied on this Court's decision in language in the statute that states it applies United States ex rel Sanders v. North to "offense[s] involving fraud" and reasons American Bus Industries Inc., for support that "offense" ordinarily means only crimes. that the WSLA includes actions brought Resolution of this issue requires us to only by the United States. This Court held in interpret the meaning of "offense" as used in Sanders that 31 U.S.C. § 3731(b)(2), a the WSLA. special statutory extension of the FCA's statute of limitations, was available only to In Dugan & McNamara, the court examined the government. Sanders's reasoning is both the legislative history of the Act and further supported by the fact that the FCA the meaning of "offense." The court has a statute of limitations that applies reasoned that the term "offense" in the 1942 specifically to relators. The limitations version referred only to criminal penalties. period in § 3731(b)(2) starts when the

362 government knows or should know of "facts and bounded time while the country is at material to the right of action." The court war. By offering this rationale, it appears the reasoned: court was critiquing the purpose of the WSLA itself and not providing a valid basis This language makes perfect sense for excluding relator-initiated claims from when referring to an action brought by the government: the limitations the WSLA. Accordingly, we are period is based on the government's unpersuaded that relator-initiated claims are knowledge of facts material to the excluded from the ambit of the WSLA. right of action' because that Thus, Carter's action is not time barred. particular knowledge notifies the government that it has an actionable IV. FCA claim. But applying the statute's language to a relator's action We next consider KBR's argument that the makes no sense whatsoever. FCA's first-to-file bar prohibits Carter's case from proceeding. Unlike in Sanders, whether the suit is brought by the United States or a relator is A. irrelevant to this case because the suspension of limitations in the WSLA The FCA prescribes penalties for claims depends upon whether the country is at war submitted to the government that are known and not who brings the case. As such the to be false. While encouraging citizens to act district court's reliance on Sanders was as whistleblowers, the Act also seeks to misguided. prevent parasitic lawsuits based on previously disclosed fraud. To reconcile Courts are "authorized to deviate from the these conflicting goals, the FCA has placed literal language of a statute only if the plain jurisdictional limits on its qui tarn language would lead to absurd results, or if provisions, including § 3730(b)(5)'s first-to- such an interpretation would defeat the file bar and § 3730(e)(4)'s public disclosure intent of Congress." Sanders follows this provision. logic, but this principle does not exclude relator-initiated actions from the ambit of Under the first-to-file bar, if Carter's claims the WSLA. Including such actions does not had been previously filed by another relator, lead to "absurd results" nor "defeat the intent then the district court lacked subject matter of Congress." In fact, including civil claims jurisdiction. By the same token, the public furthers the WSLA's purpose: to root out disclosure bar prevents a relator from fraud against the United States during times bringing an action if the matters therein have of war. The district court's reasoning for already been made public knowledge, except relying on Sanders was that if the WSLA if the person is an original source of the applied to a relator's claims this would information. Although the provisions "allow fraud [claims] to extend perhaps promote the same goals, they have different indefinitely." This is incorrect. The WSLA requirements. Here the district court ruled tolls the applicable period for a specified on the firstto-file bar and did not consider

363 the public disclosure bar. Because of this, different details." "[T]he test prevents the we begin with the first-to-file bar. less vigilant whistle-blower from using insignificant factual variations to allege B. what is essentially the same fraudulent KBR argues that Duprey and the Texas scheme already made known to the action are related actions that deprive this government." We find our sister circuits' Court of jurisdiction under the first-to-file reasoning persuasive, and we join these bar. This Court has described the first-to-file circuits in adopting the "material elements bar as an absolute, unambiguous exception- test." free rule. Therefore, whoever wins the race C. to the courthouse prevails and the other case must be dismissed. The text of the relevant We shall now apply the material elements section provides that "[w]hen a person test to determine whether Carter's action is brings an action under [the FCA], no person barred by either Duprey or the Texas action. other than the Government may intervene or The allegations in Duprey, the Texas action, bring a related action based on the facts and herein are substantially similar. All underlying the pending action." Section allege that KBR had a systematic practice of 3730(b)(5) is jurisdictional and if an action overbilling the government for hours is later filed that is based on the facts worked by their employees. The employees underlying the pending case, the court must were instructed to complete their time sheets dismiss the later case for lack of jurisdiction. without regard to the number of hours that were actually worked. These allegations of In determining whether a complaint is fraud provide the government with enough similar enough as to be caught by the first- knowledge of essential facts of the scheme to-file bar, courts have applied variations of to discover related fraud. The government a common approach. Although the would likely investigate billing practices approaches vary, courts have almost across the company, because Duprey notes uniformly rejected an "identical facts" test that the official national policy was to bill on the ground that the provision refers to a correctly but that the employees were "related" action rather than an "identical" consistently instructed not to do so. action. The courts also agree that differences in specifics — such as geographic location Carter seeks to distinguish his action by or added facts — will not save a subsequent pointing out that the other relators worked in case. The Third, Fifth, Sixth, Ninth, Tenth, different divisions and were truck drivers, and D.C. circuits have all adopted a "same whereas he was a ROWPU employee. We material elements test." are unpersuaded that these distinctions are material. Duprey and the Texas action both Under this test, a later suit is barred if it is allege a broad scheme that encompasses the based upon the "same material elements of time and location of Carter's action. Even fraud" as the earlier suit, even though the though the fraud did occur via different subsequent suit may "incorporate somewhat types of employees and in different

364 divisions, this is insufficient to demonstrate to determine whether an action is barred by that the scheme Carter alleges is different the first-to-file bar, we conclude that Carter's from the one Duprey and the Texas relators claims are barred by the Duprey and Texas allege. As the Fifth Circuit noted, "a relator actions. However, this does not end our cannot avoid § 3730(b)(5)'s first-to-file bar inquiry. by simply adding factual details or geographic location to the essential or Carter alleges that the district court erred material elements of a fraud claim. . . ." when it dismissed his complaint with Here the fraud alleged — submission of prejudice on the ground that his action was false time sheets in support of claims for forever barred by the Duprey action. In false payment — is the same in all of the United States ex rel. Chovanec v. Apria complaints. Thus, Section 3730(b)(5)'s goal Healthcare Group, Inc., the Seventh Circuit of preventing parasitic qui tam lawsuits reviewed a complaint that was dismissed would not be furthered if all three actions with prejudice because of a pending case. were allowed to proceed on the same The court reasoned that once the initial essential claims. complaint was no longer pending, the bar of § 3730(b)(5) was inapplicable and Chovanec D. was "entitled to file a new qui tarn complaint." However, if a case is brought Carter argues that regardless of the while the original case is pending it must be relatedness of his complaint to the other dismissed "rather than left on ice." Although cases, the other cases cannot continue to the doctrine of claim preclusion may prevent have a preclusive effect on his action. Carter the filing of subsequent cases, § 3730(b)(5) argues that because the Duprey and Texas does not. This is especially true when the action have been dismissed neither can be original case is dismissed on reasons other deemed a "pending action" under § than the merits or dismissed without 3730(b)(5). prejudice. Because Chovanec was entitled to Following the plain language of the first-to- file a new complaint, the proceeding should file bar, Carter's action will be barred by have been dismissed without prejudice. Duprey or the Texas action if either case Similarly the Tenth Circuit has explained was pending when Carter filed suit. The why an action that is no longer pending Duprey action was filed in 2007, and cannot have a preclusive effect for all future voluntarily dismissed in October 2011, after claims. The court reasoned, "if that prior the relator failed to serve the complaint on claim is no longer pending, the first-to-file the defendants. The Texas action was filed bar no longer applies." "The`pending' in 2007 and voluntarily dismissed in March requirement much more effectively 2012, when the government declined to vindicates the goal of encouraging relators intervene. Therefore, both actions were to file; it protects the potential award of a pending when Carter filed his complaint on relator while his claim remains viable, but, June 2, 2011. Because we look at the facts as they existed when the claim was brought

365 when he drops his action another relator . . . VI. may pursue his own." For the foregoing reasons we reverse the We agree that once a case is no longer district court's dismissal of Carter's pending the first-to-file bar does not stop a complaint. Rather than address the relator from filing a related case. In this alternative ground of the public disclosure case, both of the original actions have been bar for the first time on appeal, we remand dismissed. Because of this, the first-to-file this issue to the district court for further bar does not preclude Carter from filing an consideration. action. The first-to-file bar allows a plaintiff to bring a claim later; this is precisely what a REVERSED AND REMANDED dismissal without prejudice allows a WYNN, Circuit Judge, concurring: plaintiff to do as well. Therefore, Carter's only impediment at the moment is the I fully concur in the fine majority opinion. I district court's dismissal with prejudice. write separately to address what appears to And, as we have already concluded the be the heart of the dissent's objections: that district court erred in dismissing Carter's applying the Wartime Suspension of complaint with prejudice. Limitations Act, to the False Claims Act, actions in which the United States is not V. plaintiff or intervenor is unwise because KBR argues that this Court should affirm doing so is contrary to the policy of strictly the dismissal of Carter's complaint on the construing statutes of limitations and the alternative ground of the FCA's public goals of the False Claims Act. In particular, disclosure provision. As noted previously, the dissent expresses concern that our the public disclosure bar removes subject decision will allow the False Claims Act matter jurisdiction for FCA claims that are limitations period to "extend indefinitely" based upon matters that have been disclosed and, consequently, will incentivize private publicly, unless the relator was the original plaintiffs to delay filing their claims to source of the allegations. KBR alleges that maximize their potential recovery. Because Carter was not the original source of the it is not our place to second-guess information, and that he gathered the Congress's clearly expressed policy information from another KBR employee. decisions, I respectfully disagree with the The district did not reach this argument, dis-sent. having found grounds for dismissal When interpreting a federal statute, the elsewhere. We decline to address this issue "cardinal rule . . . is that the intent of for the first time on appeal. Because the [Congress] is to be given effect." Typically, district court should have the opportunity in we ascertain Congressional intent from the the first instance to address the facts relevant plain language of the statute. If the plain to public disclosure, we remand this issue to language of the statute unambiguously the district court. expresses Congress's intent, our inquiry

366 comes to an end, even if we disagree with tolled until "no more than 3 years after the the policy embraced by the statutory date when facts material to the right of language. For, as the Supreme Court has action are known or reasonably should have explained, been known by the official of the United States charged with responsibility to act in Our individual appraisal of the the circumstances." In Sanders, we reasoned wisdom or unwisdom of a particular course consciously selected is to be that Section 3731(b)(2) does not toll the put aside in the process of limitations period for private False Claims interpreting a statute. Once the Act actions because it would make little meaning of an enactment is sense to have a suit's limitations period turn discerned and its constitutionality on the knowledge of an entity that is not determined, the judicial process party to the action. comes to an end. We do not sit as a committee of review, nor are we The majority opinion correctly notes that vested with the power of veto. Sanders is inapposite because it involved an Here, as the majority correctly concludes entirely different statute, which includes and the dissent tacitly acknowledges, the express language that supports plain language of the Wartime Suspension distinguishing between False Claims Act of Limitations Act extends the limitation actions where the government is and is not a period for "any offense" of fraud against the party. Nevertheless, the dissent tries to United States during a time of war. No analogize the Wartime Suspension of doubt recognizing that it is not our role to Limitations Act to Section 3731(b)(2), question Congress's clearly expressed policy which was at issue in Sanders, by asserting determinations, the dissent relies on strained that federal government conduct controls the readings of the Wartime Suspension of limitations periods set out in both statutes. In Limitations Act and our precedent in an particular, the dissent notes that attempt to argue that, under the plain [b]y the terms of the [Wartime language of the Wartime Suspension of Suspension of Limitations Act], the Limitations Act, the term "any offense" does government is solely entitled to not encompass False Claims Act actions in invoke and terminate the tolling which the government is not a party. provisions of the statute. . . . The private qui tarn plaintiff has no First, the dissent appeals to our decision in connection with these decisions and United States ex rel. Sanders v. North it seems odd to conclude that such a American Bus Industries, Inc., in which we private plaintiff should be entitled to held that the False Claims Act limitations the same limitations period as the necessary actor, the government. period tolling provision, does not apply to There is no such clear statutory False Claims Act actions in which the direction. government is not a party. Section 3731(b)(2) provides that the standard six- But Congress does not "invoke" the year False Claims Act limitations may be Wartime Suspension of Limitations Act.

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Rather, the Wartime Suspension of be said in order to effectuate the Limitations Act becomes effective when relevant legislative objective. An Congress declares war or authorizes the use inference from congressional silence certainly cannot be credited when it of military force. The invocation of the is contrary to all other textual and Wartime Suspension of Limitations Act is at contextual evidence of congressional most a tertiary consideration in Congress's intent. decision to declare war or authorize the use of military force, and thus there is only a de Here, finding meaning in the War-time minimus relationship between the Suspension of Limitations Act's silence is government conduct discussed in the improper because the silence just as Wartime Suspension of Limitations Act and reasonably can be interpreted as indicating any particular False Claims Act claim. By that Congress did not intend to distinguish contrast, with Section 3132(b)(2) the between False Claims Act actions by private connection between the relevant government plaintiffs and those in which the government conduct and a particular False Claims Act is a party as it can be interpreted as claim is quite close, because whether excluding actions by private relators from Section 3132(b)(2) tolls the limitations the ambit of the Wartime Suspension of period turns on the government's knowledge Limitations Act, as the dissent does. of the alleged fraudulent conduct at issue in Moreover, Congress's decision not to clarify the particular False Claims Act claim. the scope of "any offense" when amending The dissent also places great weight on the the Wartime Suspension of Limitations Act fact that both the Wartime Suspension of in 2008 in the face of numerous decisions Limitations Act and its legislative history broadly interpreting "offense" in the are silent regarding qui tarn relators in False Wartime Suspension of Limitations Act Claims Act actions, arguing that this silence casts further doubt on the dissent's appeal to "strongly suggests that Congress did not statutory silence. A canon of statutory intend the tolling provisions of the statute to construction is that "[w]e presume that when reach indiscriminately to any private Congress amends a statute, it is plaintiff pursuing a claim for fraud against knowledgeable about judicial decisions the government." Yet the Supreme Court has interpreting the prior legislation." admonished courts to tread carefully in Congress amended the Wartime Suspension attempting to find meaning in statutory of Limitations Act in 2008 to broaden its silence because such silence is frequently scope by lengthening the tolling period and amenable to multiple interpretations: clarifying that the statute applies to Not every silence is pregnant. In Congressional authorizations of the use of some cases, Congress intends silence military force as well as declared wars. to rule out a particular statutory Notably, the amendment did not in any way application, while in others alter, narrow, or circumscribe the scope of Congress' silence signifies merely an the term "any offense." By the time of the expectation that nothing more need

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2008 amendment, numerous courts had held limitations period for False Claims Act that the term "offense" in the earlier version claims and will encourage would — be of the Wartime Suspension of Limitations relators to delay filing their claims — I am Act encompassed civil fraud claims, not convinced that either concern is including False Claims Act cases, and the justified. First, the Wartime Suspension of only court to address whether the Wartime Limitations Act tolls the limitations period Suspension of Limitations Act applies to for fraud actions for a bounded period of non-intervened False Claims Act actions had time: the time during which the country is at determined that it did, albeit in dicta. We war or otherwise engaged in a military must presume that Congress was aware of conflict. Moreover, even if the informal these interpretations when it amended the nature of modern military conflicts renders Wartime Suspension of Limitations Act in the limitations period established by the 2008, and its decision not to amend the Wartime Suspension of Limitations Act statute to exclude, or even discuss, False somewhat less definite, it is within Claims Act actions, let alone non-intervened Congress's purview to determine that certain False Claims Act actions, in the face of this conduct is sufficiently egregious — such as precedent suggests that it agreed with, or at defrauding the government during a time of least acquiesced in, these judicial decisions. war — that an extended or indefinite In such circumstances, Congress's silence limitations period is warranted. Indeed, favors the majority's reading, rather than Congress has elected to entirely do away undermining it. with limitations periods for many federal crimes. Thus, neither of the dissent's rationales for reading ambiguity into the plain language of Second, any concern that our holding will the statute is persuasive. Therefore, we are encourage relators to sit on their claims in left to conclude that when Congress said order to maximize recovery is alleviated by "any offense," it meant any offense, the False Claims Act's public disclosure and including offenses raised by private False first-to-file bars, which preclude a would-be Claims Act relators. Because the plain relator from bringing a claim that is based language of the Wartime Suspension of on information that has already been Limitations Act indicates that Congress publicly disclosed or that is "related" to a intended the statute to apply to non- pending action. Regardless of the intervened False Claims Act actions, it is not applicability of the Wartime Suspension of our place to question the wisdom of this Limitations Act, False Claims Act relators policy decision. have an incentive to bring actions as early as possible to avoid having their claims Even if the plain language of the War-time dismissed under either of these two Suspension of Limitations Act would allow provisions. us to consider the policy concerns highlighted by the dissent — that our In sum, the majority correctly concludes that decision will "extend indefinitely" the the plain language of the Wartime

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Suspension of Limitations Act Pursuant to 31 U.S.C. § 3731(b)(1), a civil unambiguously encompasses False Claims action under the FCA may not be brought Act actions in which the government is not a more than six years after the date on which party. It is not this Court's — or any court's the alleged violation was committed. In this — place to revisit Congress's clearly case, the vast majority of Carter's claims articulated policy determinations, even when against KBR stem from violations that we feel they are unwise. If, after reviewing allegedly took place before May 1, 2005. our decision, Congress agrees with the Pursuant to § 3731(b)(1), therefore, Carter dissent that limiting the Wartime Suspension had until May 1, 2011, to file his qui tarn of Limitations Act to False Claims Act complaint against KBR for it to be deemed actions in which the government is a party is timely. The latest iteration of Carter's the best policy, it is free to amend the complaint, however, was not filed until June statute, as it did in 2008. Until that point, 2, 2011. Thus, absent tolling, in some form, however, we are required to give effect to the bulk of Carter's claims are barred by the Congress' intent, as expressed through the FCA's limitations period because they did plain and unambiguous language of the not take place within six years of the filing Wartime Suspension of Limitations Act, that of the complaint. the tolling applies to "any offense." In 1942, Congress unanimously approved AGEE, Circuit Judge, concurring in part the first version of the WSLA, which and dissenting in part: temporarily suspended the statute of limitations in criminal contracting fraud I concur with the majority opinion that the cases arising out of the Second World War. "first-to-file" rule does not act as a barrier to Congress amended the WSLA in 1948, and Benjamin Carter's qui tarn action against the majority concludes that the effect of Halliburton, Kellogg Brown & Root, and those amendments was to extend the reach Service Employees International of the WSLA to civil limitations periods, not (collectively "KBR"). However, I do not merely those arising in the criminal fraud agree with the holding in the majority context. The majority may be correct, but opinion, principally section III D, that the the issue is not without doubt. Wartime Suspension of Limitations Act ("WSLA"), tolls the six-year limitations In 2011, at the time Carter filed his period set forth in the False Claims Act complaint, the WSLA provided: ("FCA"), 31 U.S.C. § 3731(b)(1), when the When the United States is at war or United States is not the plaintiff or an Congress has enacted a specific intervenor. For that reason, I respectfully authorization for the use of the dissent from the majority opinion insofar as Armed Forces . . . the running of any it would allow Carter to proceed on those of statute of limitations applicable to his claims that fall outside the six-year FCA any offense (1) involving fraud or limitations period. attempted fraud against the United States or any agency thereof in any I. manner, whether by conspiracy or

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not, or (2) committed in connection This appeal presents a quintessential with the acquisition, care, handling, question of statutory interpretation, which custody, control or disposition of any we review de novo. real or personal property of the United States, or (3) committed in "As in all cases of statutory interpretation, connection with the negotiation, our inquiry begins with the text of the procurement, award, performance, statute." "In that regard, we must first payment for, interim financing, cancelation, or other termination or determine whether the language at issue has settlement, of any contract, a plain and unambiguous meaning with subcontract, or purchase order which regard to the particular dispute . . . and our is connected with or related to the inquiry must cease if the statutory language prosecution of the war or directly is unambiguous and the statutory scheme is connected with or related to the coherent and consistent." "We determine authorized use of the Armed Forces, the`plainness or ambiguity of the statutory or with any disposition of termination inventory by any war language . . . by reference to the language contractor or Government agency, itself, the specific context in which that shall be sus pended until 5 years language is used, and the broader context of after the termination of hostilities as the statute as a whole.'" proclaimed by a Presidential proclamation, with notice to B. Congress, or by a concurrent resolution of Congress. For purposes I note at the outset that no case has ever held of applying such definitions in this (other than in dicta) that the WSLA applies section, the term "war" includes a to civil cases where the United States is not specific authorization for the use of a plaintiff or intervener in the qui tarn the Armed Forces. action. In the only case in which a court Carter argues that, by operation of the suggested the WSLA did so apply, the WSLA, the FCA limitations period was court's conclusion was not the ratio decendi suspended in 2005, at the time KBR of the decision and was clearly dicta. In submitted allegedly false claims to the McCans, the relator brought a qui tam United States for payment. Accordingly, complaint against Armour & Co., a Carter posits (and the majority opinion government contractor, alleging that Armour agrees) that the WSLA precludes KBR from sold certain pork products to war asserting the statute of limitations as a procurement agencies at prices in excess of defense in this case. For reasons explained limitations set by Congress during World below, I do not agree with that construction War II. Although the allegedly illegal sales of the WSLA. were conducted between 1942 and 1943, the relator did not file her complaint until 1954. II. While the district court discussed the A. application of the WSLA tolling provisions to the relator's complaint, it concluded that the complaint was not timely filed, even if

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WSLA tolling were applicable. Any receive) notice of the violation. We rejected discussion of WSLA tolling in McCans was that attempt. thus clearly unnecessary to the district court's holding that the suit was untimely. Although we observed that § 3731(b) Accordingly, the court's references to the applied to "civil action[s]" under the FCA, WSLA's applicability to private plaintiffs is we held that the language of § 3731(b)(2) mere dicta. could only be logically applied when referring to an action brought by the United C. States, not by a private relator. In support of this holding we reasoned that "applying the As there is no direct authority for statute's language to a relator's action makes application of the WSLA here, I find the no sense whatsoever. The government's reasoning in United States ex rel. Sanders v. knowledge of`facts material to the right of North American Bus Industries, Inc. a action' does not notify the relator of persuasive guide to our disposition of this anything, so that knowledge cannot issue. Sanders concerned the construction of reasonably begin the limitations period for a 31 U.S.C. § 3731(b), the FCA's limitations relator's claims." provisions; the same statute providing the statute of limitations in this case. That The Sanders court also made important statute provides that observations about the practical effect of allowing a private relator to claim the [a] civil action under [the FCA] may benefit of a statutory limitations period not be brought — intended for the benefit of the government. (1) more than 6 years after the date It noted that extending the limitations period on which the violation of [the FCA] for up to 10 years (the outer limit provided is committed, or by § 3731(b)(2)) in the case of a private (2) more than 3 years after the date relator would create incentives contrary to when facts material to the right of the purposes of the FCA. "[R]elators would action are known or reasonably have a strong financial incentive to allow should have been known by the false claims to build up over time before official of the United States charged they filed, there-by increasing their own with responsibility to act in the potential recovery." Critically, the court circumstances, but in no event more than 10 years after the date on which went on to note that the relator's proposed the violation is committed, construction would undermine the very whichever occurs last. purpose of the qui tarn provisions of the FCA: "to combat fraud quickly and The Sanders relator, whose complaint was efficiently by encouraging relators to bring filed beyond the six-year limitations period actions that the government cannot or will described in § 3731(b)(1), sought to avail not." himself of § 3731(b)(2), which runs the limitations period from the time the United Following the reasoning of Sanders in the States receives (or reasonably should instant case, I agree with the holding of the

372 district court that application of the WSLA In Sanders, we declined to find that the to a suit brought by a private relator is private party relator could latch onto the § inconsistent with the WSLA and its 3731(b)(2) exception since the relator was legislative history and would be contrary to neither mentioned in the statute or the articulated goals of the FCA. Let me legislative history as authorized to do so. explain why that is so. Similarly, here with the WSLA, we find no mention of the private party relator in the At first blush, Carter is correct that the statute or its legislative history: again, an WSLA applies to "any offense," involving odd basis upon which to extend the tolling fraud against the United States (obviously, of a statute of limitations which is to be when certain conditions are met). But to strictly construed. read "any offense" as encompassing actions by private relators is a superficial reading of Simply reading "any offense" to encompass the WSLA and fails to construe the statute in all offenses regardless of whether the United context. By the terms of the WSLA, the States is the plaintiff, is inconsistent with the government is solely entitled to invoke and nuanced approach that courts have terminate the tolling provisions of the that employed when reading the "civil action" statute, however, the text of the WSLA is language in § 3731(b). We reasoned in entirely silent as to private relators. The Sanders that "a civil action" should not be triggering and terminating provisions of the read to encompass all FCA actions, but WSLA are both related to and solely rather, should be read in context to include controlled actions of the United States only those actions brought by the United government: declaration of war or States. Here, the WSLA (like § 3731(b)(2)) congressional authorization for use of mentions the United States, not private military force (to trigger) and congressional relators. Thus the text of the WSLA, on its resolution or Presidential proclamation (to own, supports the proposition that only the terminate). In either circumstance, Congress United States may take advantage of its and the President possess the unique power tolling provisions. Nevertheless, I also find to invoke the WSLA to toll the limitations that this interpretation is consistent with the period for fraud offenses: a period when the purposes and legislative history of the same government is thus released from a WSLA. looming time bar to bring an FCA claim. The private qui tarn plaintiff has no D. connection with these decisions and it seems The Supreme Court has described the odd to conclude that such a private plaintiff, rationale underlying the passage of the absent a clear statutory direction, should be WSLA during World War II as follows: entitled to the same limitations period as the necessary actor, the government. There is no The fear was that the law- such clear statutory direction. enforcement officers would be so preoccupied with prosecution of the war effort that the crimes of fraud

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perpetrated against the United States inability of the Department of Justice and would be forgotten until it was too other federal law-enforcement entities to late. The implicit premise of the effectively prevent and prosecute fraud in legislation is that the frenzied light of other duties antecedent to waging activities, existing at the time the Act became law, would continue until war. The legislative history makes no hostilities terminated and that until mention of private plaintiffs bringing relator then the public interest should not be actions against those allegedly engaged in disadvantaged. fraud.

In other words, the Court recognized that the The legislative history of the Wartime primary concern motivating Congress in Enforcement of Fraud Act of 2008 passing the WSLA was the ability of law ("WEFA"), which contained the most recent enforcement to effectively police fraud amendments to the WSLA, reveals that the against the government during the fog of same concerns motivated Congress in war. This concern is evident in the WSLA's passing the 2008 amendments to the WSLA. legislative history. In sending the WEFA to the full Senate, the Judiciary Committee report repeatedly During normal times the present 3-year emphasized the difficulty of investigators, statute of limitations may afford the auditors, and the Department of Justice in Department of Justice sufficient time to ferreting out fraud against the United States investigate, discover, and gather evidence to during the conflicts in Iraq and Afghanistan. prosecute frauds against the Government. Again, the legislative history is silent with The United States, however, is engaged in a respect to private party relators. gigantic war program. Huge sums of money are being expended for materials and The purpose of the WSLA (as articulated by equipment in order to carry on the war the Supreme Court) and the legislative successfully. Although steps have been history of that statute confirm what the text taken to prevent and to prosecute frauds reflects: that Congress was concerned with against the Government, it is recognized that the ability of the federal government to in the varied dealings opportunities will no police fraud when the resources of its law doubt be presented for unscrupulous persons enforcement were stretched thin by war. to defraud the Government or some agency. Tolling afforded law enforcement the ability These frauds may be difficult to discover as to thoroughly investigate allegations of is often true of this type of offense and many fraud without compromising the ability of of them may not come to light for some time the United States to fulfill its military to come. The law-enforcement branch of the mission. Unlike federal law enforcement, Government is also busily engaged in its private relators are not "busily engaged in . . many duties, including the enforcement of . many duties, including the enforcement of the espionage, sabotage, and other laws. the espionage, sabotage, and other laws." And extending the benefits of tolling to Once again, the concern of Congress, as private relators does not "afford the expressed in the legislative history, was the

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Department of Justice sufficient time to August 31, 2010, presidential statement of investigate, discover, and gather evidence to "the end of our combat mission in Iraq" was prosecute frauds against the Government." sufficient to end the tolling provisions of the Id. In sum, Congress has shown no intent to WSLA, Carter would have until 2019, toll the FCA's limitations period when the nearly fourteen years after his claims United States is not a plaintiff to the FCA accrued, to file a qui tarn action. Before the action. district court, Carter argued that hostilities in Iraq have not formally ended, meaning that The complete silence as to relators in the the limitations period would still be tolled legislative history of the WSLA is all the today, seven years after the allegedly false more telling when one considers that the claims were presented to the government. FCA, which was originally passed in 1863, When (and if) hostilities are formally was on the books when the Congress declared terminated in Iraq, it could be up considered the WSLA in 1942 and the another eleven years (five years after WEFA in 2008. "Faced with statutory termination of hostilities pursuant to the silence, we presume that Congress is aware WSLA, plus the normal six year limitations of the legal context in which it is period prescribed in § 3731(b)(1)) before the legislating." Thus, the fact that Congress did limitations period would be deemed to have not mention qui tarn plaintiffs in the ended. Such an expansive limitations period legislative history of any version of the applicable to private qui tarn plaintiffs is WSLA strongly suggests that Congress did unsupported by statute, legislative history, not intend for the tolling provisions of that or precedent. statute to reach indiscriminately to any private plaintiff pursuing a claim for fraud In this respect, Sanders is again instructive, against the government. because it accurately described the differing incentive structures that motivate relators, as E. opposed to law enforcement, in the context Looking finally to the policies underlying of FCA actions. As Sanders explained, a the FCA, the majority's interpretation of the lengthy limitations period would create a WSLA is plainly at odds with the goals of "strong financial incentive" for relators to the FCA. The policy concerns underlying "allow false claims to build up over time the FCA will be directly thwarted by before they filed, thereby increasing their allowing private relators to take advantage own potential recovery." The government, of the WSLA's tolling provisions. In this on the other hand, always has an incentive to case, for example, Carter's claims arose in quickly act to root out fraud against the 2005, and application of the WSLA would United States. The lengthy limitations period extend the limitations period for his actions of the WSLA, therefore, is uniquely helpful well into the next decade at least, depending to a government that is otherwise hampered on the date hostilities in Iraq are deemed from enforcing antifraud laws by the terminated. Assuming for the sake of externalities of waging a military conflict. argument, as the district court did, that the Applying that same lengthy limitations

375 period to relators is uniquely problematic dismisses Sanders as inapplicable because, because doing so thwarts the whole purpose "whether the suit is brought by the United of the FCA: "to combat fraud quickly and States or a relator is irrelevant to this case efficiently by encouraging relators to bring because the suspension of limitations in the actions that the government cannot or will WSLA depends on whether the country is at not — to stimulate actions by private parties war and not who brings the case." This is a should the prosecuting officers be tardy in misreading of Sanders, the statute, and the bringing the suits." legislative history. Like the WSLA, the limitations period at issue in Sanders did not In fact, the concern identified by Sanders is contain an express limitation on who could exacerbated in the context of wartime take advantage of the tolling provision. enforcement of anti-fraud laws. As the Rather, the analysis in Sanders focused on legislative history to the WE FA notes, whether § 3731(b)(2) could be plausibly "often," during war, "the Government does read to encompass actions brought by not learn about serious fraud until years after private parties. Like § 3731(b)(2) in the fact." In contrast, private party relators Sanders, the WSLA should be read in will be inclined to delay, allowing their context, keeping in mind both the purposes potential recovery to increase, knowing that of that statute and the dire effects of the government is unlikely to discover the extending to relators a provision obviously fraud, and therefore unlikely to be the first intended only for the government. to bring a claim against the perpetrators. Absent WSLA tolling, relators are at least III. restricted to a six year window in which to bring their claims. In the context of virtually The text, the purposes, and the legislative indefinite WSLA tolling, however, a relator history of the WSLA all counsel in favor of could wait a decade or more to bring a qui holding that the government only, and not tarn claim, secure in the knowledge that law private relators, are entitled to take enforcement is otherwise too occupied with advantage of that statute's tolling provisions. the exigencies of war to discover the fraud Because the majority takes the altogether on its own. novel step of expanding the WSLA to apply to actions by relators, I must respectfully F. dissent from that aspect of the majority's holding. The majority opinion does not address the arguments set forth above, but summarily

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“US Supreme Court Agrees To Address Two Important False Claims Act Issues”

Mondaq Jonathan G. Cedarbaum & Daniel S. Volchok July 8, 2014

Yesterday, the Supreme Court granted when Carter filed his operative complaint. certiorari in Kellogg Brown & Root v. Although that other case had since been United States ex rel. Carter, No. 12-1497, a dismissed, the district court here held that case presenting two important issues under the first-to-file bar depended on the state of the False Claims Act (FCA). The first is affairs at the time of the filing of the whether the Wartime Suspension of complaint. The court also held that most of Limitations Act—which tolls the limitations Carter's claims were time-barred, rejecting period during wartime for any "offense" his argument that the Wartime Suspension against the United States—applies to a civil of Limitations Act (WSLA), 18 U.S.C. § FCA claim brought by a qui tam relator. The 3287, tolled the limitations period. The court second is whether the FCA's "first-to-file ruled that the WSLA does not apply to a bar"—which provides that once a relator civil fraud claim brought by a qui tam brings an FCA action, "no person other than relator. the government may intervene or bring a related action based on the facts underlying The Fourth Circuit reversed. The court held the pending action"—precludes a later that although the complaint was properly action only so long as the earlier action is dismissed under the first-to-file bar, because still pending. the earlier-filed case had still been pending at the time Carter filed his latest complaint, Background the dismissal should have been without prejudice because the subsequent dismissal Petitioner Kellogg Brown & Root (KBR) of that case meant that the first-to-file bar no provided logistical services to the U.S. longer applied, leaving Carter free to re-file. military during the Iraqi war. In 2006, The court of appeals also held that Carter's Respondent Carter, a former KBR claims were not time-barred because the employee, filed an FCA action against KBR, WSLA applies to civil FCA suits, even those alleging that KBR had fraudulently billed in which the government has declined to the government. After a lengthy procedural intervene. One judge dissented from this history, the district court (Cacheris, J.) portion of the court's ruling, arguing that the dismissed the latest complaint with WSLA does not apply to qui tam suits in prejudice. The court first held that the first- which the government has declined to to-file bar, 31 U.S.C. § 3730(b)(5), intervene. precluded Carter's action because another FCA case alleging similar facts had already In its certiorari petition, KBR argues that the pending in another federal district court Fourth Circuit's first-to-file rule would

377 improperly allow relators to bring case after Next Steps related case based on very similar facts, so long as they were brought seriatim. On the The case will likely be argued in December WSLA question, KBR contends that the 2014 or January 2015. KBR's opening brief term "offense" is limited to crimes, that the is due August 15, 2014 and Carter's Fourth Circuit's approach is contrary to the opposition brief is due September 15, 2014, WSLA's purpose, and that the Fourth though those deadlines may well be Circuit's decision would lead to enormously extended. long periods of tolling given the nature of the military conflicts in which the United States is engaged.

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“Supreme Court to Hear Appeal of KBR over False Claims Act Lawsuit”

Young Law Group Eric Young July 9, 2014

Last week, the Supreme Court granted By the time Carter refiled his complaint, certiorari in the case of Kellogg Brown & another relator had filed against the Root Services v. U.S. ex rel. Carter, adding company with similar allegations. The another appeal involving a whistleblower to district court held that this pending its schedule in the fall. The petition initiated complaint barred Carter’s latest complaint. by KBR asked the Court to review the Because a significant amount of time had appropriate statute of limitations and the passed since the events underlying this application of the first to file bar in False litigation, the district court also held that Claims Act litigation. most of the allegations were now barred by the statute of limitations of the False Claims The history of the case is a bit unusual. Act, set forth in § 3731(b). Benjamin Carter, the relator who worked for the defendant in Iraq, filed a qui tam Carter appealed successfully to the Court of complaint in 2006. The complaint was Appeals. The Fourth Circuit held that the amended in 2008 to include allegations of statute of limitations in the case was tolled false billing for labor costs. This complaint by the Wartime Suspension of Limitations was dismissed by the district court because Act (WSLA). It also authorized him to refile of similar allegations in a pending relator his complaint because there were no other complaint filed prior to Carter’s allegations. pending actions.

As those familiar with the False Claims Act The defendant now contests those issues on are aware, the statute bars a person from appeal. bringing a “related action based on the facts underlying the pending action.” 31 U.S.C. § It contends that the WSLA applies solely to 3730(b)(5). This is commonly known as the criminal cases brought by the government. It “first to file” bar. makes three key arguments:

While on appeal, the complaint by the other 1. The WSLA does not apply to civil fraud relator was dismissed. Carter filed a new cases where the U.S. government is not a complaint in 2010. However, since his 2008 party; appeal was still pending, the new complaint was dismissed because of his own pending 2. The WSLA does not apply when the appeal. Strategically, Carter dismissed the government has not formally declared war; appeal of the 2008 complaint. and

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3. The WSLA does not modify the ten year The Supreme Court has already weighed in statute of repose in the False Claims Act. In on two cases involving whistleblowers this other words, the WSLA does not year. indefinitely toll the statute of limitations. A few weeks ago in June, the Supreme The Supreme Court will also review whether Court decided Lane v. Franks. Lane, in his a previous lawsuit, not dismissed on the capacity as director of a statewide program merits, bars a subsequent relator from filing for underprivileged youth, terminated an a qui tam lawsuit because of the “first to individual on the payroll that had not been file” requirement of the False Claims Act. reporting to her office. Subsequently, Lane The defendant contends dismissal is was compelled to testify in the ex- appropriate because the government has employee’s criminal trial. He alleged that he already been put on notice of the fraud. was terminated in retaliation for the testimony. In a 9-0 opinion written by KBR is the second case involving a Justice Sotomayor, the Court held that the whistleblower to be scheduled by the First Amendment protects a public Supreme Court. In May, it agreed to hear the employee providing truthful sworn appeal of Homeland Security in the case of testimony, compelled by subpoena, outside TSA air marshall Robert MacLean, the course of the employee’s ordinary job Department of Homeland Security v. duties. MacLean. MacLean informed the media that the TSA had discontinued posting air In March, it extended SOX protections marshals on certain overnight flights against retaliation to whistleblowers who because of budget concerns despite an alert work at private contractors to public about a plot to hijack airlines. He was companies in Lawson v. FMR LLC. The terminated when the TSA learned of his role decision reversed the First Circuit decision blowing the whistle. The Federal Circuit denying protection to two employees of a Court of Appeals sided with MacLean in his privately held financial institution providing retaliation claim under the Whistleblower services to mutual fund clients. Protection Act.

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“The Supreme Court Will Review Fourth Circuit Decision that Weakened the False Claims Act’s Statute of Limitations and First-to-File Bar”

Vorys Patrick M. Hagan & Brent D. Craft July 1, 2014

Today, the Supreme Court granted the Congress.” District courts have begun to petition for certiorari in Kellogg Brown & issue contrary rulings, with courts in both Root Servs., Inc. v. United States ex rel. the Eastern and Western District of Carter. The petition presented two Pennsylvania holding that the WSLA does questions: (1) whether the Wartime not apply to non-intervened FCA Suspension of Limitations Act (WSLA) cases. Most recently, in the well-known applies to claims of civil fraud brought by “Lance Armstrong case,” the District of qui tam relators, and (2) whether the False D.C. held that the WSLA does not apply to Claims Act’s (FCA) first-to-file rule is an any civil FCA cases because the FCA does absolute bar or whether it permits not require “proof of specific intent to subsequent actions so long as the first-filed defraud.” action had been dismissed on non-merits grounds prior to filing of the subsequent On the second question, the Fourth Circuit action. The Fourth Circuit’s decision was joined the Seventh and Tenth Circuits in unfavorable to potential FCA defendants on holding that the FCA’s first-to-file rule does both issues. The Supreme Court’s decision not prohibit duplicative actions so long as to grant certiorari is important news for all the earlier-filed actions are not pending at companies that do business with the the time the duplicative case was filed. That government, as both issues significantly conflicts with the approach taken by the impact potential FCA exposure. First, Fifth and Ninth Circuits, which have held that allowing duplicative actions to On the first question, the Fourth Circuit held proceed, regardless of whether the that the WSLA applies to civil as well as previously filed action was “pending” at the criminal cases, and applies to FCA actions time, “cannot be reconciled with [the in which the government has declined to FCA’s] goal of preventing parasitic [suits].” intervene. The practical effect of that ruling is that the statute of limitations in all FCA If the Supreme Court upholds the Fourth cases is tolled while the United States is at Circuit’s ruling on both of these issues, the war (defined broadly to include all conflicts consequences for FCA defendants could be for which Congress has authorized the use disastrous. The application of the WSLA to of the Armed Forces) until “5 years after the all civil FCA cases, including non- termination of hostilities as proclaimed by a intervened cases, essentially eliminates the Presidential proclamation, with notice to statute of limitations for FCA cases Congress, or by a concurrent resolution of indefinitely. Indeed, the president recently

381 ordered additional troops to Iraq to address Unfortunately, the 2010 amendments to the the recent instability there, which suggests FCA have already weakened the public that the “termination of hostilities” in Iraq is disclosure bar by leaving its application to not imminent. The weakening of the first- the government’s discretion. The Fourth to-file rule compounds the harm caused by Circuit’s holding in Carter undermines both the tolling of the statute of limitations by the statute of limitations and the first-to-file decreasing incentives for relators to report rule. If the Fourth Circuit’s reasoning is fraud promptly. The practical effect of the upheld, companies doing business with the Fourth Circuit’s “one-two punch” to government could face lawsuits for alleged defendants is to encourage relators to delay FCA violations that occurred many years filing claims to maximize the potential earlier. Defending old claims is often damages. These incentives directly conflict difficult. Paper documents are often with the purpose of the FCA. destroyed in accordance with document management policies or are stored in less When read in its entirety, the dual purposes accessible locations. The relevant electronic of the FCA are to provide financial files may be stored on a sunset email or incentives to encourage private citizens to document management system. Witnesses promptly report fraud while limiting the may have moved away or forgotten relevant ability of those whistleblowers to profit facts. Some may even be dead. And, if the based on publicly disclosed, previously relator alleges a continuing violation, the alleged or stale information. Three pillars of potential damages and penalties that have the FCA provide the limitations on accumulated over a long period of time may relators. The public disclosure bar prevents be astronomical. relators from profiting from suits based upon information that was already publicly Amicus curiae briefing on the petition for available. The first-to-file rule serves a certiorari in Carter illustrates that this case similar purpose – once the government has is set for a showdown. In his amicus brief, been alerted to potential fraud by the first- the solicitor general indicated that the filed qui tam action, there is no reason to government would support the Fourth incentivize additional lawsuits. Finally, the Circuit’s application of the WSLA to all vast majority of courts have correctly held civil FCA cases and its interpretation that that relators cannot benefit from the tolling the first-to-file rule does not bar subsequent provision in the FCA’s statute of limitations actions when the first-filed action is no and thus, that the limitations period for non- longer pending. The Chamber of Commerce intervened cases is six years (as opposed to filed an amicus brief in support of the up to 10 years for the government). All defendant to alert the Court that “the sum three of these provisions of the FCA provide effect of [Carter] will be to increase the incentives for relators to make prompt number of aged and duplicative cases that allegations of fraud. serve only to inflict substantial litigation costs on businesses.” All companies that in some way do business with the government

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– including health care, government procurement and banking and finance – should closely watch this case during the Supreme Court’s October term.

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“Halliburton, KBR Whistle-Blower’s Case Revived on Appeal”

Bloomberg Tom Schoenberg March 18, 2013

Halliburton Co. and KBR Inc. (KBR) must Carter first sued in 2006. That case and three face a whistle-blower lawsuit that was subsequent complaints were dismissed on revived by a federal appeals court, which procedural grounds. In sending the case ruled that military operations in Iraq back to U.S. District Judge James Cacheris exempted the plaintiff from a six-year in Alexandria, Virginia, the appeals court deadline for filing claims. said Carter’s claims may still be barred under a different provision of the false In a 2-1 ruling today, the U.S. Court of claims law. Appeals in Richmond, Virginia, reversed a lower-court judge’s dismissal of a case Dissenting Judge against the companies filed by Benjamin Carter under the False Claims Act. Carter’s U.S. Circuit Judge G. Steven Agee, in a claims that Halliburton and KBR falsely dissenting opinion to today’s decision, said billed the U.S. in 2005 triggered the people might allow false billing to continue Wartime Suspension of Limitations Act knowing that they have more than a decade even though the Justice Department declined to file a claim and that their reward is tied to to intervene in the case, the judges said. the size of a recovery.

“Whether the suit is brought by the U.S. or a “Private party relators will be inclined to relator is irrelevant to this case because the delay, allowing their potential recovery to suspension of limitations in the WSLA increase, knowing that the government is depends on whether the country is at war unlikely to discover the fraud, and therefore and not who brings the case,” U.S. Circuit unlikely to be the first to bring a claim Judge Henry Floyd wrote in the ruling. against the perpetrators,” Agee said.

Carter, who worked for KBR as an operator Susie McMichael, a spokeswoman for in a water purification unit in 2005, alleges Houston-based Halliburton, referred the companies billed the U.S. government questions to KBR, stating that the activity for purifying water for four months at two alleged in the lawsuit was pursuant to a Iraqi camps that year when it hadn’t done KBR contract. so. He also alleges the he and his colleagues John Elolf, a spokesman for Houston-based were instructed to submit time sheets KBR, said in a statement that the company showing that they worked 12-hour days on was disappointed with the ruling and the purification when he hadn’t worked on it “respectfully disagrees” with the majority’s at all. opinion.

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“KBR is continuing to study the decision The case is United States ex rel. Benjamin and weighing our options,” he said. “We Carter v. Halliburton Co. (HAL), 12-01011, believe the underlying case is without merit, U.S. Court of Appeals for the Fourth Circuit and we are confident that it will ultimately (Richmond). be dismissed.”

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