July 19, 2014
Who, exactly, is exercising religion? And why does the contraceptive coverage rule burden that religious exercise?
Posted by Marty Lederman

Thanks once again to the Conglomerate for inviting me, an interloper ‘round these parts, to contribute to this extraordinarily rich and provocative forum.  Brett McDonnell notes that the contributors have not said much about the Court’s actual application of RFRA, and its ramifications, “given our comparative advantage as corporate law scholars.”  Well, for better or worse I do not suffer from that comparative advantage, and therefore you can, if you’re interested, find loads of my musings about the RFRA merits issues over on Balkinization (links to posts compiled here).

In light of the readership and contributors here at the Conglomerate, however, perhaps this is an appropriate place for this ConLaw guy to offer a few thoughts about the corporate law issues that have unduly dominated public discourse about the case (not to mention dominating the pages of the Alito and Ginsburg opinions).  I'll also, and more importantly, discuss the Court's failure to explain how federal law burdens the religious exercise that is actually at issue in these cases—namely, the exercise of the corporate directors acting in their decision-making capacities.

1.  Corporations' religious exercise?

Ronald Colombo kicked off this symposium by characterizing the Court as having held that business corporations are persons “capable of exercising religion” for purposes of RFRA; and many of the posts in the forum have discussed whether, in what manner, and under what circumstances corporations can be said to exercise religion, or have religious beliefs.  As I explained in an earlier Conglomerate forum on the eve of oral argument in Hobby Lobby, however, that is the wrong question to ask in this case.  And I think the Court’s decision in Hobby Lobby in effect confirmed that point.

In this forum, Ronald and Amy Sepinwall offer a very interesting back-and-forth on the question of corporate religious exercise.  They agree that corporations, whether nonprofit or for-profit, can act in accord with particular religious precepts, or in order to advance religious objectives.  They appear to disagree, on the other hand, about whether that should count as a corporation’s “exercise of religion” for purposes of RFRA.  However that debate should ultimately be resolved, Amy is surely right that the particular religious claims in Hobby Lobby and Conestoga Wood cannot be asserted by the corporations themselves.  The fundamental assertion in these cand related contraception-coverge cases is that federal law requires someone to choose between compliance with a civil obligation and adherence to a religious obligation taking the form of a prohibition  (roughly speaking:  “Thou Shalt Not Cooperate With Evil”).  This is not the sort of burden that can be imposed on a for-profit corporation’s religious exercise—not because the corporation doesn’t have a “conscience” (neither does a church) or because it cannot advance religious objectives (surely it can), but because the corporation does not have any religious obligations.  It would be absurd to allege—and more to the point, the parties in these cases do not do so—that a religion imposes duties or injunctions on for-profit corporations such as Hobby Lobby Stores, Inc.

There are a couple of places in his opinion where Justice Alito somewhat sloppily refers to “free exercise” rights of the corporations (even though the decision is based upon RFRA, not the Free Exercise Clause); and the Court ultimately holds, of course, that a corporation itself can bring a RFRA claim.  But there can be very little dispute, I think, that the Court’s reasoning and holding are ultimately predicated on the idea that RFRA protects the religious exercise of the individual plaintiffs here—the members of the Green and Hahn families. 

“Congress did not discriminate . . . against men and women who wish to run their businesses as for-profit corporations in the manner required by their religious beliefs,” writes Justice Alito.  He echoes this theme repeatedly throughout the opinion ("Congress provided protection for people like the Hahns and Greens"; "the Hahns and Greens have a sincere religious belief that life begins at conception.  They therefore object on religious grounds to providing health insurance that covers methods of birth control . . . ."; etc.).  Most importantly, the Court ultimately holds that it should protect the so-called “free-exercise rights” of corporations such as Hobby Lobby in order to “protect[] the religious liberty of the humans who own and control those companies."

I think the Court’s reference to corporate “free exercise rights,” and its holding that Hobby Lobby can sue, don't make much sense conceptually--as noted above, the corporations’ religious exercise could not be burdened in the manner alleged in these cases.  Instead of holding, as it did, that the corporations’ RFRA rights are derivative of the rights of the Greens and the Hahns, it would have made much more sense for the Court simply to say that the Greens and Hahns can sue under RFRA, and to leave for another day the question of when, if ever, corporations can do so, as well.

In any event, it’s clear that the Court's holding is based upon the assumption that federal law burdens the individual plaintiffs’ exercise of religion.  For our purposes here, then, it is more useful, and more instructive, to think of the case as though it were captioned Burwell v. Green.  And that means we need to focus further on the question of how federal law is said to burden the religious exercise of the Greens and the Hahns.

2.  Shareholders’ religious exercise?

The complaints in Hobby Lobby and Conestoga Wood are maddeningly imprecise on exactly how federal law is said to implicate or undermine the individual plaintiffs’ religious obligations.  In particular, they are not at all clear on what, exactly, federal law requires or induces the individual plaintiffs to do that would implicate them in their employees’ use of contraception.  Are they burdened in their capacity as shareholders?  As employees?  As board members?  As directors of the companies?  The complaints never specify.  Instead, the allegations indiscriminately and unhelpfully toggle back and forth among different and vague characterizations of the burden on the the individual plaintiffs.

Many of my fellow symposium participants appear to presume that the Court has afforded protection to the Greens and the Hahns in their capacities as shareholders of the corporations.  Unfortunately, Justice Alito offers ammunition for that view of the case—he indiscriminately scatters throughout his opinion sentences such as “The companies in the cases before us are closely held corporations, each owned and controlled by members of a single family.”

I think it is a mistake, however, to view Hobby Lobby as a case about shareholders’ rights.  For one thing, Hobby Lobby itself does not involve shareholders:  Hobby Lobby Stores, Inc. and Mardel, Inc. are owned by a trust, not by the Greens.  Therefore a shareholder rights theory would not have been sufficient for the Court to resolve one of the two companion cases.  To be sure, according to the complaint in the other case, Conestoga Wood, the Hahns are collectively the “principal[]” owners of the shares of Conestoga Wood.  But even that complaint does not say what percentage of the stock they own.

More importantly, even if the cases had been pleaded and argued as shareholders’ rights cases, the Court would then have had to grapple with a state-law question of whether and when shareholders can sue to vindicate their individual rights when someone (a private party or a government) takes actions against the corporation that derivatively harm them—that is to say, whether owners of a firm must take the bitter with the sweet, and abandon any individual claims they would otherwise have in exchange for the immunities that they realize when they take advantage of incorporation.  This is, in short, the so-called “insider reverse veil-piercing" question that Professor Bainbridge has emphasized.  I have already explained at length, both here at the Conglomerate and on Balkinization, why I think the Court would have had to reject such a shareholder claim (or at a minimum certify the question to the Pennsylvania Supreme Court).  There’s no need to repeat that argument here, however; the important point for present purposes is that the Court did not in any meaningful way discuss the rights of shareholders, or the state law that would have governed that question.  Notably, Justice Alito did suggest (pp. 30-31) that shareholders would not be able to bring a RFRA claim in a case where the majority of their fellow shareholders did not support their religious objection to application of a federal law, and that state law would control the disposition of such a case.  That may be significant to the Greens’ and Hahns’ claims, for a reason I discuss below.  But the Court did not even address what state law would have to say about a claim by a majority of shareholders that federal law substantially burdened their religious exercise . . . and thus the “insider reverse veil-piercing" question about shareholders’ rights to bring federal statutory claims remains unresolved.

3.  Corporate directors’ religious exercise?

In my earlier posts, I explained that a careful reading of the briefs reveals that the gravamen of the plaintiffs' complaint is that they are allegedly being required to violate religious obligations in their capacities as corporate directors, or decision-makers, rather than in their capacities as shareholders or managers or employees.  This is the key passage of the Hobby Lobby brief, for example:

It is undisputed that the Greens have committed themselves to conducting their business activities according to their religious beliefs.  See, e.g., Pet.App.8a.  Hobby Lobby and Mardel are closely-held corporations controlled entirely by the Greens.  JA129-30, 134; Pet.App.7a-8a.  Thus, Hobby Lobby and Mardel act only through the Greens.  The record amply demonstrates how the Greens have pursued their religious commitments through their business activities, Pet.App.8a, and there is no dispute about the precise religious exercise at issue here:  the Greens cannot in good conscience direct their corporations to provide insurance coverage for the four drugs and devices at issue because doing so would “facilitat[e] harms against human beings.”  Pet.App.14a.

The “precise religious exercise at issue here,” then, is the Greens’ alleged violation of a religious injunction if and when they “direct their corporations to provide insurance coverage for the four drugs and devices at issue.”

And, fairly read, that is also the issue the Court addresses in its Hobby Lobby opinion.  Justice Alito repeatedly identifies the problem as the so-called legal requirement that the Greens and Hahns “provide” employee insurance that covers IUDs, or that they “arrange” for such coverage.

So if that decision--to provide or not to provide IUD coverage--is at the heart of the "substantial burden" argument, how does federal law substantially burden the Greens and Hahns in their capacity as corporate directors?  Who knows?  Eric Orts laments that the Court’s concept of corporate personality is “radically undertheorized.”  Well, “radically” barely begins to describe how undertheorized is the Court’s explanation of the causal relationship between federal law and the alleged burdens on the individuals’ purported religious obligations in their capacities as corporate directors.

A series of simple hypotheticals might help to illustrate the problem:

Imagine that at Time A, before enactment of the Affordable Care Act, the Hahn family members collectively own Conestoga Wood, an unincorporated firm.  They are also the directors—the decision-makers—of the company.  And there are two types of employee insurance plans out there:  some that include IUD coverage, and others that don’t.  The Hahns sincerely believe that they are required to act in all of life’s affairs—including in their capacity as Conestoga directors—in a way that does not violate their understanding of their religion’s doctrine of complicity-with-sin.  Therefore they choose to have Conestoga offer the plan without the IUD coverage.  If, by contrast, the Hahns affirmatively chose to offer employees an insurance plan that included IUD coverage, and chose not to offer a competing plan that excluded such coverage (both options being available under the law), at least some observers (most importantly including the Hahns themselves) might reasonably conclude that the Hahns were morally responsible for the choice that they had thus made, just as many people concluded that corporate directors and CEOs were responsible for the decisions to have those corporations invest in apartheid South Africa.

Then, at Time B, the Hahns incorporate Conestoga Wood, Inc.  Let’s assume they no longer control the corporation in that they do not own a majority of the shares, but that the Conestoga shareholders nevertheless affirmatively delegate decision-making authority to the Hahns in their capacities as corporate directors, and (to eliminate Alan Meese’s complication) the shareholders also specifically approve of the Hahns’ decision, expressly based upon their religious dictates, to exclude IUDs from the insurance plan that Conestoga offers to employees.  In this case it remains reasonable to attribute responsibility for that decision—or for the contrary decision to cover IUDs—to the Hahns (although the shareholders might be morally implicated, too).

Finally, at Time C, Congress passes the ACA, and HHS promulgates the preventive services rule, which provides that if an employer offers an employee health plan, that plan must include cost-free coverage of a series of preventive services, including IUDs.  In that event, once the HHS Rule goes into effect it would not be the Hahns who “chose,” in any practical sense, to cover contraception in the Conestoga employee benefit plan:  That would, instead, be a legal requirement imposed by the government that will apply to any and all such plans throughout the nation.  It would be Sylvia Burwell, in other words, rather than the Hahns, who would be the relevant decision-maker--who would "direct" the employee benefit plan to provide reimbursement for contraceptive services that include IUDs.  (The only choice remaining for the corporate directors to make in that case would be whether to discontinue the plan altogether.  I discuss that option ad infinitum in a series of posts.)

It’s important to emphasize that the gravamen of the Hahns' claim is not that the use of their labor, or their funds, or their expertise, or their property, would make them complicit in wrongdoing.  Because the Hahns' possible complicity in the use of contraception is, instead, attributable to their decision, as officers-directors of the companies, to choose one type of benefit plan rather than another (to "direct" the plans to cover certain services or not), then the fact that the government has eliminated the option of operating a for-profit employer plan that doesn't include contraception coverage means that the Hahns have no relevant choice to make in their capacity as directors, and thus none for which they can be morally culpable.  Indeed, the Hahns (and the Greens) have not attempted to explain or articulate—nor does Justice Alito—why their religion would make them morally culpable in such a case, where the decision has been taken out of their hands and where they therefore would not be responsible for "directing" the Conestoga and Hobby Lobby plans to include IUD coverage.  Therefore, without more, it would appear that the Hahns and Greens have not alleged facts that would explain why the law imposes a substantial burden on their religious exercise in their capacities as corporate directors.

Think about this in terms of the apartheid example above:  If federal law had required all companies to invest in South African stocks, as a condition of doing business, then many people might have concluded that the federal government itself was morally complicit in evil.  And perhaps some would conclude that certain corporate officers were morally complicit to the extent they took steps to benefit from the required South African investments.  But very few people would have concluded that a particular corporation's CEO, or Board of Directors, was culpable merely for "choosing" to have the company comply with federal law.

Or better yet—to tie this discussion more closely to the issues that my fellow symposium participants have flagged—let’s assume a Time B-prime, still before the ACA, in which a majority of Conestoga Wood shareholders decided to reject the Hahns’ decision, and opt instead to include coverage of IUDs in the Conestoga employee plan.  Under Pennsylvania law, the Hahns-qua-directors would be required in that case to choose a plan that includes IUDs—what Alan Meese refers to as the “shareholder primacy approach.”  But in such a case wouldn’t it be absurd for the Hahns to complain that Pennsylvania law substantially burdens their religious exercise by giving effective control over the decision to the shareholders, thereby making the Hahns “complicit” in the Conestoga Wood employees’ eventual use of IUDs?  Of course it would—which is why even Justice Alito concludes that the Hahns would not be able to raise a RFRA claim in such a case. 

So why isn’t the same true here, where it’s HHS officials (acting pursuant to authority conferred by Congress), rather than the shareholders (acting pursuant to authority conferred by the Pennsylvania legislature), who tell the Hahns how they are to act in their capacity as Conestoga Wood directors?

I can imagine at least two responses, but I don’t think either is persuasive.  First, one might say that the Hobby Lobby opinion, by its terms, applies only where the religious individuals in question control (or “closely control”) the corporation, and my Time B-prime hypo has removed the corporate directors’ control over the IUD decision, by shifting it to the majority of shareholders.  But that’s the point:  The federal government has likewise removed control over that same exact decision from the Hobby Lobby and Conestoga Wood directors, which ought to eliminate any possible complicity on their part that would be the predicate for a RFRA claim.

Second, one might say that this only shows that Hobby Lobby must be a decision about shareholders’, not corporate directors’, exercise of religion.  But if that were the case, as I explained above, the Court would have had to contend with state law, which generally provides that shareholders cannot complain about harms they suffer by virtue of regulation of (or injuries to) the corporation.

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Hobby Lobby II: It's a Wrap
Posted by Usha Rodrigues

Thanks to our guests for a terrific Hobby Lobby symposium.  All the posts are collected here.  Of course the title of this post is an ironic one. Hobby Lobby is a rich opinion that we will all be mining in the coming years.  If news is the first rough-draft of history, I think blog fora like this might be the first rough draft of legal scholarship--a chance to try out ideas that will make their way into articles and essays over the coming months and years.  Thanks to all for moving the conversation forward.  

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Hobby Lobby: Limitations and Extensions, Employees and Disclosure
Posted by Eric Orts

I'd like to thank the organizers again for this excellent symposium.  Here are a few of my final thoughts responding to a few comments.

First to return to the allegation that my concern for employees is one from the "Left" (see my previous response here) consider the following hypothetical.  Corporation L run my liberal thinking managers (and let's say it's a privately held firm similar in structure to Hobby Lobby) decides to run a progressive advertising campaign designed to appeal to LGBT consumers.  (Imagine a stonger and more politicized version of the United Colors of Benetton.)  A long-time conservative Christian employee -- Employee X -- works in the public relations department.  He asks to work on other related advertising, but requests not to work on this campaign.  He is fired, and the corporation claims a defense under Hobby Lobby.  What result?  I would argue that Corporation L has discriminated against Employee X's free exercise rights -- and should be legitimately subject to a lawsuit under the employment discrimination laws.  Protecting employees' rights to religion within organized firms is not a right/left issue, though it is true that the question is very highly politicized in our current environment.

Second I may have some answers or at least further thoughts to add to Jayne's interesting and self-described "pragmatic" post.  

On the question of the insurance companies ability to provide "work-around" coverage, I'm informed by a colleague that this is possible because the costs of pregancies/births/new children that insurers would have to cover if they do not provide effective methods of contraception are higher than the costs of the contraception.  The majority and concurring opinions seem to rely rather heavily on this fact.  (See, e.g., Court's Slip Op. at 3) (referring to "no net economic burden on the insurance companies that are required to provide or secure the coverage").  This fact may provide a limiting principle for the case acting as a precedent going forward, though it imposes an additional burden on the government to provide the adequate administrative work-around.

Jayne also asks about the next shoe to drop, and my guess is that it will be with respect to the similarly controversial question of gay rights.  An interesting recent case in the U.K. is relevant in this respect.  Hazelmary and Peter Bull ran a bed and breakfast out of their home.  They denied a room to Steven Preddy and Martyn Hall, a gay couple, and were sued for discrimination.  (Don't you love these names?)  The B&B owners claimed religious principle as a defense.  They lost.  In my view (at least tentatively), this case was wrongly decided (at least if transplanted to U.S. law).  It illustrates the wisdom of restricting some anti-discrimination laws with respect to very small businesses.  We may have a general policy favoring anti-discrimination in public-facing businesses, but it seems to me that forcing a conservative Christian to rent a room in their house to people who practice behavior in their own home that they believe is deeply immoral to their religious beliefs goes to far.  Note that a larger business with more than 15 employees or holding itself out to the general public in hotel or motel form should yield a different result.  Example:  Marriott (owned by Mormons) announces an anti-gay rental policy (which I don't think, for purely business reasons, they will do).  The next big case on the heels of Hobby Lobby may well be an LGBT discrimination case.  And note that customers as well as employees may be involved as plaintiffs.

Lastly, Jayne and others (including Joan here) ask about disclosure.  And Stephen Bainbridge has also inquired about my position on this question.  See his blog here.  I agree that disclosure seems to be appropriate in these cases.  I'm not sure who exactly should have jurisdiction -- perhaps the Department of Labor.  But disclosure of both nonprofit organizations and for-profit firms that invoke a free exercise claim seems to make sense.  I'm a little hesitant to emphasize this point, however, because I'm recently reading a book by Omri Ben-Shahar and Carl Schneider that makes a strong case against relying on disclosure too much.  In the case of organizational claims of religious rights, though, disclosure would allow for market forces to act against those who choose to enact various policies that are based on religious claims and in some cases allowed to discriminate against employees, suppliers, and customers in ways that would otherwise be illegal.

 

 

 

 

 

 

 

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July 18, 2014
The Continuing Saga of Hobby Lobby and Disclosure
Posted by joanheminway

Many thanks to The Glom for allowing me to chime in here.  As you might be able to tell from the number of comments I have left for others (too many, I fear), I have been fascinated by the range and depth of the posts so far.  And thanks to co-bloggers Brett and Alan for mentions of my earlier Hobby Lobby post on disclosure issues over at the Business Law Prof Blog in their earlier posts here.  FYI, I posted there again on this subject earlier this week.  But (as Steve Bainbridge anticipated) I am not done yet . . . .

Since that post earlier this week, The Wall Street Journal published an article noting that the Obama administration clarified an employer's responsibility, under the Employee Retirement Income Security Act of 1974, to notify employees if they eliminate or change benefits.  The Washington Post and others also carried the story; Jayne Barnard also mentions this in her post earlier today.  The clarification comes in the form of an FAQ (which was not easy to find on the U.S. Department of Labor website).  Senator Richard Durbin (D-IL), in a news release praising this executive branch action, notified the public that he was introducing legislation that apparently would compel for-profit employers to make similar disclosures to job applicants.  A similar kind of bill has been introduced in the New York State legislature.  So, it seems, employment-related disclosures are being addressed or discussed in a number of different venues.  We'll have to see where all this ends up.

But what of the disclosure issues for shareholders and other investors?  Is the materiality filter in federal securities law's mandatory disclosure (including gap-filling) and anti-fraud rules appropriately sensitive to the issues for these corporate constituents?  And what about entities whose disclosure activities are not regulated under federal securities laws?  What protections might state securities laws provide?  Is fiduciary duty law enough to compel disclosures to shareholders or other investors in the absence of applicable disclosure rules under securities laws?  Of course, when it comes to shareholders, I am worried here about the minority (non-controlling) holders (since the controlling shareholders are those protected by the Court's decision in Hobby Lobby).  I see that other Glom symposium bloggers (here and here) have bemoaned the fact that the corporate entity itself has been lost in the Hobby Lobby shuffle, as it were.  Among the constituencies that are forgotten with the loss of the entity in the Hobby Lobby analysis are the minority shareholders and the board of directors.

I am troubled that the final, broadly applicable disclosure analysis may reduce itself to fiduciary duty claims.  In his symposium post, Haskell Murray notes the language in Justice Ginsberg's dissent observing that employees of for-profit corporations "commonly are not drawn from one religious community."  Well, the non-controlling shareholders in a for-profit corporation also may have sincerely held religious beliefs that are different from those of the controlling shareholders.  How, if at all, does the board give effect to the concerns of those minority shareholders in exercising its fiduciary duties?  What does "good faith" and "in the best interests of the corporation [and its shareholders]" mean in this context?

Moreover, religious beliefs may change over time for some or all of the shareholders, given that they are beliefs of individuals with free will.  But as long as those individual beliefs are shared by the controlling holders, it seems the Hobby Lobby Court would find them to be the beliefs of the corporation--without having given any consideration to the role of the board as the manager of the business and affairs of the corporation.  Lyman Johnson's focus on corporate purpose (and Alan also mentioned it) therefore becomes important.  But I want to make a different, yet related, point than the shareholder wealth maximization issue they raise.  In the Hobby Lobby opinion, the Court appears to read a corporate purpose into the Hobby Lobby charter that provides a constraint on corporate action.  (At least that's one plausible reading of the case.)  Yet, there is no disclosure of this constraint anywhere.

Even assuming applicable disclosure responsibilities under Hobby Lobby based on securities or corporate law, the nature of those disclosures and the basis for them is somewhat elusive.  I have a lot of questions.  How do the controlling shareholders make their compliance-related sincerely held religious beliefs known to the board, assuming the board is not constituted solely or even primarily of those shareholders?  How does the board ascertain that relevant beliefs are held by a group of shareholders that is controlling?  Should a corporate board be required to take periodic surveys of shareholders to make sure everyone has/still has the same sincerely held religious beliefs, to the extent they impact corporate compliance with law?  As someone who spent a number years advising corporate boards of directors in disclosure-oriented settings, I struggle with the Court's opinion in Hobby Lobby in a number of practice-oriented respects.  These questions approach one area of concern.  Public companies would have a standardized way to get at some of this information--through their transaction-related and annual Directors and Officers (D&O) Questionnaires.  But (in my experience) private firms--the firms most likely to avail themselves of the RFRA-related ACA exemption at issue in the Hobby Lobby case--do not often use this type of compliance device, absent a regulatory or contractual reason to do so.

I may be making a disclosure mountain out of a molehill; I may just be the disclosure-lawyer hammer looking for the disclosure-topic nail.  If so, feel free to tell me that.  Even so, maybe there's something else of interest for someone to comment in this post. . . .

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Shareholder or Board Consent to Religious Exercise
Posted by Brett McDonnell

I, at least, have been learning a lot from the back and forth with Alan over whose consent, and in what form, counts for determining whether a corporation has chosen a religious purpose for purposes of applying RFRA.  To recap:  I think that the board has the core power to make such a determination, while Alan believes that shareholders must explicitly consent.  The questions are: which side should the Supreme Court take, and has it already done so?

In his latest post, Alan recognizes that the facts of the cases in Hobby Lobby pose a problem for his theory, because there does not appear to be formal approval by the shareholders acting as shareholders.  However, in these corporations the shareholders are also directors, and in that capacity they have all clearly shown their consent.  Is that enough?  Alan struggles with this, and suggests a split answer:  for purposes of federal law under RFRA it may be good enough, but for purposes of state fiduciary duty law, it is not good enough.

As to whether the Supreme Court has actually decided this question, I suspect the answer is rather clearly no.  Seeing the problem that we have identified requires going deep into the weeds of corporate law theory.  I actually think the opinion is pretty good on the corporate law side, but it does not go that far.

As to what the rule should be, I am skeptical about having a separate federal common law on this point.  In part, that is because I doubt the competence of federal courts to come up with a rule of their own.  That task is even harder because the rule must apply to all different sorts of entities, from different states with different rules.  What about LLCs, for instance, just to throw out one complication?

More fundamentally, even if the federal courts could come up with a separate rule, I doubt that is conceptually appropriate.  The issue posed by RFRA is what sort of purposes a particular corporation has, considered as an entity.  RFRA sometimes give entities standing because individuals sometimes exercise their religious beliefs collectively in organizations.  Where a particular organization has enough commitment to a religious purpose, it makes sense to allow that organization to claim RFRA's protection.  The question then becomes whether or not a particular organization has adopted a religious purpose.

Answering that question requires looking to how such an entity defines its purposes, and that requires looking to the basic rules which constitute the entity.  Those rules are the relevant state corporate law, both statutory and common law, along with the firm-specific documents (charters, bylaws, shareholder agreements) which work within that state law framework.  The core logic of RFRA points us to the rules defining the entity, and for corporations those rules are set by state law.  That of course leaves us with our disagreement over what procedure state law requires.  Hobby Lobby does not end that debate, although I will point out that if the Court thinks its approach fits within state law, under Alan's view it should have found this a hard, borderline case for determining corporate purpose, whereas under mine it is pretty easy--which seems closer to the Court's own perception.

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RFRA's Strict Scrutiny: A Missed Opportunity and a Doomed Proposal
Posted by Brett McDonnell

So far we haven't said much about the strict scrutiny analysis that comes at the end of the Hobby Lobby opinion.  That makes sense given our comparative advantage as corporate law scholars.  However it does matter, both in general and for a few points we have discussed, such as Eric's call for paying attention to the interests of Hobby Lobby's employees and Jayne's skepticism as to whether a workable accommodation is truly available.

The majority assumed that assuring that women had access to contraception is a compelling interest, but argued that the mandate is not the least restrictive means to achieving that interest.  The Alito opinion considers two alternatives, ultimately resting more on allowing Hobby Lobby to use the already existing accommmodation for religious nonprofits, under which the insurers pay for the contraceptive coverage.  If this works, it means that the RFRA objection is met while the employees are still covered.  I say "if" because the Court may yet strike down that accommodation as itself invalid under RFRA.  That would be a nasty bait-and-switch, but given Justice Kennedy's concurrence, I remain hopeful that at least he will not do so.

The contrast between Alito and Kennedy illustrates at least a different tone in how they apply strict scrutiny.  In law school we learn this is strict in theory but fatal in fact, which seems to fit Justice Alito's tone.  However, sometimes the balancing is more nuanced and even-handed, as in Justice Kennedy's concurrence.  Much anxiety over the opinion stems from a sense that Justice Alito's tone will prevail in future cases.

That could be problematic because of an inherent tension in RFRA.  I am a big fan of the statute, but there is merit to some concern.  RFRA applies to statutes that do not discriminate against religions either on their face or by intent, but only in effect as applied in some circumstances.  Given our rich array of statutes and religious beliefs, that can happen quite a lot.  If everytime it does we are going to re-write the law unless the government can satisfy a very toughly-applied strict scrutiny standard, we may be doing a lot of re-writing.

This concern isn't new.  It is the core of Justice Scalia's refusal to follow a strict scrutiny standard in Employment Division v. Smith, the case that RFRA overturned.  In essence, Scalia chose to follow rational basis scrutiny in such circumstances.  But if strict scrutiny risks being too tough, rational basis scrutiny is too weak, providing in effect no religious liberty protection unless statutes explicitly regulate religion.  Is a compromise possible?

That leads me to the missed opportunity and my doomed proposal.

The missed opportunity.  There is of course an intermediate scrutiny standard of review available in constitutional law jurisprudence.  That standard would allow a more even-handed weighing of the competing interests, not favoring plaintiffs as heavily as strict scrutiny or the government as heavily as rational basis.  Moreover, precedent was readily available.  In free speech cases (a clause separated from free exercise by a semi-colon), in time, place and manner cases the Court basically applies intermediate scrutiny.  These cases occur where a statute does not regulate speech explicitly or by intent, but still has the effect of restricting speech--precisely analogous to the situation in Smith and RFRA.

So why did no one in Smith take the intermediate scrutiny route?  Or, why didn't Congress do so in RFRA?  Beats me.  That is actually two missed opportunities.

The doomed proposal.  It is still technically possible to re-visit the point.  Congress could always amend RFRA.  But the statute is now helplessly caught up in the culture wars, in stark contrast to the near unanimity of its passage.  It is very hard to envision this weakening of RFRA passing as long as Republicans retain blocking power in the House, Senate, or Presidency.

Which leads to a more complicated version of the doomed proposal.  What about a grand bargain?  Republicans agree to amend the federal RFRA, and in return Democrats agree to pass the intermediate scrutiny version in a large number of states that currently have no RFRA.  To my mind, it's not even a compromise--the result is better at both the federal and state levels.  That's not the way the parties see it, but still each side gets a lot out of this.  Alas, they both lose something too.  Given the state of current politics, I can't see such a bargain working.  The spirit of compromise is weak, and both sides are having too much fun rallying their bases with Hobby Lobby.

 

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Corporations as Aggregates?
Posted by Usha Rodrigues

This post comes from Friend-of-Glom Bill Callison:

My summer reading consisted in part of  Burwell v. Hobby Lobby Stores, Inc.   Well, part of it.  I skipped all the stuff at the end about governmental interest, substantial burden and least restrictive means, and, heck, I have not gotten around to reading the dissents.  But I will, teacher, I will.  Overall, I really struggled with the 25 or so pages I actually read that had to deal with corporations and stuff.  I could not figure out whether I was reading fiction or nonfiction. I think this was primarily because I could not figure out whether the author was working hard and trying to apply corporate law that he did not quite understand or whether the author was skipping over all that pesky corporate law stuff, without really trying to understand it (law school was a long time ago and the federal courts class was where the action was for us judges and our clerks), in order to get to the conclusion part of the story he was interested in.  And, cynical me, maybe that gave him the result he wanted.  When I say “author”, I mean 5 Guys, like the burger place.  I also thought that the writing was full of rhetorical ploys, and false similes and metaphors (things like, “Hey, it might work for sole proprietors.  Why not corporations!”).  I walked away dissatisfied.  I waited all summer for that book to come out, and this is all they could do?  Fortunately, I know that other authors (such as judges in state courts) work with the same materials and that what they say about corporations is probably more important than what the USSC might have said.  Therefore, although I know that there are important threads in Hobby Lobby, and that people will argue about it, and that advocates may use it in things like veil piercing cases, I wait for the book to be written.  I hope that those authors apply a large discount to the Court’s decision.  Much of it was raw dictum anyhow.  I really wish that reticent Bainbridge fellow had not run out of things to say.  No one else (including me) has.
 
Now – for the more “serious” part of this post --
 
            The issue in Hobby Lobby is relatively simple - did HHS regulations violate RFRA by requiring the appellee closely-held corporations to provide health-insurance coverage for contraceptive methods that violate the sincerely held beliefs of the corporations' owners.  The Court held, first, that RFRA provides protection to corporations since "the plain terms of RFRA make it perfectly clear that Congress did not discriminate … against men and women who wish to run their businesses as for-profit corporations in the manner required by their religious beliefs."  In reaching this conclusion, the Court rejected arguments that use of the corporate form distinguishes closely-held corporations from "sole proprietorships or general partnerships."  I do not think the Court returned to the general partnership theme, but I do think it ties into the “aggregate” approach to business entities discussed below.  It would have been useful to note that under RUPA and all state partnership statutes a general partnership is an “entity”.   Second, the Court held that the HHS regulations substantially burden the exercise of religion and that they do not constitute the least restrictive means of serving a compelling governmental interest.  Thus, the regulations, as applied to the appellees, violated RFRA.
 
            The Court's decision that RFRA applies to corporations took several steps.  First, the Court stated that RFRA applies to "a person's" exercise of religion and that RFRA does not define "person."  Therefore, the Court considered the Dictionary Act, which applies "in determining the meaning of any Act of Congress, unless the context requires otherwise."  The Court decided that RFRA's context does not "require otherwise," and ruled that under the Dictionary Act, "the wor[d] 'person' includes corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals."  The Court's "context requiring otherwise" analysis is somewhat mysterious.  Rather than endeavoring to place RFRA's use of "person" into the religion-based context of RFRA, the Court simply accepted the appellant's concession that nonprofit corporations can be persons and stated that "no known definition includes some but not all corporations."  Very formal; not very contextual.  What’s with the “known definition” trope?– I thought that part of the judicial job is definition.  One is left wondering whether an objective analysis would have been different (and what it would have looked like) had the nonprofit corporation question not been "conceded."  One is also left wondering about what the Court's analysis would have been if it had undertaken to discuss the obvious question of whether an administrative agency has a valid basis for differentiating religious nonprofit corporations from other nonprofit corporation and for-profit corporations.
 
            The Court then focused on the argument that corporations are not protected by RFRA because they cannot "exercise religion."  The Court concluded that corporations can exercise religion, but rather than provide a positive basis for this conclusion the Court debunks several strawperson arguments.  First, the Court concludes that "the corporate form" does not militate against religious exercise since, as noted above, it decided that the appellant conceded that nonprofit corporations are protected by RFRA.  Again, the Court did not delve into possible distinctions between nonprofit corporations and for-profit corporations.  It also concludes that the "profit-making objective" does not militate against religious exercise because a prior case indicated that individuals who attempted to make a profit as retail merchants might have free-exercise claims and "if … a sole proprietorship that seeks to make a profit may assert a free-exercise claim, why can't [a corporations] do the same."  Really?  In grounding corporate free-exercise rights on the free-exercise rights of sole proprietors, the Court made an egregious mistake.  Sole proprietorships are not entities, and "sole proprietor" is simply a label hung on an individual conducting business in personal form.  As individuals who can think religiously, sole proprietorships also can think religiously.  The "why can't corporations do the same" analysis rests on the nature of corporations as entities that are not individuals, unless one reaches the conclusion that closely-held corporations are mere extensions of the individual owners and thus are akin to sole proprietorships.  As discussed below, the Court's analysis supports an argument that corporations are merely extensions of their owners – also known as aggregates.
 
            The second argument raised and debunked by the Court is that "RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money."  The Court states that "[t]his argument flies in the face of modern corporate law."  In the Court's view not all corporations are soul-less, profit-seeking devices, and modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and that many do not do so.  While I believe and hope that this is the case, it should be noted that the Court's bald assertions have been the focus of considerable discussion in recent years, and that the outcome is not as clear as that alleged by the Court.  A Court which has not partaken of discussion concerning corporate purpose (and may not have even read any of it – pretty much zero footnotes0 should not be so certain of its assertions.  For example, the Court refers to the fact that numerous states recognize "the benefit corporation, a dual purpose entity that seeks to achieve both a benefit for the public and a profit for its owners," but it fails to recognize that the rationale for benefit corporations is to create a new form in which profit is not paramount.  None of the appellant corporations in Hobby Lobby were benefit corporations.  Further, a conclusion, even if correct, that modern corporate law recognizes that corporations can engage in activities that do not maximize profit does not address the question of whether corporations can exercise religion.  To say that Hobby Lobby can do good is not to say that it can think.
 
            Having concluded that corporations are "persons" and that they are capable of "exercising religion," the next question is how exactly corporations, which are legal constructs, go about exercising religion.  Although the Court does not engage in extended analysis, it is clear that its conclusion is that corporations can carry out the "sincerely held religious beliefs of their owners," the shareholders.  It notes that members of the family that owns and controls appellee Conestoga Wood Specialties are devout members of the Mennonite Church, which opposes abortion and believes that "the fetus in its earliest stages … shares humanity with those who conceived it."  The Conestoga Wood shareholders believe that "human life begins at conception."  Similarly, family members that own and control appellees Hobby Lobby and Mardel are committed to "honoring the Lord in all [they] do by operating the company in a manner consistent with Biblical principles."  The Hobby Lobby/Mardel shareholders y also believe that life begins at conception and that it would violate their religion to facilitate access to contraceptive drugs or devices that operate after conception.  The Court clearly focused on the shareholders' religious beliefs and, therefore, Hobby Lobby makes sense only to the extent that the shareholders' beliefs are transported to the corporations they control.
 
            This conclusion is buttressed by the Court's facile repudiation of HHS's argument that it would be difficult to ascertain the sincere beliefs of a corporation.  The Court responded to the argument that there could be battles over the religious identity of large corporations with the rejoinder that, "[t]hese cases, however, do not involve publicly traded corporations, and it seems unlikely that the sort of corporate giants to which HHS refers will often assert RFRA claims."  The Court also concludes that shareholder disputes over the application of religious principles to corporate activities can be readily resolved by state corporate law.  But the Court does not analyze the method for this "ready means" of resolution.  I am not sure such ready means exist.
 
            More to the point, by focusing on the shareholders’ beliefs and transporting them to the “person” that is the corporation, the Court seems to conclude that corporations are peculiar persons -- aggregates of their shareholders (and no one else) and not entities separate from their owners.  It does not use those words, but the holding, together with references to sole proprietorships and general partnerships indicates to that this is the direction taken.  At the end of the day one wonders where a Hobby Lobby analysis leads.   Almost a decade ago I wrote a Business Lawyer article on rationalizing limited liability and veil piercing in which I stated that one approach is to treat closely-held entities as agents of their owners, such that there is a rebuttable presumption that the principals are personally liable (“respondeat superior”) for the acts of their agents.  I did not base this on aggregate theory, but if one moves toward an aggregate approach to corporations one opens large cans of worms.  I also recall that one of my friends, after hearing me talk about this at ABA annual meetings in a SF hotel, moved to throw me out the window.  I suspect Lauris would move to throw the Hobby Lobby case out of the window as well.

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July 17, 2014
CSR Theory and Practice
Posted by Usha Rodrigues

Many thanks to Alan for pushing me, both in this symposium and elsewhere on the Court's view of the social ends to which corporate funds can be put. Alan characterizes two different versions of corporate social responsibility. 

The first, "weak" version allows managers to pursue policies that reduce profits, so long as shareholders expressly agree.   Under this approach altruistic shareholders may authorize managers to divert corporate  profits to charity, thereby enhancing shareholder welfare.  Such an approach treats shareholder welfare, not profit, as the proper corporate maximand and thus furthers the shareholder primacy norm.      The second "strong" brand contemplates that managers can pursue policies that reduce profits so as to improve the overall welfare of society, to the detriment of shareholder welfare if necessary. Under this latter approach managers can donate corporate funds to charity or overpay employees without shareholder approval even if the managers are certain that shareholder welfare will suffer as a result.  Shareholders’ only remedy is to sell their stock or elect new directors.  Friedman, it should be noted, objected to this latter form of CSR in his famous 1970 essay. 

The rub for me is that how differently CSR plays out in the closely-held (whatever that means) context versus the big public corporations we generally associate with CSR.  When, if ever, will a large public corporation say: "We are going green because, to heck with the shareholders, it's the right thing to do?" 

Please.  The managers will say some variation of "this is good for the bottom line, it's good for branding, and long-term it's good for us all." In short, they will say they are serving shareholders BY serving the common good.  Take as a given that most public firm CSR policies are justified in this way.  I think it is only in the private Hobby Lobby firm that we are likely to see an admission of true charity where we can easily apply Alan's strong or weak form of CSR, and even ask the question of whether the shareholders consented to the policy.

The question from Alan's point of view would then become, I think, how to separate those public-firm CSR policies that are really disguised social welfare schemes from those that are genuine--even if misguided--attempts to further corporate interests by way of doing good.  I suppose that's why Alan argues for a profit-maximizing default that shareholders can opt out of, rather than the opposite default.  

As a normative matter I believe the default rule should be one of profit maximization. Whether I am correct is a topic for a different symposium.  But here again, our essay was somewhat more guarded.  In particular we said: “While some case law [citing Dodge v. Ford] suggests that fiduciaries must unalterably maximize shareholder profits, we believe that shareholders can waive any such rule, like other default rules.”

But Dodge v. Ford doesn't really say you have maximize shareholder profits, just that you can't ignore shareholders and run a semi-eelemosynary1 institution.  Of course I agree with Alan that you can waive the rule, but the question is where the default is.  And it seems to me that, given the wide berth the business judgment rule affords managers, the default is probably to allow for CSR as long as it's in some way justifiable as long-term wealth maximizing.  The question is why shareholders who are suspicious of corporate-Samaritan managers don't create firms that opt out of CSR entirely, and forbid managers from anything approaching CSR? 

1 I love that word, and I only get to say it in this context. 

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The Privatization of Religion
Posted by Ronald Colombo

Prescinding a bit from corporate law per se, and at the risk of stating the painfully obvious, I think it is fairly clear that one of the reasons that Hobby Lobby has engendered so much opprobrium is because it strikes at the heart of efforts to privatize religion (and, dare I say, marginalize the role that faith plays in our society).

This was driven home vividly be a recent event in my neck of the woods.

A newly opened Hobby Lobby store (in northern NJ) was greeted this past Saturday by about 50 protestors.  According to an article covering the situation, the protestors chanted (among other things): "Hobby Lobby, hear the news - religious views are for the pews."

I think this accurately captures the feelings of a growing number of Americans.  The broad bipartisan consensus that led to RFRA's passage 20 years ago, bringing together both the ACLU and the Christian Legal Society, has largely dissipated.  There is a very real attempt to replace the "free exercise of relgion" with "freedom of worship."

Hobby Lobby cuts in precisely the opposite direction.  It gives recognition and protection to a broad and robust understanding of "the exercise or religion." 

I personally think this is appropriate, on a number of levels.  Not only do I think this comports well with our nation's traditional understanding of religious liberty but, more relevant to this symposium, to the changing nature of the corporation as pointed out by Lyman.  The decisions people make regarding their work, investments, and even what companies they patronize have become increasingly value-laden and politicized.  The market has given rise to "B Corps," and even many state governments today recognize "Benefit Corporations"(including Delaware) which can expressly disavow profit maximization.  To assert that corporations should be "value neutral" is so very yesterday. 

And herein lies the great contradiction, as some of my fellow contributors have pointed out.  There is rather broad support for the notion that businesses should indeed put principle ahead of profit.  Yet some of the most ardent advocates of that position balk when the principle is in question is religiously informed.

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July 16, 2014
Hobby Lobby and Competing Interests Within the Corporation
Posted by Elizabeth Pollman

Thanks to the Conglomerate for hosting this excellent symposium.  I’d like to pick back up an issue that I briefly blogged about earlier this month, which is whose interests to consider as being represented by the corporation and how to handle questions of corporate rights when people associated with the corporation have competing interests at stake.

This is a difficult issue—one that the Supreme Court has not adequately explained in the 200+ years in which it has been answering questions of how to treat corporations under the Constitution.  I hope to explore it in more depth in some of my current projects … here I thought I’d just draw attention to a passage of the Hobby Lobby majority opinion which I think is particularly thought-provoking on this point.  Justice Alito wrote:

As we will show, Congress provided protection for people like the Hahns and Greens by employing a familiar legal fiction: It included corporations within RFRA’s definition of “persons.”  But it is important to keep in mind that the purpose of this fiction is to provide protection for human beings.  A corporation is simply a form of organization used by human beings to achieve desired ends.  An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another.  When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people.  For example, extending Fourth Amendment protection to corporations protects the privacy interests of employees and others associated with the company.  Protecting corporations from government seizure of their property without just compensation protects all those who have a stake in the corporations’ financial well-being.  And protecting the free-exercise rights of corporations like Hobby Lobby, Conestoga, and Mardel protects the religious liberty of the humans who own and control those companies.

It’s interesting that Justice Alito chose to use examples dealing with constitutional rights in this passage while elsewhere stating in the opinion that the ruling was only on the statutory question under RFRA, and the Court was not reaching the First Amendment claim.  

Putting that aside, there’s the point reflected in this paragraph that corporate rights are generally derivative in nature.  That is, corporations have been at times accorded constitutional (or statutory) protections in order to protect natural persons involved in or associated with corporations.  Margaret Blair and I have been working on an article, forthcoming in William & Mary Law Review, which traces Supreme Court jurisprudence and the derivative nature of corporate constitutional rights…. but we also show something that Justice Alito didn’t address which is that the rationale for according derivative rights to corporations also suggests limitations to such rights, and that the Court has drawn limits in the past.

Further, Justice Alito’s choice of examples doesn’t fully grapple with the complexity of the issue because with the Fourth Amendment and property/takings examples it seems likely that the people associated with a corporation would have common interests that are being protected.  It’s also curious that Justice Alito refers to protecting the interests of “employees and others associated with the company” when referencing Fourth Amendment protections and “all those who have a stake in the corporations’ financial well-being” when referencing property protections – but only to those “humans who own and control” the corporations when considering free-exercise rights.

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Right, Left, and Hobby Lobby
Posted by Eric Orts

A belated thanks for including me in this symposium:  I'm very much enjoying and learning from the various posts.

One additional comment that I'd like to make concerns the designations of "right" and "left" and how these political frames shape our discussion of Supreme Court opinions.  There is no doubt that we live today in a world of Kulturkampf with the rise of fundamentalist religions apparently everywhere:  from Texas to the Middle East.  However, I think that actually reading the opinions of the Supreme Court in Hobby Lobby suggests that it would be helpful at least for academics sometimes to cease fire.

I am accused now of being on the "left" because I argue that employees should be considered as part of a corporation (or other business firms of more than fifteen employees) with respect to religious claims that support women employees' coverage for contraception under a national health care law.  See Brett McDonnell's post here.  But the logic of my position is not "left" or "right."  My argument that employees should be considered as legitimate members of corporations for many purposes would also protect the claims of fundamentalist Christians or others with whom I may disagree religiously.  Take, for example, the Braunfield and Gallagher cases that I mention in my first post in this symposium.  And then imagine that the plaintiffs are fundamentalist Christians opposing a restrictive law rather than Jews.  Same result:  protecting the rights of religiously oriented businesses in the face of discriminatory public laws.  Other precedents apply the same logic to protect employees as well as owners and managers.

(Let me also clarify my position on one point:  Professor McDonnell says that I advocate employees as having a right to determine "what religious goals, if any, the corporation is exercising."  This is actually not my argument.  Employees' role in governance is a separate issue, and in my view there is room for many different types of business enterprises structures.  Again see my new book on Business Persons, chapter 5.  My point here is that employees should count as relevant members of firms when the question involves religious free exercise.  There is good reason to think that owners and managers may call the shots in terms of business decisions about a firm's operations, marketing, quality control, customer services, etc.  But for a business to make determinations that affect employees' religious or strongly held moral beliefs on questions of compliance with a federal law is a different matter.  In my view, even if employees are not part of the active management and governance of a firm, there is an argument that their religious views matter just as much as those of their managers.  I make the same argument, by the way, with respect to the political activities of business in the context of Citizens United.  Justice Stevens errs in his dissent there, in my view, by focusing only on potentially divergent views among the shareholders of a firm (which is indeed relevant).  He misses that fact that employees have differing political opinions too.  See id., chapter 7.

Alan Meese in this symposium cheerfully adopts of the label of being on "the right."  But I resist a similar characterization.  Perhaps I'm simply contrarian:  I remember that I would sometimes sit with friends at Oberlin in my undergraduate days long ago, and we would consider that we were in the "far center" rather than on the traditional "left" or "right."  I realize that some may reply "Oh, Oberlin:  yes, he's definitely Left."  Or some might say:  "Far Center is very close to Out in Left Field!" 

But seriously:  Perhaps law and business professors can play a role in calling a truce to the Kulturkampf which surely possesses the media-driven world today.  The decisions in Hobby Lobby, I think, suggest an opportunity for some reflection along non-partisan lines.

One reflection is to suggest that perhaps Hobby Lobby didn't really need to be decided.  It seems that a compromise might have been offered by the Obama Administration to carve out from coverage of the health care law a number of closely held for-profit corporations along the same lines that they agreed to carve out religious non-profits.  It may have been wise politically too:  a fifteen-employee limit might have been negotiated then more easily than it will be to cabin the scope of Hobby Lobby's holding now.  Perhaps I'm too cynical, but in view of the political reactions to Hobby Lobby on both sides, one wonders whether the case wasn't litigated (or allowed to go forward) with political purposes in mind.  Win or lose:  both sides energize their bases!  As one of my political scientist neighbors at Penn remarked, perhaps the biggest economic winners in Citizens United, McCutcheon, and Hobby Lobby have been political lobbyists and fundraisers. 

But for law and business professors -- and other observers -- the Hobby Lobby case presents an opportunity for deeper intellectual engagement.  As previously discussed, we have "conservative" Justice Alito writing about religious values in business corporations that he recognizes extend also to questions of environmental sustainability and benefit corporations.  He casts doubt on the deservedly fading mantra of shareholder value maximization.   And we have "liberal" Justice Ginsburg describing the relevant stakes of employees as "interests" rather than "rights."  One almost gets the sense that contraception is an economic decision, in her view, as much as a moral one.  In other words, Hobby Lobby is normatively complex:  and the reason, in my view, is that the issues here run deep into our received but insufficiently examined theories of business:  what is business and what is business for?  And how should we fashion laws in light of our collective answers to these questions?  Answering these questions, I hope, will reveal a long-term silver lining in the opinions of Hobby Lobby that may transcend our current Kulturkampf.

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Are You There, God? It's Me, Corporate.
Posted by Usha Rodrigues

I'm certainly enjoying Day 1 of our Hobby Lobby symposium, and am working on a post to contribute.  In advance of that, I thought I'd report this gem of a line from The Daily Show.  It probably shows that I'm of a certain age, but Judy Blume humor strikes a chord.

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Replying to Ronald Columbo on Corporate RFRA Rights
Posted by Amy Sepinwall

Thank you, Ron, for your very thoughtful treatment of my post. I think we agree more than we disagree. The fundamental point of disagreement seems to be whether an organization that is run according to a religious code should count as religious, with you supporting the claim that it should and my seeking to deny that claim.

You say that you "have trouble understanding why such an entity [i.e., a for-profit corporation committed to honoring the Lord in everything it does] would be exercising religion any less than a religiously affiliated soup kitchen." I agree -- both for-profit and non-profit entities that are run in accordance with religious precepts are equally religious. It's just that I think that neither of them counts as religious in the sense of the word that I have in mind.

As the vegan/kosher analogy aims to make clear, there is a difference between conduct that happens to abide by a set of religious precepts and religious observance. The latter requires more than mere conformity with the precepts; it requires knowledge of the precepts themselves, a commitment to those precepts, and a motivation to observe those precepts precisely because they are commanded by one's deity/religion. 

Sometimes all we mean by "religious" is "run in accordance with the rules of some religion." In that sense, Hobby Lobby is as religious as, say, the Franciscan Sisters of the Poor Homeless Shelter. 

But there is a more demanding sense of "religious" -- one that tracks the notion of "observance" described above. I think we recognize and distinguish between these two conceptions of "religious" in everyday talk. Thus, when we refer to a person as a "religious individual" I think we (at least sometimes) mean more than that his acts align with the precepts of a given religion. In addition, we mean that he has internalized those precepts -- he follows them because they are what his religion commands. Organizations -- again, whether profit or non-profit -- cannot internalize in this way.

Now, my arguments against corporate religious exercise presuppose a further claim -- viz., that one who claims a religious exemption must satisfy the more demanding sense of "religious" as in "religious observance" You likely disagree. But given that the outcome for RFRA exemptions will be the same for both of us -- you will rest your claim for an exemption on the corporation's religious nature and I will rest it on that of the owners -- it isn't clear to me that the disagreement between us amounts to much. (The lawyer in me thinks this is a good thing -- always better to have multiple lines of argument leading to the same conclusion!)

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Hobby Lobby and Hybrid Firms
Posted by Haskell Murray

Shortly after the Burwell v. Hobby Lobby opinion was issued Professor Usha Rodrigues wrote the following in her excellent post on the case:

I was wondering if the Court would mention benefit corps.  Kind of surprised the majority does, because one could see the existence of a hybrid form as undermining the Hobby Lobby/Conestoga argument, i.e., if you were serious about your religion, why didn't you pick a different form?  I'm looking at you, Haskell Murray.

In this post, I will attempt to address Professor Rodrigues’ sensible question.

Justice Alito does not make clear why he mentions benefit corporations. As my co-blogger at Business Law Prof Blog Professor Ann Lipton has noted, Justice Alito’s analysis, from a corporate law perspective, leaves much to be desired. That said, I think there is a logical reason for Justice Alito mentioning benefit corporations in this case, even though neither Hobby Lobby nor Conestoga chose to use the benefit corporation form. 

The logical reason for mentioning benefit corporations in Hobby Lobby is that the mere existence of benefit corporations illuminates the increasing difficulty in differentiating between “non-profit” and “for-profit” firms. Professor Ronald Colombo described that difficulty in his post earlier today.

Just this morning I met with a group of social entrepreneurs. Some of the entrepreneurs ran 501(c)(3)s with a significant commercial component. Some ran LLCs, benefit corporations, or traditional for-profit corporations with a significant social mission. The legal form of each organization was not apparent from the descriptions of the organizations; I had to ask.

Justice Ginsburg, in her dissent, tries to distinguish religious for-profits from religious non-profits when she writes:

Religious organizations exist to foster the interests of persons subscribing to the same religious faith. Not so of for-profit corporations. Workers who sustain the operations of those corporations commonly are not drawn from one religious community.

This attempted distinction fails. Many religious non-profits also engage non-believer workers, perhaps most notably, non-profits that train the chronically unemployed for the workplace. For example, Spring Back Recycling, a 501(c)(3) organization that originated from a student project at Belmont University (disclosure: my employer) has no religious requirement for its workers despite the fact that the organization is sponsored by a local church ministry. Similarly, non-profit Catholic hospitals routinely hire (and treat) non-Catholics. Speaking of hospitals, making distinctions between non-profit and for-profit hospitals has long been difficult and debated. St. Thomas Hospital, whose west branch is around the corner from my house, has a pretty detailed mission integration page on its website, but frankly, I am not 100% sure that it is non-profit (though I assume it is) and, assuming that it is non-profit, I am not sure I could tell the difference between it and the local for-profit hospitals if you removed the signage.   

With the emergence of hybrid firms the distinction between “for-profit” and “non-profit” corporations is becoming even more difficult. Both the Model approach and the Delaware approach to benefit corporation law expressly allow a religious purpose for the legal entities. As I mention in a new article, I approve of the transparency promoted in the Delaware public benefit corporation law, which requires disclosure of the corporation's specific public benefit purpose, religious or otherwise, in its certificate of incorporation. (The Model approach makes disclosure of the specific public benefit purpose optional.) Especially over the last decade, we have seen increasing convergence in the organizational models; for-profits are increasingly focusing on social problems and non-profits are increasingly using commercial methods. Hybrid firms are a part of this convergence. 

After Hobby Lobby, in other areas, some have started to argue against exemptions for religious non-profit corporations as well as for-profit corporations, and I think logic has to take them there; as Justice Alito wrote, "[n]o known understanding of the term "person" includes some but not all corporations." However, the argument against accommodations/exemptions for religious non-profit corporations (and incorporated churches) will be a much broader argument, and much more difficult politically, than an argument solely against accommodations/exemptions for traditional for-profit corporations. 

Many thanks to Usha Rodrigues (and her co-bloggers) for asking me to contribute; I look forward to reading the other posts, responses, and comments.  

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Hobby Lobby and the Tax Definition of Closely Held Corporation
Posted by Ellen Aprill

The Court’s conclusion that the “contraceptive mandate, as applied to closely held corporations, violates RFRA ” (slip op. p. 49), without defining closely held corporations, has led some commentators to look to tax law. See here, here, and here.

Leaving aside the opinion’s reference to reliance on state law and its observation that the case did not address the applicability of RFRA to public companies, as Usha has described, the use of tax law for this purpose strikes me as misplaced because of the inconsistency in the way tax law uses, and fails to use, the term “closely held.”  

Commentators have primarily relied on IRS Publication 542, Corporations, and the IRS website, Entities.  These sources explain that, in general, a closely held corporation is one that “has more than 50% of its outstanding stock owned  (directly or indirectly) by 5 or fewer individuals during the last half of the tax year” and “is not a personal service corporation.” Publications and the IRS website are not authorities on which taxpayers may rely.

This 50%/5 definition comes from Internal Revenue Code section 542(a)(2), where it functions as part of the definition of “personal holding company.”  (A personal holding company is one that meets the 50%/5 ownership tests and also has at least 60% of its adjusted gross income from certain kinds of investment income.) Section 542 itself, however, does not use the phrase “closely held  corporation.”

Some Code sections do use the term.  One establishes a special rule for documenting corporate charitable contributions of property to a “closely held C corporation.”  Sec. 170(f)(11)(B).  Treas. Reg. sec. 1.170A-13(c)(7)(i) defines the term to mean “any corporation (other than an S corporation) with respect to which the stock ownership requirements of paragraph (2) of section 542(a) [the 50%/5 definition] of the Code is met.”  Note, however, that this definition appears in regulations, not the Code. Another section of the Code, section 469(j)(1), involving the limitation of deductions for passive activity losses, also refers to “closely held C corporation.” Eventually, it gets to the 50%/5 definition, by cross reference to another section, section 465(a)(1)(B), which in turns refers to section 542(a)(2). Section 856(h) defines a closely held real estate investment trust by cross references to section 542(a)(2).  Section 6655, dealing with failure by a corporation to pay estimated tax, has special rules for closely held real estate investment trusts, but gives its own 50%/5 definition, rather than cross-reference to section 542(a)(2).  Section 4942, which imposes an excise tax on the failure of a private foundation to distribute its income, refers to special valuation rules for securities held in a “closely held corporation,” but neither the statute nor the applicable regulations define the term.

Examples from other sections demonstrate the variety of the ways the Code adapts the 50%/5 definition.  As noted above, section 465(a)(1)(B), which deals with amounts at risk, does not use the term “closely-held corporation. “  Section 460, which involves long-term contracts, has a set of rules for closely-held pass-thru entities, defined to have 50% or more of beneficial interests held by 5 or fewer persons. Section  460(b)(4)(C)(iii).  Section 1563(a)(2) uses a 50%/5 test in connection with the definition of a controlled group of corporations, but it  neither employs the term “closely-held” nor cross-references to sec. 542(a)(2).  The definition of a controlled foreign corporation in section 957 uses part of the definition – it requires more than 50% stock ownership by U.S. shareholders, defined in section 951(b) as those owning 10% or more by vote -- but neither uses the term “closely-held” nor the 5 shareholder limit.

Yet another Code provision, which I have not seen discussed in the blogosphere, gives a quite different definition of a closely-held business.  Section 6166 allows an extension of time to pay estate tax where the decedent’s estate consists largely of an interest in closely held businesses.   In the case of a corporation carrying on a trade or business, eligibility for this deferral requires that 20% or more in value of the voting stock of such corporation be included in determining the gross estate of the decedent or that the corporation have ”45 or fewer shareholders.” Obviously,  45 shareholders are many more than 5 shareholders.  (Several other provisions involving  estate tax use “closely held,” usually, but not always, cross-referencing section 6166.)

To complicate matters further, a number of Treasury regulations use “closely held” without definition and, in context, appear to be distinguishing those corporations that are publicly traded  from that are not. See, e.g. Treas. Reg. sec. 1.56-1(c)(6), Example 4; Treas. Reg. sec. 1.274-3(e ) (2); Treas. Reg. sec. 1.355-7(j), Example 5.

Some of the commentators linked above also suggest the possibility of using the requirements for a Subchapter S Corporation –a corporation subject to only one level of tax - as a possible definition of closely held corporation.  Although Chief Justice Roberts referred to “this type of Chapter S Corporation that is closely held” during oral argument, Transcript p. 52, nowhere does the opinion itself refer to tax law.   Furthermore, section 1361 now permits a Subchapter S corporation to have as many as 100 shareholders, more than twice the number of shareholders permitted in the estate tax provision regarding interest in closely held businesses. 

Thus, although the 50%/5 definition appears in a number of places, given all the different uses of “closely-held” in the tax statutes and regulations, tax law should not be the basis for understanding the meaning of “closely held corporations” in Hobby Lobby.

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