July 17, 2014
icon Hobby Lobby, Shareholder Primacy and Proft Maximization
Posted by Alan Meese

For what it’s worth, I commend Lyman’s thoughtful post “A Missing Person: The Corporation.”   As noted in my prior post and other work on the subject, I do not believe that Hobby Lobby’s decision to pay above-market wages, provide exceptional service to customers or donate generously to charity contradicts corporate law, even if such conduct results in lower profits than the firm would otherwise enjoy.   Nor should we change corporate law to prohibit such conduct.  Like Lyman, I believe that a free society should encourage the creation and maintenance of institutions like Hobby Lobby that both create wealth for their owners but also confer benefits on the rest of society by, for instance, creating well-paying jobs.  (According to this source, the minimum wage for full time employees at Hobby Lobby is $14.00 per hour, even higher than Lyman reports.)   Finally, I agree with Lyman that neither corporate law nor the academy should devalue such conduct because of its religious motivations.

Unlike Lyman, however, I would characterize at least some such institutions as quintessential exemplars of “shareholder primacy in action.”    Hobby Lobby behaves the way it behaves because the Greens, in their capacity as shareholders, have induced the firm to do so.  (Brett raises a separate and very good question about what steps shareholders should have to take to legitimize such behavior.  I will address this question in a subsequent post.)   If the Greens converted to Atheism tomorrow, the firm would soon behave differently.  (While Atheists, for instance, might choose to pay high wages out of secular concerns for fairness, they would not close on Sundays.)   The Greens behave this way within an institutional framework that authorizes them, as shareholders, to set the course of the firm they own and induce the firm to pursue religiously-motivated conduct to the detriment of profit.   While the Greens are less wealthy as a result of the various policies Lyman catalogues, their behavior is voluntary, so we can presume that their utility is higher than it would be if Hobby Lobby pursued profit exclusively.

While some federal judges opined that Hobby Lobby’s behavior violated an immutable profit-maximization norm, the Hobby Lobby Court quite rightly recognized that corporate law contains no such immutable norm.  In my view (and Lyman apparently disagrees), the Court did so by embracing, not rejecting, shareholder primacy.  The Court recognized that a “corporation is simply a form of organization used by human beings to achieve desired ends.”  Those ends, of course, often include more than just profit maximization.  The Court also opined that “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.” (emphasis added)  It looked to the beliefs of these “owners,” which it described in some detail, to determine whether the HHS mandate burdened the corporations’ religious exercise.  (See e.g. n. 7.)  As explained in my prior post in this symposium, this focus on shareholder primacy is not consistent with the sort of corporate social responsibility that Milton Friedman decried as Socialism.  While other case law might support such an approach, I respectfully submit that Hobby Lobby does not.

In his first post, Lyman takes issue with my assertion in a prior essay with Nate Oman that profit maximization is a default rule that shareholders may alter unanimously.  Let me begin by clearing up some confusion.  Nate and I did not contend that unanimous consent was necessary to alter such a default rule; we only claimed that such unanimous consent was sufficient.   By all accounts, Hobby Lobby’s shareholders unanimously reject profit maximization in favor of religious exercise.  Our essay dealt with the case before the Court and took issue with those who claimed that the very nature of corporate law somehow precludes religious exercise by business corporations, even when shareholders unanimously endorse such a course of action.  Lyman is of course correct that something less than unanimity is sometimes sufficient, as when shareholders amend the charter.  Other legal devices might require more.  For instance, while Delaware enforces agreements between a majority of shareholders, some other states appear to require unanimity.  I agree with Lyman that the Court's opinion does not endorse any particular voting rule, and I did not mean to suggest otherwise.

More fundamentally, Lyman objects to our account of the content of the default rule.  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.”

In other words, we assumed for the sake of argument that there is a profit-maximization norm but pointed out that such a norm is not immutable under any account of corporate law.   While Hobby Lobby does not expressly embrace such a profit-maximization norm, the Court's invocation of the "agreement" and "approval" by owners of practices that depart from profit maximization suggests to me that the Court believes there is some background norm the departure from which shareholders must approve and that the norm is profit maximization.  I also hasten to add that I may be reading too much into this language, as Brett suggests in one of his posts.  But even if I am, I see nothing in the opinion that rejects a profit maximization default rule, either.  

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icon 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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icon A "Missing Person"--the "Corporation"
Posted by Lyman Johnson

As do philosophers, we corporate law scholars must struggle with whether we need a sound/better ontology of the corporation before we can prescribe and moralize(in a good sense) about it. In 2012, I wrote an article(http://ssrn.com/abstract=2070939) the abstract of which stated: "contemporary corporate theory accepts corporate personhood but, ironically, has little to say about the corporation itself, thereby sidestepping full engagement with corporate responsibility."

Like Eric, I have long thought folks of all political and theoretical outlooks should address the subject of responsible corporate behavior. The reality in today's corporate law and theory, however, is that the predominant shareholder primacy focus of our field means 1) the "corporation" as a meaningful concept with an institutional purpose and identity distinct from the persons involved in it is lost, and instead has become a mere cipher for the body of shareholders--a real and enduring failure, and perhaps this is what Eric's book takes on; and 2)only shareholders(and their dealings with directors/officers) receive sustained attention from mainstream corporate scholars, with many "progressive" scholars resisting this by means of advocating CSR and stakeholder theories of various sorts.

Corporate law and theory thus ignores the corporation itself and all those involved in it except shareholders, directors, with just a bit about officers. Other interests are out-sourced to other bodies of law. "Corporate responsibility," however, should not be a fringe element in U.S. corporate law, but a central part of it. And corporate responsibility need not be achieved only by means of "statist" solutions but can be advanced by volunteerism as well. I suspect much volunteerism is itself impeded by the faulty belief that those who govern companies must indeed focus exclusively on shareholder interests, a belief we in legal education and business education reinforce, as a 2011 Brookings Institute study reported.[And we need to distinguish "corporate responsibility," which means responsible action by an institutional actor toward others, from "corporate rights" and "interests" which focus on the holder or recipient].

But the point is that the subject of corporate responsibility should engage corporate scholars and the focus should indeed be on the distinctive "corporate" aspect of that and what it means, lest the corporate institution itself be let off the hook, as in my view, the contractarian theories do.  Some, like Alan and Milton Friedman, will believe that the responsible institutional course of conduct is to maximize profits, while others(me, for example) think corporations should voluntarily be far more attentive to the interests of employees and other vulnerable persons, whether from religious or philosophical beliefs, while yet others think the state should play a large role in requiring specified "responsible" corporate conduct. At least we in corporate law should more deliberately attend to the overarching issue of the need for responsible corporate behavior in a free society where businesses play such a central role in social life--whatever may be, and this is important, our quite differing visions of what "responsible" conduct entails in the corporate setting.

This is where the Hobby Lobby company is so fascinating, because it spans some of these categories and so challenges our thinking on this subject. Its statement of purpose is orthodox progressive stakeholderism, with one exception: it puts the Lord first, but then it follows with exceptional service to customers, taking care of employees, investing in the community, and lastly, providing a return to stockholders. They pay employees an above market minimum wage, currently over $13 I believe. The founder, Mr. Green, has said he does not want to take for himself and "skim from your employees." The company gives to charity over a third of annual profits, and in the event of a sale 90% of the proceeds will go to charity and only 10% to the stockholder-trust.  This is all voluntary and it is motivated by religious beliefs, and it is not profit-maximizing or shareholder primacy. By anyone's definition of responsible corporate behavior, and apart from not providing 4 of 20 contraceptive aids, this company has been a very good and generous citizen. Sadly, many simply don't like the religious underpinning of the actions, and we have to acknowledge that there frequently is an animus against religion in the academy and press that has fueled much opposition to this company. I hope with Eric that we can ignore our disagreements within corporate law but many religious people--and that includes some of the relatively few in the legal academy--sincerely believe there is growing hostility toward religiously-motivated behavior, even when it is a force for much good.

I believe we need a greater pluralism in the corporate world, where attending to the well-being of interests of persons besides capital providers is thought to be the affirmative responsibility of those who control and influence businesses, and not simply mandated by the state. This is why I resist the idea that, legally, profits must be maximized; it can inhibit such a voluntary focus. To be responsible, one must be free, and in a democracy we will differ as to what should be done, and how and why, with that freedom.  As with free speech, however, when we seek and  permit "responsible" corporate behavior, we may get some of the kind many of us do not like. As with diversity generally, however, it will enrich our collective life. Certainly these issues should be part of a truly "corporate" law and theory, and not pushed out on the margin.

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July 16, 2014
icon 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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icon 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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icon Corporate Law in Hobby Lobby
Posted by Lyman Johnson

My ironic excuse for posting late to the party is that I have been working on David Millon's and my Hobby Lobby piece! I have thoroughly enjoyed reading the very thoughtful pieces posted so far; they warrant close reading and re-reading.

In this first post, I will cover three related points, and I hope not too tersely. First, to conclude, as the Court did, that a business corporation could "exercise religion" under RFRA--a federal question--the Court first had to ascertain that such a corporation could refrain from solely making profits--a state law question. Those are distinct issues but easy to conflate. Resolution of the state law issue was a necessary hurdle to clear for the federal RFRA issue. But it is not sufficient. For a variety of reasons, many close corporations as well as public companies likely would fail to convince on the "exercise of religion" prong of the analysis. But that would not be because any of them--close or public--are somehow disempowered from doing so as a matter of state law. The Court's opinion did not, on the corporate law aspect of this two-step query, limit its reasoning to "closely held" corporations. Setting aside those highly-specialized and rarely used close corporation statutes--not involved in the case--the corporate statute applies to corporations of all sorts, close and public. The Court--skimpily, to be sure--drew on general corporation law provisions. In short, line drawing between closely-held corporations and others is germane to the RFRA "exercise of religion" facet, but not to the more fundamental issue of corporate purpose under state law.

This takes me to my second, related point. As Alan Meese notes, Justice Alito includes the phrases "with ownership approval" and "so long as owners agree." But contrary to his earlier post and his and Nate's Harvard piece, nothing requires that to be unanimous. Justice Alito in this passage is not exploring the nuances of voting rules--which, in any event, are founded on versions of majoritarianism not unanimity--and later he deals explicitly with disagreements on religion within a corporation. Thus, it is not the case that, in Alito's analysis, he is stating or even implying that profit maximizing behavior governs unless ALL shareholders agree. His passage is simply a way of stating the obvious: without consensus and agreement in corporate governance, decisions simply can't be made, or, if made,  will later be undone. In no way, does the opinion dive into the particulars of corporate voting here.

Finally, the opinion said nothing in the corporate purpose portion about "contracting around" or somehow "modifying" some supposed default rule on profit maximization, a point where Alan and I truly join issue.The majority opinion cited(skimpily, sure) generally applicable provisions of the corporate statute, not departures from it.  Hobby Lobby does not provide support that profit maximization is a default rule and it undercuts that position. The opinion by Alito speaks categorically in stating that corporations, acting under state law, can "exercise religion" under federal law because they do not have to maximize profits under state law; not, however, because they opted out of or "contracted around" some nonexistent default rule in their organic documents, which activity was never mentioned by the court. Here, to use the Pennsylvania law as an example, it could not be clearer that the default rule is NOT profit maximization but, rather, that there is no default rule on maximizing.  Pennsylvania for-profit corporations are defined as being those that make the "pursuit"(not the "maximizing") of profits as "a" (not the "sole") purpose; that purpose, again by statute, may be "incidental."

The Court may have been naively unaware of the ongoing scholarly debate as to the state of positive law on corporate purpose--itself an indication of the question's unsettled status--or the Court may have wisely sought to sidestep that debate, but the opinion does not provide authority that profit maximization prevails unless modified. It speaks more broadly, as does the underlying law itself.

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icon CSR, Employees, and Hobby Lobby's Theory of the Firm
Posted by Brett McDonnell

In my first post, I proposed some guidance as to when corporations should be treated as exercising religion under RFRA, and said that I planned to examine how well the Court's opinion fits with that guidance.  However, several very thoughtful related posts raise issues that I should address first.  Essentially, these posts put pressure on my approach from both the right and the left.

From the right, Alan Meese argues that the Court's opinion only endorses a weak theory of corporate social responsibility, not the stronger version that I prefer.  The weak version allows corporations to pursue policies that reduce profits only if shareholders expressly agree.  Let's distinguish three situations.  (1) Shareholders have expressly dictated, through the proper legal channels, that the corporation should pursue only profit.  (2) Shareholders have expressly dictated that the corporation may pursue another goal even if it sometimes leads to a reduction in profit.  (3) Shareholders have taken no express position either way.  Alan and I are both contractualists enough to agree that in situations (1) and (2), the express shareholder position prevails.

Where we disagree is (3).  I don't want to re-litigate here the whole legal and moral debate.  Alan does point to two sentences in Justice Alito's opinion which provide some support for the claim that the Court favors the weaker version of CSR, by referring to owner approval.  I think you can parse the language of that paragraph (p. 23 of the majority opinion) differently.  Some sentences don't have any owner approval caveat.  Of the two that do, at least the first does not necessarily imply that owner approval is required (it may just point out that shareholders sometimes do approve). 

More significantly, on Alan's approach what does it take for shareholders to expressly agree to waiving the alleged profit maximization default rule?  One would think the agreement has to operate through a legally-recognized channel for shareholder action.  If so, did that happen for Conestoga?  The Court refers to a "Statement on the Sanctity of Human Life," but that was adopted by the board.  It also refers to "Vision and Values Statements," but does not say who adopted that/them (and if shareholder approval is crucial to the Court, shouldn't it mention this?).  If the shareholders have not explicitly agreed to a religious goal through a legally-recognized channel, does that mean the profit maximization default rule remains in place?  If so, then Conestoga would seem inconsistent with Alan's position.  If instead one says that shareholders may agree to considering other goals through more informal means, then I'm not sure that we have a real disagreement in practice, since where a board has adopted a non-profit-centered goal in any sort of systematic way, one will probably be able to find implicit shareholder agreement (at least if one is motivated to look for it).

From the left comes the post of Eric Orts asking why employees don't also count in determining what religious goals, if any, a corporation is exercising (also on this point is an excellent op-ed by Matt Bodie and Grant Hayden).  Since I once wrote an article called "Employee Primacy," I'm very sympathetic.  In my ideal world, the views of employees would count at least as much as those of shareholders.  But U.S. corporate law is not my ideal world (to say the least).  In this world, the board is the primary authority (hello, Steve Bainbridge), and shareholders choose who is on the board, along with a few other significant powers.  And in closely held corporations, the same persons are both directors, controlling shareholders, and officers.  So, where through appropriate means the board and shareholders in some combination (see my first post) have set a religious goal, that becomes the goal of the corporation. This is particularly persuasive where that goal has been publicized, so that employees know what they are getting into (Joan Heminway has a thoughtful post on the role of disclosure, though I'm not prepared to say such disclosure is required).  That does not necessarily mean that the religious goals of the corporation, so determined, trump the religious rights of its employees.  Later stages of the analysis, in particular the strict scrutiny test, must address that potential conflict.  But it does mean that in the first two steps of the analysis--determining if a particular corporation has a religious goal such that it is exercising religion and whether that religious goal is substantially burdened--one looks to the actions of the board and shareholders.

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icon 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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icon 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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icon 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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icon 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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icon Hobby Lobby And Corporate Social Responsibility: A View From The Right
Posted by Alan Meese
  1. Thanks to Conglomerate for organizing this symposium and for inviting me to participate!

     2. Several thoughtful scholars have asserted that Hobby Lobby’s discussion of corporate religious exercise ("CRE") endorsed  “corporate social responsibility” (“CSR”) over “profit maximization” as the guiding principle of corporate conduct.  Usha Rodrigues claims that the Court’s opinion implies “Milton Friedman be damned.”  Lyman Johnson  asserts that it is “time to change the syllabus on corporate purpose” and that those “on the right . . . won the battle on religions freedom but . . . suffer[ed] a major setback on corporate purpose.”  Finally, Brett McDonnell contends that the opinion “fits perfectly with the expansive view of corporate purpose that liberal proponents of social responsibility usually advocate[.]”   Brett also wonders why those who ordinarily champion CSR nonetheless reject CRE by firms that seek to make a profit.

    3. I do not disagree that Hobby Lobby recognized that state corporate law sometimes allows business corporations to pursue something other than profit maximization.  But I think Usha, Lyman and Brett might overstate the nature and significance of the Court's language.  For those who do not know, I am “on the right,” at least among law professors.  I also embrace the shareholder primacy norm and the Chicago School’s views on CSR as articulated by Milton Friedman.  However, I do not view Hobby Lobby as a “setback,” let alone a major one, on the question of corporate purpose.   Instead, I view the Court’s discussion of corporate purpose and CRE as entirely consistent with shareholder primacy and Friedman’s views of CSR.

4.   In my view it is useful to distinguish between two different versions of CSR.  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.  In particular, he contended that this form of CSR authorized managers of corporations characterized by the separation of ownership from control to ignore the welfare of their principals (shareholders) so as to further the welfare of a different principal (society).   According to Friedman, managers who endorsed such CSR were "preaching pure and unadulterated socialism" and were "unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades."   Implicit in this critique, it seems, was a belief that widely dispersed shareholders of large public corporations do not really consent to their agents' use of their property to pursue social ends at the expense of profits.

 5.   Hobby Lobby’s discussion of corporate purpose apparently embraces the weak version of CSR.  Indeed, the Court twice qualifies its assertion that corporations may forsake profits to pursue other objectives.  For instance, the Court asserts that many business corporations pursue charitable objectives “with ownership approval.”  The Court also states that a business corporation “may take costly pollution control and energy-conservation measures that go beyond what the law requires” but prefaces this statement with the caveat “so long as the owners agree.”  While the Court does not specify what form such agreement can take, there was no doubt that Hobby Lobby’s shareholders, some of whom also managed the firm, “agreed” with and “approved” the firm’s religious exercise, even when such exercise reduced profits.  Thus, the Court treated profit maximization as a default rule, which shareholders could alter if they wished.  This focus on shareholder consent necessarily excludes the stronger view of CSR defined above, whereby directors can serve the greater social good regardless of the resulting impact on shareholder welfare.  Indeed, the whole point of the Court’s opinion on corporate personhood and religious exercise is that, in closely held corporations, shareholders, as owners, may induce the corporation to adopt practices that reflect shareholders' personal religious beliefs.  This is so, the Court said, even if such practices contradict a regulatory edict.   Shareholder primacy, not any notion of greater social good, is the animating principle here.

 6.   Usha, Lyman and Brett  are thus absolutely correct that Hobby Lobby rejects an immutable requirement that business corporations pursue profit and only profit.  However, Hobby Lobby’s embrace of this weak form of CSR, which treats profit maximization as a default rule, is in my view no setback for the right or Friedman’s views on CSR.   Indeed, about six weeks before Hobby Lobby Nate Oman and I endorsed just such an approach in this essay, arguing (among other things) that profit maximization is a default rule, which shareholders may waive to pursue religious objectives that may reduce profits. (Stephen Bainbridge  articulated a similar approach in response to Lyman's reaction.)  We also rejected the suggestion that directors who execute such shareholder preferences must invoke some pretextual profit-maximizing rationale to justify such conduct.   Moreover, as I explained a few days after Hobby Lobby, Friedman expressly opined that the “individual proprietor” should feel perfectly free to “reduce the returns of [his or her] enterprise in order to exercise [his or her]  ‘social responsibility[.]”   As Friedman explained, this individual “is spending [his or her] own money, not someone else’s.  If [he or she] wishes to spend [his or her] money on such purposes, that is [his or her] right, and I cannot see that there is any objection to [his or her] doing so.”  I doubt that Friedman would have objected if, instead of an individual proprietor, five shareholders of a closely held corporation unanimously agreed that the firm should give money to charity or decline to sell alcohol, even if such steps reduced the firm’s profits.  Such shareholders, after all, would be spending their own money.  Friedman did not object to private charity that is truly voluntary.

7.  The Court's implicit rejection of a strong version of CSR may help explain the left's failure to applaud the decision.  There is also, I suspect, a deeper reason that the Court's language on corporate purpose has not mollified many on the left.  Simply put, the correlation between CRE and traditional examples of CSR is imperfect. No doubt some CRE, e.g., charitable donations or the voluntary installation of pollution control equipment, correlates perfectly with CSR.   But what about the business that also exercises its religion by declining to sell alcohol or closing on the sabbath of its owners? While these practices may reduce profits, they do not confer obvious benefits on other segments of society.  Businesses that close on a sabbath inconvenience those customers who wish to shop on that day. Those who decline to sell alcohol force some consumers to shop at a less convenient location.  True, some employees might welcome the predictable day off, but some others might desire the extra wages and/or profits that bolster the ESOP.  More to the point (of Hobby Lobby), a firm that does not purchase certain forms of medical care for its employees thereby declines to confer a benefit on its employees, a benefit that "society" (the presumed object of "social" responsibility) has chosen to create.  While such a decision may be a bona fide example of CRE entitled to an exemption from the general law, any analogy to CSR would appear to be strained. 

 

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icon Corporate RFRA Rights - a response to Amy Sepinwall
Posted by Ronald Colombo

I'd like to thank Amy for teeing up some of the most important issues raised by Hobby Lobby, and for her insightful analysis.  That said, I'd also like to join issue as follows:

1. The corporation can/cannot exercise religion in virtue of the kind of entity it is.

The Diocese of Rockville Center is a corporation.  So is Catholic Charities.  Nonprofit corporations, but corporations nonetheless.  What matters is not their status as a corporation, but rather their religious mission.  It is not the organizational form that matters, but rather the substance of what the entity does.

One could imagine a business corporation with a mission statement such as:

"Honoring the Lord in all we do by operating the company in a manner consistent with Biblical principles."

(Actually, no imagination is necessary - that text is taken from Hobby Lobby's statement of purpose.)

I have trouble understanding why such an entity would be exercising religion any less than a religiously affiliated soup kitchen.  For many, the concept of exercising one's religion through one's work or profession might seem odd or alien.  But for some, one's work or profession might be considered one's "vocation" - a calling from God.  Without judging which individual is "right" or "wrong," I think we can readily recognize that both are making claims that are fundamentally religious in nature

2. Limited liability entails that the corporate owners cannot seek to exercise their religious convictions through the corporate form.

Here I agree with Amy, to a point.  I agree that stripping an entity of First Amendment rights because it enjoys the benefits of limited liability seems quite suspect.  More specifically, it runs up against the doctrine against unconstitutional conditions in my opinion.

That said, I generally do not believe that a corporation should have free exercise rights merely because its owners happen to be religious.  The corporation is, after all, a separate legal entity.  Thus, for a corporation to have free exercise rights, I feel that it, the corporation itself, should be religious in nature.  As per #1 above, this is something I am prepared to find under certain circumstances, but not somehing that Amy is comfortable with.

However, my paradigm is the public corporation.  When it comes to a closed corporation, like Hobby Lobby, I sense that we may be elevating form over substance.  Many closed corporations are operated akin to partnerships, such that there is no separation of ownership and control.  This would seem to permit the owners of the closed corporation to exercise their own free exercise rights via the corporate entity.  Steve Bainbridge has written persuasively on this subject.

3. Divergent beliefs among the corporation’s owners and employees entail that the owners may not seek to exercise their religious convictions through the corporate form

This gets back to my point in number 2, supra.  To me, corporate free exercise rights should ordinarily flow from the corporation's religiousity, not merely the religious beliefs of its owners.  I envision a corporation with a religiously grounded mission statement, and practices and policies informed by its religious principles.  Once we have such an entity, it matters little what the owners, or employees, or customers necessarily believe.  A Catholic school, for example, chartered and organized as such, doesn't lose its status as such just because its employees and students don't happen to be Catholic.  It is a Catholic school by virtue of its foundational structure: its curriculum, the doctrines it teaches, its operational principles, etc. 

As for what religious position a corporation should take or what it should do when the guidance of it mission statement and adopted policies is unclear, that's naturally what it has a board of directors for.  The same way religiously grounded mutual fund companies must make decisions as to which investments are acceptable pursuant to its religiously informed screens and which are not, the board of a religiously grounded corporation would be entrusted to make similar decisions on behalf of the corporation.

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icon Undertheorizing the Corporation Continued: Hobby Lobby and Employees' Rights
Posted by Eric Orts

Hobby Lobby joins Citizens United as an important Supreme Court decision that rejuvenates interest in the problem of corporate personality.  The essential question in both cases boils down to one of the legal rights of organizations and, in particular, for-profit corporations.  Do corporations have the same rights as ordinary people -- or not?  In Citizens United, the question was whether corporations possess political rights of free speech guaranteed under the First Amendment, and a five-person majority opinion answered strongly "yes."  In Hobby Lobby, the question was whether corporations have religious rights under a federal statute, and the same five-person majority answered "yes."  Four dissenters disagreed in both cases and insisted that these kinds of political and religious rights belong only to individuals.  In the alternative, they argued that regulations applied to corporations affecting political speech and the exercise of religion deserve greater deference than similar laws applied directly to individual people.

Some legal scholars will no doubt moan at the prospect that the legal personality of corporations -- and business firms in general -- has again become problematized.  They may feel that this is an old issue, and new sciences such as economics should by now have freed jurists from arcane debates about the "personality" of organizations -- "as if fictional 'persons' can be real!" they might exclaim with disbelief.  But though some economists may scoff at the idea that corporations can be treated as real "persons," lawyers know that this is done all the time.  Corporations own property, enter into contracts (both internally and externally), and have standing to sue and be sued in court.  At one level, this reality is a matter of convenience:  giving legal purchase on modern organizational complexity.  More deeply, corporations and other fictional "entities" are correctly conceived as constructions of organized people.  And as such, they may properly exert "rights" derivatively on behalf of these people.

Consider an uncontroversial example (at least for most non-Marxist scholars):  If the government passes a law expropriating a company’s property (such as its land, capital equipment, or bank balance), then the company may bring an action for an illegal "taking" without compensation.  Courts look through the "fiction" of the corporation to see the ownership rights of real people at stake:  shareholders or equity partners, creditors, and others with claims on the assets for the firm such as employees, managers, suppliers, and customers.  Everyone agrees that it makes sense for the company as an entity to bring a lawsuit against the government with any recovery to be distributed back into the company’s treasury.

Citizens United and Hobby Lobby are different because they involve a different kind of rights.  Property is natural in the business world, and the rules of engagement are relatively clear.  Political and religious rights pose tougher questions of social boundaries.  And unfortunately, the Supreme Court has not yet dug deeply enough theoretically -- on either side of the divide among the Justices -- to result in satisfactory outcomes.  As I have argued in my recent book Business Persons, the Supreme Court has so far left the concept of corporate personality "radically undertheorized" (p. xv).  Both the majority and dissenting opinions in Citizens United and now again in Hobby Lobby adopt relatively inflexible views:  either a corporation is a "person," and hence gets rights; or a corporation is not a "person," and hence does not.  This is unsatisfactory, because neither side actually inquires closely enough about "who" the corporation really represents in the relevant situation.

The legal theorist H.L.A. Hart is helpful here.  In his inaugural lecture at Oxford University, "Definition and Theory and Jurisprudence," Hart emphasized the importance, when asking about the nature or boundaries of a "corporation," of paying attention to the question being asked.  The answer to "what is a corporation?" changes depending on the context of the question.  Another uncontroversial example regards whether an employee is to be considered as within the boundaries of a corporation or not when making contracts with customers.  In terms of the basic law of agency, an employee acts on behalf of the corporation -- and binds the corporation as an entity -- when entering into sales or other contracts within the scope of his or her employment.  With respect to the distribution of profits to investors, however, employees are usually not considered to be within the corporation, except to the extent that profit-sharing arrangements have been made explicitly by contracting with them.

This lesson in the changeable nature of the composition of corporate personality provides assistance in unravelling cases such as Citizens United and Hobby Lobby.  The mistake in the majority opinion in Hobby Lobby, I believe, is not that the Court allows the corporation to qualify as a "person."  Clearly, and contrary to the dissent's objections, it qualifies as a "person" under the relevant statutes (namely, the Religious Freedom Restoration Act, the Religious Land Use and Institutional Person Act, and the Dictionary Act).  Because the question involves one of religious rights, however, the Court errs when it assumes that only the owners and managers count.  The entirety of the majority opinion examines the dilemma of whether the corporation's owners and managers may be compelled to violate their religious beliefs in providing contraception to their employees, but omits the perspective of the employees.  Since at least the abolition of slavery, it seems wrong to assume that employees would relinquish their own claims to religious freedom in the workplace.  Much has been made in the press of the fact that all five Justices in the majority opinion are Catholic (on a most unrepresentative Court of six Catholics and three Jews).  But one doesn't have to adopt a conspiracy theory to point out a possible bias that may have encouraged these Justices to miss the fact that a woman's right to contraception may also be posed in religious and moral terms.  (As a Unitarian, I can vouch for this fact, but it has been a long time since a prominent Unitarian has served on the Court.  One has to go quite far back in history to find one:  William Howard Taft, Oliver Wendell Holmes, and Joseph Story.  More importantly, this argument was pressed on the Court by in a broad-based, multi-denominational Brief of Religious Organizations as Amici Curiae Supporting the Government, but it was apparently dismissed or at least ignored by majority, concurring, and dissenting opinions in Hobby Lobby.)  One might also follow Brian Leiter here and ask why, at least in this context, the strongly held religious views of employers should trump conflicting non-religious but nonetheless strongly held moral views of women employees.

Justice Ginsburg's dissent also seems to miss the basic point urged by Hart's analysis, that is:  "who" qualifies as the corporation with respect to this question of the exercise of religious rights?  Ginsburg fails to think very deeply about the nature of the firm, repeating Justice Marshall’s ancient adage from the Dartmouth College case of 1819 that a corporation is "an artificial being, invisible, intangible, and existing only in contemplation of law."  And she follows Justice Stevens' nominalist dissent in Citizens United which asserts that corporations "have no consciences, no beliefs, no feelings, no thoughts, no desires."  (Slip Op. at 14) (Ginsburg, J., dissenting).  This view of the corporation is outdated and unrealistic.  Ginsburg's opinion overlooks the main question (though there are hints at times that she gets it; see id. at 32, noting that employees may "hold other beliefs").  With respect to religious rights, employees should count as part of the firm too.  They too are "persons" with religious rights.  Missing or at least not fully appreciating this point, Ginsburg's opinion too easily concedes that the rights of owners and managers in closely held corporations matter more than those of employees.  At one point, Ginsburg refers to the “significant interests of the corporations’ employees and covered dependents.”  (Id. at 8) (emphasis added).  Not only does this construction imply that employer owners have rights potentially superior to employees' interests; it also assumes that employees are seen as somewhow external to the "corporation" rather than, in this context and for this purpose, as internal members of it.  (See also id. at 17 n.17, 24-26 (referring to employees' "interests" rather than "rights")).

A deeper theoretical understanding of business firms will be needed to resolve hard cases that are likely to follow Hobby Lobby.  Easier cases concern small firms composed entirely -- inclusive of owners and employees (or perhaps at least the vast majority of employees) -- of those embracing a single religion and who are affected adversely by a discriminatory law.  The cases of Braunfield v. Brown (1961)and Gallagher v. Crown Kosher Super Market (1961) challenging Sunday closing laws on First Amendment grounds provide illustrations.  (It is interesting to note that "liberal" Justices such as Brennan and Douglas stood on the side of religious claims of business firm owners in these cases, which reveals that the question of the legal personality of firms in the context of religious rights is not a simple ideological one.)  In a small family-owned business in which owners and employees share a religion, there is no problem in theory with allowing a for-profit enterprise to invoke religious rights against a Sunday closing law (when the Sabbath falls instead on Saturday for the members of the firm).  Ginsburg’s dissent is wrong, then, to rely on a strict separation between “non-profit” and “profit” enterprises.  (Slip Op. at 14-19.)  A for-profit enterprise may sometimes embrace religious values as Justice Alito insists.  Justice Ginsburg is also wrong to suggest some relevant difference between a “sole proprietorship” and a corporation (id. at 19) given the widespread reality of one-person corporations.

Nevertheless, the precedents of Braunfield and Gallagher, though useful in arguing in favor of standing for business firms to maintain claims asserting religious rights, are inapt for resolving Hobby Lobby (and the companion case of Conestoga Farms decided at the same time on similar facts as Hobby Lobby).  The reason is that the number of employees in Hobby Lobby had grown at the time of the litigation to 13,000 employees (and in Conestoga Farms to 950).  At some point, a business firm -- even if founded with strong religious principles -- grows to a point at which it must act in a "public" forum and comply with broad-based legal rules designed to prevent discrimination in employment, not only with respect to religious affiliation but also other characteristics such as race or gender.  It is unlikely that Hobby Lobby will unleash a raft of religiously inspired employment discrimination.  (Ginsburg's dissent worries that such a parade of horribles will occur, but I believe that the majority opinion and Kennedy's concurrence suggest that this parade will not take place.  See also my Wharton colleague Amy Sepinwall's post on this issue.)  The exact number of employees that convert a private firm to having a "public" face in this respect is not set in stone.  And so it makes sense to rely on relevant statutes to provide reasonable estimates.  The current number under the most relevant anti-discimination statutes for most private businesses is fifteen employees.  Perhaps fifteeen employees would be a good limit to set for the scope of Hobby Lobby going forward if the religious and moral rights of employees are to be given due credit, though establishing this limit may require a statutory amendment or Supreme Court adjustment to the Hobby Lobby precedent.

There are no doubt going to be some difficult cases of line-drawing in the Hobby Lobby line of cases in the future.  At some point, business firms act in a "public" manner that requires them not to discriminate against their employees (or their customers) on the basis of religion, even if their own religions may counsel a different course.  As John Rawls has noted, religions express "comprehensive" views of the world, but in order for decent multicultural societies to evolve, prosper, and remain at peace, a "public" world of order and religious tolerance must hold sway and provide balance.  My own view is that the religious moderation expressed in Justice Kennedy’s concurrence, as well as the emphasis on the "least restrictive alternative" test in Justice Alito’s majority opinion, will mute the impact of Hobby Lobby.  Statutory amendments and administrative regulations are likely to be adopted to protect the rights of women employees to have access to all methods of legal contraception, and the First Amendment will not be invoked against them.  The majority and concurring opinions appear to have left plenty of room for these options.

Even though it is flawed and in my view wrongly decided, we may at least be thankful that Hobby Lobby (as well as Citizens United) invites us to think more seriously and deeply about the nature of business corporations and other firms -- and the important role that they play in our lives.  We create them as useful fictions that become real in everyday practice.  And we should remember that if we don't like how they have evolved, we can change the rules.  And in this last respect, Justice Alito's realistic opinion – referring to the role of values such as environmental sustainability in business firms as well as the advent of benefit corporations that pursue hybrid profit and non-profit purposes (Slip Op. at 23-25) -- is superior to the flat-surfaced nominalism of Justice Ginsburg's dissent.

 

 

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icon When Should Corporations Have RFRA Rights?
Posted by Brett McDonnell

Unlike most on my side of the political aisle, I am mostly a fan of the Hobby Lobby decision, for reasons I outline in part in a recent op-ed.  Giving some for-profit corporations protection under RFRA makes sense as a matter of both quasi-constitutional law (RFRA is a statute, but it draws upon First Amendment concepts) and corporate law.  As for the constitution, as the Court explains well, individuals often exercise their religious beliefs collectively within organizations, and protecting such organizations is important to protecting the individuals involved.  As for corporate law, as a proponent of progressive corporate law and corporate social responsibility, I think that corporations can and often should have core purposes that include more than just maximizing shareholder returns.  But once one recognizes all this, we must analyze when corporations should be able to invoke RFRA protection.  I do that here, and in my next post I will consider whether the Court's opinion is consistent with my analysis.

Consider two dimensions: degree of organizational commitment to religious beliefs, and share ownership.  Each can vary in strength of commitment.  On the organizational dimension, the formally strongest commitment would come with a charter provision concerning religious goals, or a bylaw or shareholder agreement.  Less formally, one can have mission statements, or various entrenched practices or public statements, and so on.  On the ownership dimension, one can go from having one or two shareholders who hold sincere and strong shared religious beliefs all the way to publicly-traded corporations with no controlling shareholder and a diverse mix of thousands of shareholders.

Both dimensions count.  Consider four possible extremes.  (1) Both dimensions show a strong commitment to religious goals, e.g. a corporation with just one, highly religious, shareholder, selling a religious product, with formal commitments and many entrenched, public religious practices.  Here the case for RFRA protection is strongest.  (2) Both dimensions are weak, e.g. a public corporation with no religious practices.  Here there is no RFRA protection.  (3) The organizational commitment is strong but the share ownership side is weak (perhaps the corporation has gone public and now has a diverse shareholder base).  The lack of committed shareholders weakens the corporation's commitment to religion, since the shareholders can ultimately change course by electing a new board.  However, with strong enough organizational commitments, the corporation can still be adequately devoted to religious goals that RFRA protection could be appropriate.  (4) Share ownership is centered in a few religious owners, but the organizational commitment is weak.  I struggle with this fourth situation.  It will depend upon the facts, including whether there is any previous organizational commitment at all (and if so, what and how much), and whether there are good reasons why the owners might not have shown a religious purpose before yet the corporation can still legitimately object to the imposition of the law in question.

I think that this way of looking at things shows both the strength but also the limits of objections like that of the law professor brief.  Those objections focus on corporate personhood and the distinction between shareholders and the corporation.  But that strikes me as only calling into question a particular way of determining RFRA status, one overly focused on the beliefs of individual shareholders.  It does not succeed in showing that some corporations, at the entity level, may not have a strong religious goal. 

For more analysis of the corporate law theory of this topic, I strongly recommend the paper by Meese and Oman.  The main limit of that paper is that it does not develop a set of guidelines for when RFRA protection should apply, based on its analysis .  I am trying to start on that project here.  Next up:  given this approach, has the Supreme Court got it right? 

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