March 25, 2014
icon Religious Obligations in the Corporation
Posted by Lyman Johnson

I look forward to reading the transcript of today's arguments. In the meantime, a comment on Marty's post.

I am glad that he has concluded the same thing as me, i.e., that of the burdens on natural persons here, it is on those persons as directors; see the reasons I stated yesterday. But I disagree with him that a corporation cannot have a religious obligation.

Imagine an incorporated church. Of course that organization, as an organization, has obligations of a religious nature, whether that be calling a minister, providing worship services, conducting communion, prayer meetings, and so on. There is no corporate law reason, as explained yesterday, that a for profit corporations cannot pursue profits and do some of those ecclesiastical activities. Indeed, I believe Hobby Lobby employs three chaplains. Moreover, in the Christian tradition, much of the directives are not just to individual believers but to the Body of Christ, which is the church, a group of people. And the word "corporation" derives from the root word for "body." People carry out religious activity in groups, that is, "corporately," and the law provides a ready-made vehicle for doing so, the "corporation."

But even if one accepts arguendo that the company qua company has no religious obligations, the natural person directors on the boards of these two companies certainly do. And they owe fiduciary duties to the serve the company's interests. If, because the company here is assumed to have no religious obligation, and therefore must comply with the Affordable Care Act in toto, and if, as fiduciaries, the board members must serve those interests even as they themselves, personally, have religious obligations that forbid them from doing so, then those natural persons are being forced to choose between violating their duties or violating their beliefs and obligations. I understand this to supply the scenario that Marty thought was absent.

Better in my view, to see that, for the reasons explained yesterday and above, a for-profit business corporation can be(it need not be but it can be) a mixed purpose entity advancing profits and one or more other purposes, maybe religious but maybe another social or environmental purpose, as Ron notes. And those walking, breathing people who serve as directors, in "exercising" their individual beliefs and their governance duties to the corporation, can simultaneously draw on and seek to advance individual and "corporate" obligations.

And to the nexus of contracts point, it is well taken as a theory matter. I think, however, in the world of legal doctrine the distinct legal personhood of the corporation is entrenched, subject to piercing, and this is where the 44 professors and Steve join issue.  But as noted yesterday, such separateness is no impediment to the business founders here. This is because it is in their capacity as directors that these natural persons must, by corporate statute,  "exercise" corporate responsibilites, and they seek to do so in this litigation by vindicating their "free exercise" religious right as individuals discharging this corporate function.


Lyman Johnson

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icon Hobby Lobby Symposium: Can A Corporation Have A Conscience?
Posted by David Zaring

My always insightful colleague Amy Sepinwall has published an op-ed in the Washington Post on the Hobby Lobby case.  A taste:

it is worth noting that this controversy has arisen because of our choices about the kind of health-care system we want. Our resistance to single-payer national health care means that employers, whether corporations or individuals, stand as middlemen between employees and their coverage. (Or between women and their reproductive freedom.) There would be no need for a contraceptive mandate, and no need to entertain objections to it, if the federal government were in charge of dispensing health insurance in the first place.

Of course, even national health care wouldn’t solve the problem of conscience: Under a national system, it would be individual taxpayers, instead of employers, who would contend that they were being forced to fund conduct that conflicted with their religious beliefs. But the complaint would be much less compelling coming from a taxpayer, as tax dollars already fund contraception, including the “morning after” pill, under Medicaid, as well as other programs and expenses that many citizens oppose, such as capital punishment, research using embryonic stem cells and so on.

Living in a country where tax dollars are used for ends that some citizens disagree with may be the inevitable price of democracy. Having to offer contraception that conflicts with one’s religious beliefs, or having access to contraception turn on one’s place of employment, needn’t be.

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icon Compelling State Interest
Posted by Brett Scharffs

In a previous post, I speculated that the reason the government insists that Hobby Lobby has no conscientious interests and that the Greens’ free exercise interests are not burdened by the contraception mandate may be because the arguments regarding compelling state interest and least restrictive means are so weak.

If Hobby Lobby (or the Greens) have suffered a substantial burden on their Free Exercise rights, this triggers balancing under the compelling state interest test. The government can justify the burden by showing that it is necessitated by a weighty interest, and there is no less restrictive means of achieving that interest.

This post will focus just on the question of compelling state interest.

The contraception mandate is a new subsidy that did not exist prior to the enactment of Obamacare, so it is difficult to see the state’s interest as suddenly becoming compelling. Some employer plans are exempted by a grandfather clause. More significantly, by its terms, the mandate (indeed the entire Affordable Care Act) does not apply to employers with fifty or fewer employees, which means it does not apply to approximately 90% of all private employers in the United States, and does not apply to about 50% of all employees. Furthermore, in February 2014, President Obama announced that he was delaying the implementation of ObamaCare for employers with between 50 and 100 employees for another year, until 2016. Unilateral executive postponement of the ACA would be extremely problematic if it were a violation of compelling state interests. Finally, under settled doctrine, the state must establish not just a general interest in providing contraceptives to some women, it must establish a compelling interest to impose this mandate on this employer.

The contraception mandate seems primarily to be a cost shifting mechanism, moving the expense of providing contraceptives from individuals and the government to private businesses. It is odd to claim that there is a state interest so strong that we must force Hobby Lobby to offer these services in violation of sincerely and strongly held religious beliefs, when there is not enough of a compelling state interest to apply this law to 90% of all employers, especially when the President can unilaterally postpone the implementation of the statute for another large group of midsized employers.

In my next post I’ll explain why the claim that the contraception mandate is the least restrictive means for accomplishing the government’s interest in providing contraceptive coverage is, if anything, even weaker.

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icon The Confusion Created by Imprecise Concepts
Posted by David Zaring

This post comes from Brian McCall.

The Hobby Lobby case and the debate surrounding it is plagued by a modern amalgamation of concepts that should be considered distinctly.  The word religion has gone from being a precisely understood concept to becoming one of the most amorphous, vague and ill-defined concepts.  As a result its application to corporations, another concept which lacks clarity in modern philosophy, has become muddled.  Part of this confusion stems from the transmutation of the term from an objective concept about reality to a subjective feeling or immanent impulse.  In classical thought religion (coming from the Latin to bind again) was the external practice of the worship of God.  The external acts rebind human creatures to the Divine by means of fulfilling their obligation in justice to render the homage due to a Supreme Being.  The practice of religion referred to these acts of public cult and was a distinct, although obviously related, concept from ethics or morality, or more precisely Natural Law.  Natural Law contained precepts that served as guidance for making correct decisions about human action.  Natural Law was related to religion in that both had a reference to God but not in the same sense.  For Natural Law, God was the lawgiver and the ultimate tribunal for the enforcement of Natural Law.  Yet, the relationship to God expressed by Natural Law was distinct from the religious relationship, although the two refer to the same Divine Person the manner of relation is different. 

Human beings and societies and associations they form can practice religion.  In a context in which the members of a corporate association do not share a common religion the exercise of religious practice by a corporation is not likely to be practical.  Yet, in a different context it is certainly possible.  For example, a Catholic hospital or a religious school organized as a corporation can practice religion in the sense defined above and should therefore possess the same freedom to practice that religion.  The aforesaid institutions can build and operate a chapel display religious iconography for veneration and hold public acts of worship on corporate property. 

The HHS mandate and the law on which it is based do not impinge the exercise of religion.  Rather they compel particular human action, requiring the provision of specific forms of contraceptives by corporations and their insurer agents to their employees.  Now human law is free to compel human action, individually or by corporate associations.  Yet, a law compelling human action which violates the Natural Law is beyond the authority of human laws and according to St. Augustine, St. Thomas and thousands of years of Natural Law jurists, a law which requires a subject to violate the Natural Law is no law at all but rather a violation of law which does not bind in conscience.  Corporations, like other legal persons, have obligations to obey the law, using law in the broadest sense to include law all the way up to Natural and Eternal Law.  Thus corporations like natural persons must conform to the human law unless that law is iniquitous by compelling violation of higher law.  A blog post is insufficient space to examine why this particular law does violate two principle precepts of Natural Law (we ought to preserve human life and we ought to procreate and rear children).  Yet, it is on this ground that Hobby Lobby should be refusing to obey the human law and not because it violates the exercise of religion.  The Nuremburg trials stand as the most recent historical example that even in a juridical world dominated by Legal Positivism we still recognize the truth that human laws compelling one to violate the Natural Law do not excuse moral responsibility.  As Ronald Colombo succinctly argues elsewhere in this symposium, corporate social responsibility has reminded all of us that we cannot achieve moral limited liability by using corporations to complete human acts.  Corporations have to obey the law, again in the broadest sense not limited to particular enactments.  If the HHS mandate violates Natural Law by compelling acts contrary to Natural Law, Hobby Lobby and any other corporations are not bound to obey such a law and this should be their defense.  In a fallen world with a far from perfect legal system, their defense may fail and they may unjustly suffer illegal consequences but the point is corporations as human institutions are not exempted from the obligations of Natural Law and have the same right to refuse obedience to iniquitous laws.   By accepting the imprecise use of the term religion, our entire First Amendment jurisprudence exemplified in this case suffers from blurring this important distinction between religion and the right and duty to disobey iniquitous laws.

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icon Gierke, Coase, and Hobby Lobby
Posted by Nate Oman

One of the things that is striking to me in the corporate scholars amici brief to the Court is how oblivious it seems to what I'd always taken to be the dominant contemporary theoretical approach to corporate law, namely that the idea of the corporation as a nexus of contracts and of corporate law as a series of default terms for what is in effect a relational contract between the constituents of the firm.

Brett has already noted the extreme formalism in claiming that the owners of a closely held corporation are in no way burdened when the state regulates their corporation.  More broadly the fixation on the normative significance of the legal personality of the firm strikes me as theoretically antedilluvian.  Saying that a firm is a distinct legal person doesn't represent some metaphysical judgment about its normative status.  It is just a practical device for dealing with pragmatic considerations like asset partitioning and the consolidation of contracting and dispute resolution.

To be sure, there was a time when the fictive personality of the firm was deemed to rest on something more substantial than convenience.  The so-called "real theory" of the corporation was imported into American legal discourse from Germany at the end of the 19th century.  Built on the work of figures like Otto Von Gierke it tried to argue that the legal personality of the firm actually rested on some real distinction between the firm and its shareholders.  As summarized by Ernst Freund in The Legal Nature of Corporations (1900), it held:

Above the existence of the individual there is the existence of the species, and the corporation is nothing but the legal expression of this fact, which appears as a reality in the physical person, so the higher will of the species is embodied in numerous and various forms of assocation, and as a result we find, beside the individual, entities of a higher order endowed with the volition and acting capaicty.  And where the law recognizes such embodied will as a person, we have a juristic person or a corporation.

Interest in the real theory of the corporation largely disappeared in the United States, however, with the publication of John Dewey, “The Historic Background of Corporate Legal Personality,” 35 Yale Law Journal 655 (1926).  A decade later, Ronald Coase published "The Nature of the Firm," 4 Economica 386 (1937) arguing that corporations were simply a response to high transaction costs, an alternative mechanism for pursuing essentially contractual goals.  Given the dominance of the nexus of contracts view of the firm, it seems bizarre to me that people in 2014 would argue that there is some kind of metaphysical mistake in suggesting that corporations are a means by which people engage in religious exercise.  If corporations aren't a means by which people act in the world, what on earth would they be?

Now the fact that a corporation has lots of constituents and consists of many different contracts might well be relevent to the question of how religious we should see its actions as being and the extent to which laws are burdening religious exercise.  To claim, however, that applying the ideas of religious conscience or exercise to a corporation is a category mistake or to suggest  -- as Marty does -- that no religion claims that corporations could have religious obligations strikes me an attempt to place corporations in some metaphysical category distinct from human activity.

I don't think metaphysics and legal personality really has anything to do with it.  A corporation is just a set of contracts, agreements between individuals to pursue some shared goal.  Regulating corporations is, as a normative matter, just another way in which we regulate collective and contractual activity.

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icon The Threshold Issue
Posted by Brett Scharffs

The threshold issue in the Hobby Lobby case is whether there is a substantial burden on the free exercise of religion. This in turn depends upon whether Hobby Lobby is a person under the Religious Freedom Restoration Act, or in the alternative, that as owners of the business the Green's religious freedom is substantially burdened.

Secretary Sebelius takes the position that 1) Hobby Lobby has no free exercise interests and that 2) the Green's interests are not implicated. Not just that the free exercise interests are outweighed by important government interests, but that there are no cognizable free exercise interests implicated at all. The government makes two arguments to support the first proposition and one to support the second. 

The government says Hobby Lobby has no free exercise interests because it is a for-profit corporation. The government's brief says, "For profit corporations 'are different from religious non-profits in that they use labor to make a profit, rather than to perpetuate a religious values-based mission.'" When corporations enter the marketplace, the argument goes, they subject themselves to legislation designed to protect health, safety, and welfare of their employeess. But we expect corporations to have and pursue values. Secretary Sebelius lavishly praised CVS when it announced it would stop selling tobacco products, even though this will cost the cmopany millions in sales, reduce shareholder profits, inconvenience customers, and perhaps result in employees losing their jobs. CVS was not scolded by the government for not sticking to its knitting of maximizing shareholder profit; it was lauded for prsuing moral values -- the protection of human health -- in spite of the fact that it might detract from corporate profits.

Being a for-profit corporation does not prevent a corporation from having conscientious interets. As Apple CEO Tim Cook explained just a few weeks ago to a shareholder angry that the company was wasting money on green energy initiatives, Apple does "a lot of things for reasons besides profit motive." Cook said, "We want to leave the world better than we found it." Then addressing the shareholder directly, Cook exhibited a rare flash of anger: "If you want me to do things only for ROI [return on investment] reasons, you should get out of this stock."

The government's second argument for saying that Hobby Lobby has no religious freedom interests has to do with the structure of the corporation as a separate entity from its owners. Granting corporations religious rights, Secretary Sebelius argues, would "disregard fundamental tenets of American corporation law," since a corporation is a "distinct legal entity, with legal rights, obligations, powers, and privileges different from those of the natural individuals who creted it, who own it, or whom it employs."

Here the government misrepresents the significance of seprate corporate legal existnce. Calling a corporation a person is a legal fiction to be sure, but a useful one that is employed broadly. We treat corporations as persons allowing them to own property and enter into contracts. Separate corporate personhood is used to shield owners from being held personally liable for the debts and obligations of the corporation. There are a few exceptions, such as piercing the corporate veil. But the separate corporate existence of corporations is not to separate the values of the corporation from the values of the owners and managers of the corporation -- where else would a corporation get its values if not from its owners and managers? It makes no sense to say as the government does that the beliefs of owners must not be "imputed" to corporations.

The key question is whether we treat corporations as entitites that can be expected to act conscientiously. The answer is clearly, yes. Corporations can be held liable in both civil and criminal law (along with their owners and managers), we expect them to be good citizens, to behave responsibly, to exercise corporate social responsibility. We even treat corporations as capable of having human rights, and we certainly expect them to be respectful of the human rights of others. We do not limit expectations of moral behavior to non-profit corporations, to "expressive associations," or closely held businesses. Our expectations concerning matters of conscience are much broader and extend to all corporations.

If corporations are "persons" under RFRA, then the question is whether the contraceptive mandate imposes a "substantial burden" on free exercise interests. Asking a corporation to be complicit in taking human life is clearly a substantial burden. Imposing millions of dollars in fines for refusing to do so is also a substantial burden.

What about the Greens themselves? The government argues that the Greens' free exercise rights are not violated because the HHS mandate applies only to the corporation, not to them as individuals. Argues the government: "Federal law does not require the Greens to provide health insurance, particular health benefits, or any other form of compensation to the corporation's employees. The Greens do not personally employ the 13,000 individuals who work for Hobby Lobby; the corporation does."

To argue that forcing a company to do something does not have implications for its owners is an extreme instance of legal formalism. This logic would mean that the government could (without even implicating free exercise interests) compel a cmpany owned by those who conscientiously object to military service to channel all their production into the building of weapons of war; that the government oculd force a Jewish butcher who does business as a corporation to process pork; or to force any business to provide abortion coverage or assisted suicide coverage in their health plans. This is a view that project a statist authority far beyond anyting we have come to view as acceptable in our pluralistic liberal democracy with its commitment to individual rights and fredoms.

In an amicus brief filed in the case on behalf of a number of international law and religion scholars and institutions, we noted that there is an unsettling "heads we win, tails you lose" quality to the government's argument. On the one hand, Hobby Lobby is said to have no free exercise interests at all; on the other hand, the Greens are said to not have their free exercise interests burdened because it is just their company that is being compelled. In actuality, restrictions on collective expression of religion by for-profit corporations may substantially burden the free exercise rights of both corporations and owners.

This does not mean Hobby Lobby, or the Greens, win. If there is a substantial burden on religious exercise, it means the government must bear the burden of proving there is a compelling state interest that justifies imposing the burden, and that the contraceptive mandate is the last restrictive means for protecting that state interest. My own suspiscion is that it is because the government's argument that there is a compelling state interest justifying the contraceptive mandate and that the contraceptive mandate is the least restrictive means of protecting that interest is so weak that the government argues so strenuously that there is no burden at all because Hobby Lobby is a corporation. I'll address these questions in a later post.


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icon Corporate Rights and Responsibilities
Posted by Ronald Colombo

I'd like to briefly address a point raised by both Marty and Brett: that of corporate obligations.

Marty points out that corporations "don’t have religious obligations."  But, as Brett points out, we do indeed expect our corporations to behave responsibly. 

Indeed, the entire corporate social responsibility movement is replete with morally laden rhetoric, suggesting that corporations have very real obligations to society as a whole -- and not just to their shareholders.

Once that bridge is crossed (and I think it has been), it becomes very difficult to deny the argument that for some corporations, these obligations might be religious in nature.  Just as a corporation that styles itself as environmentally friendly takes on, I would suggest, genuine moral obligations to be environmentally friendly, a corporation founded upon a particular set of religious values has a genuine moral obligation to remain true to those values.

And this implicates the perennial linkage of rights with responsibilities.  If a person (or entity) has a particular moral responsibility, he or she (or it) ought to have the rights necessary to discharge that responsibility.

Thus, to the dismay of pretty much everyone I know, I suggest that a corporation's rights and responsibilities ought to rise and fall in tandem.  If we're going to take CSR seriously, we need to take corporate First Amendment rights seriously as well (and vice versa). 


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March 24, 2014
icon Asking the Wrong Questions in Hobby Lobby
Posted by Marty Lederman

I'm very grateful to Gordon for inviting me to post on the Conglomorate about the Hobby Lobby and Conestoga Wood cases--in particular, to summarize some of the arguments I've made about the cases over on Balkinization and SCOTUSblog.  Links to my posts about various different aspects of the cases, and to some posts of others, are collected here.  As for the issues of particular interest to Conglomorate readers . . . well, I'm afraid I think there's less there than meets the eye as to several of them.

more ...

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icon Corporate Conscience
Posted by Brett Scharffs

Hi, Gordon, et al, I'm looking forward to discussing Hobby Lobby with you this week. It isn't too often that a case involving my two primary interests, corporate law and law and religion intersect, so it should be fun. The big question of corporate conscience I find fascinating. We urge corporations to be socially responsible and to be good corporate citizens, and we praise Coca Cola for its interest in arctic wildlife, but somehow Hobby Lobby is told they aren't behaving like a corporation should when they express a conscientious interest in protecting human life. I may or may not agree with their views about when human life begins, but it seems odd that they are treated as not behaving as a business should when the conscientious views of their owners are injected into the corporation's life.

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icon Pardon my self-promotion #2: My critique of the corporate law professors' brief in Hobby Lobby
Posted by Steve Bainbridge

As mentioned in my opening post, I think a key issue in the contraception mandate cases is whether form should trump substance. In my second post, I discussed my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, 16 Green Bag 2d 235 (2013), in which I proposed that courts should use reverse veil piercing to provide a more coherent doctrinal framework for analyzing when substance out to trump form. As I noted in that post, some 44 corporate law professors filed an amicus brief in these cases that, at least in part, was intended to attack my argument.

I responded in A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby and Conestoga Wood, which is now available in final form at the the Virginia Law Review Online. In it, I argued, as the abstract explains, that:

The Patient Protection and Affordable Care Act (ACA) effected numerous changes in the legal regime governing health care and health insurance. Among the ACA’s more controversial provisions is the so-called contraceptive mandate, which requires employer-provided health care insurance plans to provide coverage of all FDA approved contraceptive methods. 

On March 25, 2014, the Supreme Court will hear oral argument in the Hobby Lobby and Conestoga Wood cases, in which the shareholders of two for-profit family-owned corporations argue that requiring them to comply with the contraception mandate violates the Religious Freedom Restoration Act. 

Forty-four law corporate law professors filed an amicus brief in these cases, arguing that the essence of a corporation is its “separateness” from its shareholders and that, on the facts of these cases, there is no reason to disregard the separateness between shareholders and the corporations they control. The Brief is replete with errors, overstated claims, or red herrings, and misdirection.

Contrary to the Brief’s arguments, basic corporate law principles strongly support the position of Hobby Lobby and Conestoga Wood. In particular, the doctrine known as reverse veil piercing provides a clear and practical vehicle for disregarding the legal separateness of those corporations from their shareholders and thus granting those shareholders standing to assert their free exercise rights.

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icon Are the cases distinguishable?
Posted by Ronald Colombo

Thank you to Gordon Smith and the organizers of this symposium for allowing me to participate.

Rather than repeat the very fine comments and observations that have already been posted, I'd like to take this opportunity to say something that I have not heard said before:

Although Hobby Lobby and Conestoga have been treated identically by commentators, perhaps there is a means by which they could be distinguished.

As i read Hobby Lobby, an effort is made to claim that the company itself has a religious identity.  In Conestoga, however, that claim isn't really pressed.  I think this may be an important distinction.

For as I see things, a corporation's ability to avail itself of Free Exercise rights should turn largely on its categorization as a(n) (religiously)  expressive association.  Justice O'Connor's reservations notwithstanding, it would seem to me as though corporations can indeed be expressive associations (and some apparently are).  Although Dale calls the expressive / non-expressive dichotomy into question, it does so by making the test even more lenient -- not stricter.  Thus, to the extent that a corporation qualifies as an expressive association, I believe it ought to be able to bring forth a free exercise claim.  (Shameless plug:  I expound upon this in The Naked Private Square, 51 Hous. L. Rev. 1 (2013)).

However, the mere fact that a corporation's shareholders happen to be religious do not, I suggest, transform the corporation itself into a religiously expressive association.

Now, there may be other reasons to find in favor of the free exercise claimants in such cases.  For example, Prof. Bainbridge's arguments on PCV strike me as compelling.  But those arguments are different, I suggest, than the arguments why a genuinely religiously expressive corporation ought to be able to avail itself of the Free Exercise Clause.


-Ron Colombo

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icon Hobby Lobby and corporate separateness
Posted by CorporateAcquisitions MergerLawBlogger

Hobby Lobby and corporate separateness

Thanks to Gordon, Lisa, and the rest of the Glommers for inviting me to participate in this Symposium on Hobby Lobby.  Hobby Lobby and the related cases are extremely interesting and important from a corporate law perspective.   There are two interesting questions.  First, can a for-profit corporation have religious exercise rights?  Second, more interesting, I think, can as the shareholders of Hobby Lobby and Conestoga claims can shareholders suffer an injury because of government regulations imposed on the corporation?

I think we can all stipulate that no matter how many times, the Green family brings the certificate of incorporation of Hobby Lobby with it to church on Sundays, Hobby Lobby isn’t going to heaven.  So, if Hobby Lobby can’t go to heaven, what are we talking about?  That Hobby Lobby – a for-profit Oklahoma corporation – has rights under the First Amendment and RFRA to the free exercise of religion. I side with the Hobby Lobby dissent with respect to the conclusion that it is a dubious proposition. As the dissent in Hobby Lobby notes:

At the time of RFRA’s passage, the Supreme Court had never addressed whether, let alone recognized that, a for-profit corporation possessed free exercise rights under the First Amendment. In other words, during the 200-year span between the adoption of the First Amendment and RFRA’s passage, the Supreme Court consistently treated free exercise rights as confined to individuals and nonprofit religious organizations.

In fact, the majority in Conestoga found:

General business corporations do not, separate and apart from the actions or belief systems of their individual owners or employees, exercise religion. They do not pray, worship, observe sacraments or take other religiously-motivated actions separate and apart from the intention and direction of their individual actors. ...

Since Conestoga is distinct from the Hahns, the Mandate does not actually require the Hahns to do anything. All responsibility for complying with the Mandate falls on Conestoga. Conestoga "is a closely-held, family-owned firm, and [we] suspect there is a natural inclination for the owners of such companies to elide the distinction between themselves and the companies they own." But, it is Conestoga that must provide the funds to comply with the Mandate — not the Hahns. We recognize that, as the sole shareholders of Conestoga, ultimately the corporation's profits will flow to the Hahns. But, "[t]he owners of an LLC or corporation, even a closely-held one, have an obligation to respect the corporate form, on pain of losing the benefits of that form should they fail to do so." ... "The fact that one person owns all of the stock does not make him and the corporation one and the same person, nor does he thereby become the owner of all the property of the corporation." .... The Hahn family chose to incorporate and conduct business through Conestoga, thereby obtaining both the advantages and disadvantages of the corporate form. We simply cannot ignore the distinction between Conestoga and the Hahns. We hold — contrary to Townley and Stormans — that the free exercise claims of a company's owners cannot "pass through" to the corporation.

The second question has perhaps more corporate law implications.  In both Hobby Lobby and Conestoga, the plaintiffs, as shareholders, claimed that they were personally injured by the government regulation of the corporation.  The claim goes that that requirement on the corporation that it comply with the ACA causes a direct injury to the shareholder.  If that were true, then that raises some serious implications for corporate separateness. 

One wonders if the Supreme Court decides that shareholders are injured because the corporation is required to comply with certain regulations, how does that work exactly?  And, how does it jive with our basic understanding about the corporate law that the business and affairs of the corporation are managed by the board and not the stockholders?  I mean, why is it that the shareholders and not the board are injured by the government's regulatory acts?

It would seem odd that on the one hand a shareholder would seek to benefit from the state franchise that recognizes corporate separateness and grants shareholders limited liability for their investments and protection from the liabilities of the corporation, but would then seek to break through that separateness to claim some direct personal injury to themselves because of costs imposed on the corporation.  Remember that no one is arguing that the corporation is a sham or that formalities have disregarded.  The argument is that shareholders believe themselves personally injured because of regulatory requirements on the corporation.  Absent other facts, that seems like a real stretch.

In any event, perhaps tomorrow will show us all how much the Court is enthralled by questions of the corporate law, but somehow, I doubt they are! 

 -Brian Quinn



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icon Pardon my self-promotion: Hobby Lobby and reverse veil piercing
Posted by Steve Bainbridge

As mentioned in my opening post, I think a key issue in the contraception mandate cases is whether form should trump substance. If Hobby Lobby were David Green's sole proprietorship, there is no question but that he would be able to assert his RFRA and First Amendment claims. Should that change simply because he incorporated his business?

Unfortunately, whether they have allowed incorporated employers to raise such claims or not, courts have failed to articulate a coherent doctrinal justification for their holdings. 

In my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, 16 Green Bag 2d 235 (2013), I proposed that courts should use reverse veil piercing to provide a more coherent doctrinal framework.

Reverse veil piercing (RVP) is a corporate law doctrine pursuant to which a court disregards the corporation’s separate legal personality, allowing the shareholder to claim benefits otherwise available only to individuals. The thesis of this article is that RVP provides the correct analytical framework for vindicating certain constitutional rights.

Assume that sole proprietors with religious objections to abortion or contraception are protected by the free exercise clause of the First Amendment and the Religious Freedom Restoration Act (RFRA) from being obliged to comply with the government mandate that employers provide employees with health care plans that cover sterilizations, contraceptives and abortion-inducing drugs. Further assume that incorporated employers are not so protected. This article analyzes whether the shareholders of such employers can invoke RVP so as to vindicate their rights.

At least one court has recognized the potential for using RVP in the mandate cases, opining that these cases “pose difficult questions of first impression, including whether it is “possible to ‘pierce the veil’ and disregard the corporate form in this context.” The court further opined that that question, among others, merited “more deliberate investigation.” This article undertakes precisely that investigation.

Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case. Whatever demerits RVP may have, it provides a better solution than the courts’ current practice of deciding the issue by mere fiat.

This proposal met with some considerable hostility from a segment of the corporate law academy, which will be the subject of my next post.

Permalink | Health Care, Hobby Lobby, Religion, Supreme Court | Comments (View) | TrackBack (0) | Bookmark

icon Corporate Law in the Supreme Court
Posted by Lyman Johnson

I thank Gordon and my other friends here for inviting me to write about Hobby Lobby/Conestoga Wood. I will not address the "substantial burden" or "compelling interest" aspects of the analysis, which I think will turn out to be decisive precisely because I believe the Court will recognize the two companies as having a free exercise right. In a later post I will address what I think are the intriguing possibilities of such a ruling for those of us who seek corporate reform(me from the right and many from the left) and will  argue that those who want real reform are backing the wrong pony if they side with the government in these two cases. But first to some straight corporate law points.

I think certain corporate statutory points have not been clearly made, or if they have been made, I missed them. I think the chief brief by Conestoga Wood does the best job but it still falls a bit short. Understanding these might obviate the extensive emphasis on the corporate separateness argument made by the 44 law professors and Stephen Bainbridge's reverse piercing rejoinder. What are these?

First, there is nothing in RFRA to suggest that Congress meant to displace or preempt state corporate law, here that of Oklahoma and Pennsylvania. Numerous Supreme Court cases recognize that states endow corporations with the attributes they possess. Thus, not only does the federal Dictionary Act define a "person" to include a corporation, there is nothing to indicate a federal override of state law's role in defining corporateness. Using the Pennsylvania statute and Conestoga Wood as my example, what does that corporate statute say? First, like section 3.02 of the Model Business Corporation Act, the PA statute section 1501 states that a corporation shall have the same legal capacity of individuals to act But how does a corporation act? Through its board of directors, all the members of which must be natural persons. Thus PA section 1721, like section 8.01 of the Model Act, states that all CORPORATE powers shall be "exercised by" the board of directors(please note that the term "exercised" here is the same term as in the First Amendment "free exercise" clause). When the board acts, it is not an act of the board for itself, it is an act of the corporation. Moreover, as the board acts, its natural person members can indeed do what the Third circuit wrongly said a corporation cannot do: they can worship and pray and otherwise "exercise"(in the corporate and First Amendment senses) rights in their board meeting, and they do so in their "corporate" capacity. And it is the board itself that is the key decisionmaker, not employees or others in corporate governance. The two boards here have made the key decisions. Second, PA section 102 is very interesting. It says that "a"(not "the") purpose of a corporation can be to "purse"(not "maximize") profit, and that profit may be an "incidental" (not sole) purpose of a for-profit corporation. Thus, for-profit corporations in Pennsylvania, by statute, can have multi-purposes, only one of which need be to pursue profits. That further blurs the line between so-called "non-profit" corporations(a misnomer anyway because many make profits they just can't distribute them; since the government concedes on non-profits does the First Amendment really turn on whether dividends can be paid?) and for-profit corporations, the latter of which can be hybrid purpose companies. Here, the two companies pretty clearly seek to make money and also to carry out a board-fashioned CORPORATE religious mission.

Thus, it is via the usual channels of corporate governance that individuals play a key role in corporations acting. It need not be as owners. I honor corporate separateness but think corporate powers are and must be, as here,  "exercised" by board members in pursuit of a well-articulated, and utterly lawful under state law, corporate purpose that has a religious dimension. This all could have been made clearer before tomorrow's arguments.

Permalink | Business Organizations, Corporate Governance, Corporate Law, Hobby Lobby | Comments (View) | TrackBack (0) | Bookmark

icon Heading to the Court
Posted by Jayne Barnard

I'm lucky to be able to say I'll be in the courtroom on Tuesday morning for the arguments in the Hobby Lobby and Conestoga cases.  Whether the Justices will ask -- or care -- about corporate law issues remains to be seen.  The vast bulk of the 84 amicus briefs filed in the cases explore the historical origins of the Free Exercise Clause, the legislative history of the Religious Freedom Restoration Act, reproductive technology, women's equality, and employees' rights.  Only two -- the Corporate and Criminal Law Professors' brief and the brief filed on behalf of the U.S. Women's Chamber of Commerce -- deal almost exclusively with corporate law principles.  Will corporate law be the tail that wags this dog? 

Permalink | Business Organizations, Hobby Lobby | Comments (View) | TrackBack (0) | Bookmark

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