I have no time just now to respond to some of the thoughtful reactions to my earlier post. But a quick follow-up is in order to refute the repeated assertions by Professors Scharffs and Bainbridge that the law is shot through with exemptions, thereby undermining the government's compelling interest in reducing unintended pregnancies (and abortions) by ensuring that women have affordable access to the FDA-approved contraceptive methods.
For one thing, even if there were many exemptions, that would not undermine the government's compelling interest, any more than the numerous legal exemptions to tax laws, antidiscrimination laws, wage and hour laws, etc., undermine the compelling interests that have historically sufficed to justify denial of religious exemptions under those statutes. See, e.g., Tony & Susan Alamo Foundation, 471 U.S. at 300 n.21 (although Fair Labor Standards Act contains many exceptions to the definition of “employee” (see 29 U.S.C. 203(e)) and to the requirement of minimum wages (see 29 U.S.C. 213(a)), the Court deemed them to be “not relevant here,” and denied the requested religious exemption); Hernandez, 490 U.S. at 700 (“The fact that Congress has already crafted some deductions and exemptions in the Code . . . is of no consequence . . . .”); see also the examples in the government's reply brief at 19-22.
More to the point, the Professors fundamentally misunderstand this law. As I’ve explained in previous posts, with one minor exception, the purported “exemptions” the Professors identify are not exemptions at all; in each case, women will be entitled to cost-free contraception insurance. And that one exception—HHS’s exemption for churches—will affect very few female employees who would otherwise make claims for cost-free contraception coverage. The contraceptive coverage here, therefore—like all of the other preventive care services the statute requires, such as immunizations and colo-rectal cancer screening—is a benefit to which virtually all women in the United States will be entitled, and the government has a compelling interest in ensuring that remains the case.
(Also, one important specific correction on a major misunderstanding: Professor Scharffs writes that "the mandate (indeed the entire Affordable Care Act) does not apply to employers with fifty or fewer employees." That's just wrong.)
The Wall Street Journal live blog of the contraception mandate cases before the Supreme Court reports that:
Chief Justice John Roberts suggested he was thinking of a narrow ruling allowing closely held companies like Hobby Lobby Stores Inc. to claim a religious exemption, while leaving aside more-complicated ownership structures of publicly traded corporations to another day — a position that Justice Stephen Breyer indicated he might, or might not, be open to.
If you'll pardon one more episode of self-promotion, reverse veil piercing would provide the basis for just such a narrow ruling. As I observed 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 another red herring, the Brief argues that:
If this Court were to accept the arguments being advanced by Hobby Lobby and Conestoga, it would … invite … disruptive proxy contests … regarding whether the corporation should adopt a religion and, if so, which one.
Proxy contests are principally an issue for public corporations, while RVP-I—like forward veil piercing—is exclusively an issue for close corporations. The claim is thus disingenuous, at best. Nevertheless, this claim—while false—does provide a valuable opportunity for reminding the reader that the Brief’s concern for minority shareholders with diverse interests is largely irrelevant. As this author has noted:
[A] public corporation with many shareholders holding diverse views is a poor candidate for RVP-I. In contrast, a closely held corporation – even if quite large by metrics such as assets or employees – with a small number of shareholders holding common religious beliefs is a good candidate.
Courts routinely differentiate cases for piercing the veil from cases in which the veil should not be pierced based on, inter alia, the number of shareholders in the corporation. There is no reason why they could not do the same in cases like those brought by Hobby Lobby and Conestoga Wood.
So here is a proposed narrow test, taken from my article Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, 16 Green Bag 2d 235 (2013):
Analysis of the RVP-I cases thus suggests a three-pronged version of RVP that should be adopted in the mandate cases:
- Is there such substantial identity of the shareholder(s)’s religious beliefs and the manner in which the corporation is operated and the purposes to which it is devoted that the corporation is effectively the shareholder’s alter ego?
- How strong is the government’s interest in ensuring that the corporation’s employees get the mandated insurance coverage?
- Would reverse piercing this corporation’s veil advance significant public policies?
As to the first prong, Judge Walton’s analysis in Tyndale provides a useful model for future courts to follow.
- Veil piercing is a close corporation doctrine.39 In this context, in particular, a public corporation with many shareholders holding diverse views is a poor candidate for RVP-I. In contrast, a closely held corporation – even if quite large by metrics such as assets or employees – with a small number of shareholders holding common religious beliefs is a good candidate.
Do the corporation’s articles of incorporation include a statement of purpose referencing religious beliefs and goals?
Is the ownership structure of the corporation designed to ensure continuity of its religious purposes even after the original founders have retired or died?
Are the directors and officers of the corporation obliged to share the founders’ religious beliefs? If so, are they required to document that fact, such as by signing a statement of faith?
Are religious practices such as devotions, prayer, scripture reading, or worship services routinely made a part of corporate meetings?
Are such practices made available to employees?
Is some substantial portion of the corporation’s profits donated to religious charities or otherwise used to advance the founders’ religious beliefs? The biblical concept of a tithe springs to mind here as a possible metric.
The more of these factors that a court finds to be present, the more willing the court should be to treat the corporation as the shareholder’s alter ego.
Turning to the second prong, the government contends it has an interest in ensuring that Americans have access to the health insurance coverage required by the mandate. Whether or not that interest rises to the level of a compelling one that would justify infringing on free exercise and RFRA rights remains to be deter- mined. In evaluating the government’s interest, however, courts should note that the government has already undermined the mandate by carving out exemptions for grandfathered plans, employers with fewer than 50 employees, “member[s] of a recognized religious sect or division thereof” who have religious objections to the con- cept of health insurance, or religious employers [as defined in the regulations].” As Judge Walton observed, a “law cannot be regarded as protecting an interest of the highest order . . . when it leaves appreciable damage to that supposedly vital interest unprohibited.”
As for the final prong, the government has tried to minimize the significance of the issues at stake by referring to the plaintiffs’ interests rather than their rights. Conduct that is motivated by religious belief is accepted as one of the ways in which people exercise their religious freedom, however, even when the conduct occurs in a commercial setting. As such, the strength of the public policy issues at stake in the mandate cases go far beyond the homestead policy at issue in the seminal Minnesota cases. The issues at stake here arise out of the First Amendment, not a mere statute.
The values protected by the religious freedom clauses of the First Amendment “have been zealously protected, sometimes even at the expense of other interests of admittedly high social importance.” Accordingly, “no official, high or petty, can prescribe what shall be orthodox in politics, nationalism, religion, or other matters of opin- ion or force citizens to confess by word or act their faith therein.” Because that is precisely what the plaintiffs in the mandate cases claim the government is forcing them to do, the policy prong of the RVP-I standard strongly favors the plaintiffs.
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.
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.
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.1. For example, it is widely believed that the central issue in the cases is whether corporations, or for-profit corporations in particular, can exercise religion, or have religious "consciences." But I don't think the Court needs to, or should, consider that broad question in the abstract. As I explained in one post, even if for-profit corporations can exercise religion in certain contexts, the particular religious claims in Hobby Lobby and Conestoga Wood cannot be asserted by the corporations themselves:
The Hobby Lobby and Conestoga Wood cases do not require the Court to decide, once and for all, whether and under what circumstances for-profit corporations can ever have religious beliefs or consciences; whether they can exercise religion; or whether they can be “persons” under RFRA.
Those formulations pitch the question at far too broad a level of generality, and one untethered from the facts of these particular cases. The issue in these cases is much narrower than that.
This is not a case about whether a particular corporation can "advance" a religious agenda, take steps to further a religious mission (such as by selling religious books), or promulgate religious doctrine; indeed, it's not a case in which the state is alleged to be preventing a corporation from doing anything at all. Therefore it bears no resemblance to, say, a law restricting for-profit religious bookstores from selling certain books. The particular burden being alleged here is that the HHS Preventive Services Rule allegedly coerces a violation of religious duties--thatis to say, rather than restricting a religious practice, HHS is alleged to be focring someone to act in a manner contrary to religiously inspired limitations. The federal government allegedly is putting someone to a choice between compliance with a civil obligation and adherence to a restrictive religious injunction (roughly speaking: “Thou Shalt Not Cooperate With Evil”).
If there is such a burden on religious exercise here, it is not one that is imposed on the corporations—on Hobby Lobby Stores, Inc., Mardel, Inc. (in the Hobby Lobby litigation) or on Conestoga Wood Specialties Corp. That's not because those corporations don’t have “consciences”—neither do churches—or because they cannot advance religious objectives (perhaps they can), but because they don’t have religious obligations. I’m not aware of any religion that imposes duties or injunctions on for-profit corporations. And, more to the point, the complaints in these cases make countless allegations about religious duties and how the government allegedly is compelling certain parties to violate those duties, but they nowhere allege that any of the three corporations here are subject to any religious obligations.
2. A conclusion that the HHS Rule does not substantially burden any religious exercise of these corporate plaintiffs, however, hardly resolves the cases. As you will see if you begin to peruse the plaintiffs' complaints and briefs, the crux of the alleged burden in these cases is not on the corporations’ alleged exercise of religion, but instead on the purported religious exercise of the individual plaintiffs—five members of the Green family in Hobby Lobby, and five members of the Hahn family in Conestoga Wood.
For starters, the federal legal obligations in these cases run against the corporations themselves, and/or their insurance plans, not against the shareholders. So the shareholders are not directly burdened by federal law. The question, then, is whether shareholders nevertheless can obtain relief for injuries that they allegedly suffer derivatively, by virtue of the state's regulation of the corporation, notwithstanding the black-letter law that corporations and their shareholders are distinct entities for purposes of liability and benefits.
Individuals typically form a corporation so that they will not be personally liable for any claims against the corporation--indeed, that's one of the principal reasons state law creates the corporate form. Does it follow that shareholders cannot complain about injuries they suffer derivatively when other actors, including the government, take action against the corporation? By accepting the “sweet” (limited liability), must shareholders also accept the “bitter,” in the form of abandonment of rights they otherwise might have had to recover for injuries they suffer by virtue of their ownership of the corporate shares? As Judge Matheson put the question in his separate concurrence in Hobby Lobby, should “[t]he structural barriers of corporate law give [one] pause about whether the plaintiffs can have their corporate veil and pierce it too”?
In response to this question, Professor Bainbridge published an article suggesting that the Court should make use of a corporate law doctrine called "insider reverse veil piercing" in order to allow the Greens and the Hahns to assert RFRA claims as shareholders notwithstanding the fact that they are generally immune from liability for any wrongs committed by their corporations--i.e., to allow them to reap the sweet and also avoid the bitter.
Subsequently, a group of 44 corporate and criminal law professors filed an amicus brief arguing that "reverse veil piercing" would be inappropriate here, and that the Court should not allow the plaintiffs to sue as shareholders.
Professor Bainbridge has now responded with a follow-up article critiquing the corporate law professors' brief. He argues again that the Court should use "insider reverse veil piercing," or "RVP-I," "to allow . . . shareholder standing to sue if the [C]ourt is unwilling to allow the corporation to do so."
What (if anything) should the Court make of this corporate law dispute about RVP-I?
a. First of all, it's not clear that these cases are even about injuries to the individuals in their capacities as shareholders. Indeed, it appears that the individual plaintiffs in Hobby Lobby, members of the Green family, are not shareholders of Hobby Lobby and Mardel, the two corporate plaintiffs in that case; they are, instead, trustees of a management trust that owns the companies. The Greens do not allege that they own the companies; and unless I've missed something, their complaint does not allege any way in which their funds would be used to "pay for" contraception. As I explained in a recent post, Hobby Lobby's brief confirms that the case is not fundamentally about coercing the Greens to pay forcontraception, or about the Greens' religious exercise in their capacity as shareholders. The Greens' fundamental complaint, instead, is that federal law coerces them to violate a religious obligation in their capacities as corporate directors, i.e., decision-makers. "[T]he precise religious [religious] exercise at issue here," the brief explains, is that "the Greens cannot in good conscience direct their corporations to provide insurance coverage for the four drugs and devices at issue because doing so would 'facilitat[e] harms against human beings.'”
A decision by the Court limited to shareholder rights, therefore, would not resolve Hobby Lobby.
That leaves the Conestoga Wood case. The individual plaintiffs in that case, members of the Hahn family, also primarily complain about federal law burdening them in their capacity as corporate directors, or decision-makers. In addition, however, paragraph 11 of their complaint alleges that the Hahns are collectively the “principal” owners of the shares of Conestoga Wood. So perhaps the RVP-I question does arise vis-a-vis the Hahns, whose shareholder funds presumably would be used, not to pay for contraception reimbursement directly, but instead to pay for part of the overall premiums to the plan insurance carrier. (Remarkably, the Conestoga Wood complaint does not specify whether CW has a self-insured employee health insurance plan or a plan issued through an independent insurer. But in its Supreme Court brief, it refers to its (unidentified) "issuer" as having "inserted coverage of the contraceptives into its plan over Petitioners’ objection" after the district court denied a preliminary injunction.) So, in some very attenuated sense, the Hahns' shareholder funds are subsidizing the plan's reimbursement for employees' use of contraception . . . and the complaint might be read to suggest that this use of the Hahns' funds would make the Hahns complicit in their employees' use of so-called "abortifacients" in the rare case (if any) in which use of certain contraceptive methods prevented a fertilized egg from implanting in the uterine wall.
b. But even if the "shareholders' complicity" issue is teed up in Conestoga Wood . . . Honestly?
Can it really be the case that the Supreme Court of the United States ought to decide Conestoga Wood based upon the assumption that the corporate law "RVP-I doctrine" would apply in this unprecedented context? This is a state law question, the answer to which depends upon the legal relationship between a corporation and its principal shareholders . . . presumably under Pennsylvania law.
Professor Bainbridge cites as his primary authorities two 30-year-old state-law cases--one from Minnesota, the other from Michigan--both involving questions far-flung from the RFRA context in Conestoga Wood. To be sure, he also cites one Pennsylvania case--Barium Steel Corp. v. Wiley, 108 A.2d 336(1954). But in that case, which was decided 60 years ago, the Pennsylvania Supreme Court split 3-3 on what we (well, what corporations law professors) would today apparently call an "insider reverse veil piercing" theory, in a case that has almost nothing in common with Conestoga Wood. And the three Pennsylvania Justices who would not have recognized the RVP-I in Barium Steel wrote this: "The decisions in this State will be searched in vain for a single instance where a piercing of the corporate veil has been judicially sanctioned in order to confer a benefit upon the ones responsible for the presence of the veil. Certainly, the opinion for this court in the instant case cites no such decision."
That exhausts my knowledge of how Pennsylvania law treats insider reverse veil-piercing. Perhaps Professor Bainbridge is right that Pennsylvania (and other state) courts would or should "reverse-pierce" the veil in this RFRA context, in which a federal statute is implicated. Perhaps he's wrong. But how should the Supreme Court of the United States resolve that question?
Bainbridge argues that courts have historically "pierced the corporate veil" in 13.41% of RVP cases, and that the Court should decide whether Conestoga Wood should be among that number based upon the simple test of whether piercing here would advance a "significant public policy." But he does not cite any other Pennsylvania authority in support of this view, or any case at all involving RVP and RFRA, or RVP and shareholders' religious exercise more broadly, from any jurisdiction.
This absence of precedent ought to be a serious problem for his RVP-I argument, particularly in light of the principal case cited in the corporate professors' brief (and in the government's brief), Domino's Pizza, Inc. v. McDonald, 546 U.S. 470 (2006).
McDonald was the sole shareholder of a Nevada corporation. He alleged that Domino's had broken contracts with that corporation because of racial animus toward him, in violation of 42 U.S.C. § 1981. The Court held that section 1981 offers relief to a plaintiff when racial discrimination impairs an existing contractual relationship, so long as the plaintiff himself has or would have rights under the existing or proposed contractual relationship. Of course, the contracts themselves, between corporations, did not afford McDonald any rights, because he was merely a shareholder. Citing some of the same Minnesota cases Professor Bainbridge cites, however, McDonald argued that "under state law shareholders are at times permitted to disregard the existence of the intermediate corporate entity where failing to do so would impair full enforcement of important . . . statutes." Resp. Br at 32 n.34.
At oral argument, Justice Kennedy identified this claim as "kind of an inverse corporate veil piercing," and asked: "[A]re there any cases where we pierced the corporate veil in order to help the shareholder?" (The answer, of course, is that the Court has never done so.)
Not surprisingly, the Court unanimously rejected McDonald's inverse veil piercing claim. Justice Scalia's opinion for the Court explained that "it is fundamental corporation and agency law—indeed, it can be said to be the whole purpose of corporation and agency law—that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation's contracts."
The Court presumably was able to issue such a categorical interpretation of state law because it had been offered no examples, in any jurisdiction, of reverse veil piercing to vindicate shareholder contract rights. To be sure, Conestoga Wood does not involve shareholders' contract rights, so McDonald does not directly resolve the RVP-I question here. But the Hahns have the burden to show a RFRA burden, and neither they nor Professor Bainbridge have cited any case, from Pennsylvania or elsewhere, in which shareholders have been permitted to use RVP-I to allege harms to their religious exercise, under a state or local RFRA, resulting from a law that has an impact on corporate funds. The Court presumably should, therefore, treat the RVP-I argument here the way in which it treated the equally unsupported and unprecedented argument in Domino's--i.e., summarily reject it.
Domino's appears to be the one and only occasion in which the Supreme Court has specifically considered the relationship between the "RVP" doctrine and a federal statute. You'd think, therefore, that Professor Bainbridge would devote serious attention to the case. His analysis of Domino's is relegated to a footnote, however. And his efforts to distinguish the holding in that case are unpersuasive. For example, he notes that the shareholder in Domino's raised "only" contractual and statutory rights. ButConestoga Wood's claim here (the only claim with any traction, anyway) is based on a federal statute (RFRA), just as McDonald's was. Bainbridge's suggestion that the federal statutory right established by RFRA is more "fundamental" than the federal statutory right against race discrimination established by section 1981--indeed, so much more "fundamental" that it ought to result in an about-face on the Court's RVP-I holding--is so implausible that it doesn't warrant a response.
His principal argument fares no better. He insists that Domino's is a "weak precedential reed" because the Court in that case "made no effort to analyze the issues raised by RVP, but simply dismissed it out of hand," without addressing "any of the points made [by Prof. Bainbridge] in defense of the doctrine." In other words, Bainbridge thinks that the Court should ignore its unanimous holding in Domino's because the Court did not do its homework in that case, even after Justice Kennedy had specifically teed up the question as whether the Court should recognize a claim of "inverse corporate veil piercing." Suffice it to say that that argument is unlikely to have any traction with the Court. Moreover, it misses the point: The Court rejected the RVP-I claim in Domino's because the plaintiff there gave the Court absolutely no basis for concluding that state law would recognize such an exception to the default "fundamental corporation and agency law" principle that a corporate shareholder has no rights and is exposed to no liability under the corporation's contracts. The same thing is true in this case: Neither the Hahns nor Professor Bainbridge has offered the Court any authority at all in support of the proposition that the Pennsylvania Supreme Court -- or other state courts, for that matter -- would recognize an RVP-I claim in a case involving RFRA.
Moreover, even if the Court were somehow able to answer the RVP-I question as a matter of Pennsylvania law (after certifying it to the Pennsylvania Supreme Court, perhaps?), that state-law-based judgment would not govern similar cases arising in the other 49 states and the District of Columbia, and therefore would hardly be a satisfactory resolution of the question on which the Court granted certiorari in Conestoga Wood. (And it wouldn't have any impact on a non-shareholder case such as Hobby Lobby.)
* * * *
In the absence of any indication that Pennsylvania law would allow RVP-I in this novel context, the more appropriate approach for the Court would be to follow its example in Domino's, and simply move on from a shareholder-injury inquiry to address the principal question raised both in Conestoga Wood and in Hobby Lobby--namely, whether federal law coerces the individual plaintiffs (the Hahns and the Greens) to violate religious injunctions in their capacities as decision-makers, or directors, of the three corporations in question in these two cases. In an earlier post, I discuss why I think the plaintiffs have failed to adequately plead facts to support such a claim.
4. Finally, and most importantly, in posts at both SCOTUSblog and Balkinization, I've tried to explain that, wholly apart from the questions regarding corporations and shareholders, a broad ruling in favor of Hobby Lobby and Conestoga Wood could mark a sea-change in the way the Court has traditionally resolved claims for religious exemptions in the commercial sector, with potentially dramatic ramifications for an array of laws involving taxes, wages and hours, antidiscrimination norms, etc. This is so because, when it comes to regulation of commercial activities, the Supreme Court—and virtually every other court and legislature, for that matter—has consistently construed the Free Exercise Clause and religious accommodation statutes not to require religious exemptions from generally applicable regulations. The Supreme Court, in particular, has rejected such claims in at least nine cases, from 1944 through 1990--and has almost always done so without a dissenting vote.
This long line of consistent denials of exemptions to actors in the commercial sphere reflects the view of Justice Jackson in the first such case (Prince v. Massachusetts), in which he wrote in his concurrence that “money-raising activities on a public scale are, I think, Caesar's affairs, and may be regulated by the state so long as it does not discriminate against one because he is doing them for a religious purpose and the regulation is not arbitrary and capricious, in violation of other provisions of the Constitution.”
A unanimous Court put the point this way in U.S. v. Lee, in 1982: “When followers of a particular sect enter into commercial activity as a matter of choice, the limits they accept on their own conduct as a matter of conscience and faith are not to be superimposed on the statutory schemes which are binding on others in that activity,” at least where “[g]ranting an exemption . . . to an employer operates to impose the employer’s religious faith on the employees.”
Whether or not this was a stand-alone “holding” in Lee, there is no doubt that the statement did—and continues to—fairly reflect the Court’s unbroken line of decisions over many decades. (The singular exception to the rule is Hosanna-Tabor, which, unlike Hobby Lobby, involved the right of nonprofit, specifically religious organizations to determine the “ministers” who speak on their behalf.)
And the Lee statement further points to the principal reason for this uniform treatment of religious exemption claims in the commercial sphere—namely, that in such cases it is virtually always the case that conferral of an exemption would require third parties (customers, employees, competitors) to bear significant burdens in the service of another’s religion, something the Court has understandably been loath to sanction. As I wrote on SCOTUSblog,
Contrary to the views of some, I think it overstates matters to say that such a significant third-party burden invariably renders a permissive religious accommodation unconstitutional. The Court’s jurisprudence in the area of permissive accommodations is not so unequivocal. But this much is clear: Such a significant third-party burden at a minimum raises profound constitutional concerns. For that reason, as Chip Lupu and Bob Tuttle explain, the Court has regularly construed permissive accommodation statutes – using the avoidance canon either expressly or implicitly – to recognize a compelling government interest in avoiding the imposition of significant third-party harms.
The Court’s decision in Hobby Lobby is likely to have a profound effect upon how other courts treat state and federal RFRA claims in the commercial sector going forward. If the Court were to hold that RFRA requires an exemption in these cases—and were to hold, in particular, in the case brought by a very large for-profit employer, that the law substantially burdens plaintiffs’ religious exercise and that the government lacks a compelling interest in denying religious exemptions—that would be a groundbreaking departure from the judiciary’s (and Congress’s) historical practice, one that could pave the way for claims for “myriad exceptions flowing from a wide variety of religious beliefs” (Lee) by commercial enterprises with respect to many other statutes, including nondiscrimination requirements, zoning regulations, taxes, and so on.
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.
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.
My thanks to Gordon et al, for inviting me to join them in discussing the upcoming contraception mandate cases. I've been blogging extensively about them over at my usual haunt, ProfessorBainbridge.com, and have published two law review articles on the case.
What's a nice corporate law guy like myself doing in this constitutional law arena? My interest in the contraception mandate cases was piqued when a friend sent me a transcript of a hearing held by U.S. District Court Judge Reggie Walton in the Tyndale House Publishers, Inc. v. Sebelius case, which raises issues similar to those in Hobby Lobby and Conestoga Wood.
At one point, there was a telling colloquy between Judge Walton and U.S. Department of Justice lawyer Benjamin Berwick. Berwick argued that employers who chose to incorporate their business are precluded from raising First Amendment free exercise of religion-based objections to regulations affecting their business. In response, Judge Walton posed the following hypothetical:
[M]y wife has a medical practice. She has a corporation, but she’s the sole owner and sole stock owner. If she had strongly-held religious belief and she made that known that she operated her medical practice from that perspective, could she be required to pay for these types of items if she felt that that was causing her to violate her religious beliefs?
Berwick replied that the corporation and its shareholders are separate legal persons. The judge thereupon summarized his understanding of the government’s position as being that his wife would “have to go as an individual proprietor with no corporation protection in order to assert her religious right.” Berwick did not contest that characterization.
In effect, Berwick wanted the judge to elevate form over substance. Corporate law often elevates form over substance, of course, but not always. The question in every context thus must be asked: Is this an appropriate case for form to triumph or is this one in which substance should prevail?
As a corporate law matter, that's the basic issue in these cases.
The following post comes to us from Jill Fisch, the Perry Golkin Professor of Law at the University of Pennsylvania:
Just a few more thoughts about the event studies and question II in Halliburton. As I noted in my prior post, the level of discussion on the feasibility and mechanics of event studies was disappointing. I have explained the limitations with using event studies to address the question of price impact or price distortion for purposes of Basic. See Jill E. Fisch, The Trouble with Basic: Price Distortion after Halliburton, 90 Wash. U. L. Rev. 895, 919-21 (2013). In particular, a statement or series of statements that falsely confirm existing market expectations will not move stock price at the time it is made. An event study is incapable of measuring the effect that a counterfactual accurate disclosure would have had on the market, had it been made. A substantial number of securities fraud lawsuits present exactly this factual context. Basic itself was such a case. Basic denied the existence of merger negotiations for over a year during which time it was, in fact, involved in such negotiations. Basic’s lies had little or no effect on the stock price (indeed, the price rose after two of the three denials). When the merger was subsequently announced, the stock price rose dramatically. The argument in Basic was that, had the merger negotiations been accurately disclosed at an earlier time, the stock price would have been higher. What the stock price would have been, in October 1977, if Basic had not lied, is a question that event study methodology cannot answer. This, however, is the test that Professors Henderson and Pritchard seek to have the Court impose through a requirement that plaintiffs prove price impact at class certification.
The following post comes to us from Jill Fisch, the Perry Golkin Professor of Law at the University of Pennsylvania:
I was at the Supreme Court this morning to hear the oral argument in the Halliburton case. The debate was lively and the Justices were engaged. Two big surprises. First, the Justices devoted very little attention to the question of whether Basic should be overruled. This was a disappointment to some of the conservative lawyers who were watching the argument with me. Although Aaron Streett led off aggressively in his argument, as in Petitioner’s Brief, with the statement that Basic was wrong when it was decided and more wrong now, the Justices did not seem to have much appetite for discussing this issue. Of course that doesn’t mean they won’t vote to overrule – it is impossible to read the Court from the questions asked at oral argument – but there was very little discussion on economic theory, fraud on the market, congressional intent, etc. Justice Kagan stopped Streett early on when he tried to argue that the Court said 10(b) was just like section 18, and asked wasn’t section 9 a closer analogy, but that was about it.
There was some discussion about congressional acquiescence. Streett argued that Congress hadn’t decided for or against Basic in the PSLRA. Roberts seemed mildly interested in this, but David Boies had a pretty good answer in terms of not just citing the PSLRA but also SLUSA and noting that the legislation would make little sense if class actions were eliminated. The biggest issue here was Justice Alito raising section 203 of the PSLRA in which Congress says nothing in the statute is intended to affect whether there is a private right of action. Justice Scalia critically noted that the parties did not even address section 203 in their briefs.
When Streett tried to talk about the economic arguments, saying that the economic premises for Basic have changed, CJ Roberts asked “How do I review the economic literature?” He then asked, somewhat skeptically whether Streett was suggesting that the Court “jettison” Basic because economists believe the efficient capital markets hypothesis is no longer true. Streett had trouble answering that. Several other Justices noted that the economic debate over the degree of market efficiency was beside the point, stating that prices generally respond to information. Streett did not disagree. Streett also argued that Basic was no longer right because today’s traders don’t rely on the integrity of market price, citing hedge funds, index funds and program traders. David Boies made use of this point when his turn came around, arguing that these new types of traders make market prices respond even more quickly to information and noting that the only information that program traders have is market price.
The second major surprise was the degree of attention that the Justices devoted to question II in the petition for cert. The Justices seemed quite taken by the position advocated by Professors Pritchard and Henderson (which they termed the “law professors’ position) (too bad for the rest of us law professors) that plaintiffs be required to prove price impact, at the class certification stage, through an event study. Several Justices characterized modifying Basic to require that plaintiffs prove price impact as a “middle ground.” They repeatedly asked detailed questions about event studies and why requiring event studies at class certification would be a big deal, especially since they are already used to establish market efficiency in some courts, as well as to prove loss causation. Justice Sotomayor for example, asked why proving price impact would be so difficult
Malcolm Stewart, arguing for the SEC, focused exclusively on retaining Basic, but was happy to sell the plaintiff’s down the river on requiring proof of price impact. Perhaps the most damaging point came when he was asked by Justice Kennedy whether the plaintiffs would be hurt by a requirement that they prove price impact at class certification. Stewart said that the plaintiffs would not be hurt and might even be helped because they would be focusing on the effect of the fraud on a particular stock and not on the market generally.
Two points from the oral argument were particularly troubling. First, as Stewart’s answer demonstrated, the argument was permeated with a limited understanding of how event studies work and the complexities involved in using an event study to measure price impact, particularly in the case of misrepresentations that falsely confirm continued good news. Several of the Justices seemed to think that an event study is an easy and reliable way to ascertain price impact; so if it is available, why not require it? CJ Roberts even asked Malcolm Stewart if event studies were around at the time of Basic. David Boies failed to explain the fact that, in many FOTM cases, there is no price effect at the time of the false statement and that an event study is faced with the complex or possibly scientifically impossible task of ascertaining how price would have reacted in the counterfactual situation in which the truth had been disclosed earlier. The big picture discussion of event studies also overlooked logistical issues that could turn out to be quite significant in the lower courts such as burden of proof – what happens if the economists cannot say whether or not the price was distorted to a sufficient degree of statistical significance? Boies did try to explain that the loss causation event study looks at a different event – the corrective disclosure – which is often a cleaner event for purposes of the event study methodology in that it is less likely to be affected by confounding information.
Second, Streett suggested and appeared to persuade the Justices that class certification was the end of the game – that if a class is certified, it is almost a sure win or an inevitable settlement because of the in terrorem effect of class actions. He repeatedly argued that, because the NYSE is an efficient market and therefore market efficiency is easy to prove for all NYSE-listed companies, relying on efficiency alone without also requiring price impact is not enough. Sotomayor appeared quite troubled by the fact that less than 1% of securities fraud cases go to trial and then asked David Boies what percentage of cases involve a court rejecting class certification, seeming to suggest that it is problematic if cases were not weeded out by the class certification stage. No one raised the fact that the PSLRA pleading requirement coupled with the motion to dismiss together effectively weed out a substantial number of cases at an early stage, prior to discovery and its effect on the incentives to settle. Similarly none of the lawyers focused on why price impact must be litigated at class certification or at trial – why not, alternatively, in the context of a motion for summary judgment – although Justice Ginsburg asked what difference it made at what stage price impact is litigated.
A few weeks ago, the faculty here gave a lunchtime discussion of various SCOTUS cases in the 2013OT. As a corporate law professor, there's never a lot to choose from, and this year's skimpy offering was no different. I chose the consolidated cases of Chadbourne & Parke LLP v. Troice; Proskauer Rose LLP v. Troice and Willis of Colorado Inc. v. Troice. (Documents courtesy of Scotusblog.) Though the names do not suggest it, these are the private securities lawsuits stemming from Allen Stanford's Ponzi Scheme. Mr. Stanford is serving 100 years in prison right now and probably doesn't have a lot of extra cash lying around, so investors have chosen to sue these other entities. Because federal securities law is not very amenable to securities fraud lawsuits against aiders and abetters (like these defendants would be), these cases were brought under state law.
Unfortunately, federal securities law, and the Private Securities Litigation Reform Act, is not that easy to bypass. Defendants wanted the case dismissed under the Securities Litigation Uniform Standards Act, which pre-empts class actions in which plaintiffs allege a misrepresentation in connection with the purchase or sale of a "covered security." As you can tell from my quotation marks and boldface, plaintiffs counter that the fraud was not in connection with a "covered security."
What was the fraud? Stanford touted certificates of deposit (CD) accounts that paid 10% (what?) at Stanford International Bank, based in Antigua. Now, CDs at U.S. banks aren't considered securities at all, but the SEC and the DOJ argued that Stanford committed securities fraud in the purchase and sale of a security anyway. However, these charges were dropped in favor of wire fraud, obstruction and money laundering, and he was convicted on those counts.
That being said, no one is arguing that the CDs aren't a "security." But, plaintiffs argue that the CDs aren't a "covered security." A covered security is one that is listed on a regulated national exchange and traded nationally. The CDs are definitely not covered securities. But, SIB represented that the accounts were backed by "safe, liquid investments" and that monies were "invested in a well-diversified portfolio of highly marketable securities issued by stable governments, strong multinational companies and major international banks." Defendants argue that this is enough to meet the "in connection with" standard -- the monies were supposed to be used to purchase covered securities at some point. (The money was never used to purchase anything, but no one is taking the "phantom securities aren't securities" angle in this post-Madoff era!) In addition, defendants make the argument, and the SEC was using this argument in the Stanford case, that at least one plaintiff sold covered securities to invest in the CDs. If the defendants are right, then the case is dismissed under SLUSA and cannot continue in any court as a class action.
Here is the transcript of the oral arguments on the first day of the term. Other commentators seem to think it was split and that defendants may win. I wasn't there, but the transcript seems to suggest that the justices were very skeptical of the reach of the defendants arguments. Both the "in connection with" argument and the "selling covered securities to purchase the fraud" arguments seem to bring up spectres of ordinary purchases becoming securities fraud fodder. I.e., if I sell stock to buy a house, the seller better not say anything misleading or its securities fraud for you! I hope the plaintiffs win for this and other reasons.
As Broc Romanek observes, that is indeed rare:
Supreme Court Delivers Two Securities Law Decisions in Single Week!
Last week, the Supreme Court delivered two decisions impacting the securities law. Even one in a term is rare. Some say that securities defendants won one and lost one. Others say differently (for eg. see this blogby Lane Powell's Doug Greene). We have been posting dozens of memos on both Gabelli v. SEC andAmgen v. Connecticut Retirement Plans and Trust Funds in our "Securities Litigation" Practice Area.
The Gabelli court found that five-year statute of limitations period for federal enforcement actions seeking civil penalties begins to run "when the fraud is complete," not when it is discovered by the government (unlike the standard for private plaintiffs). And the Amgen court found that plaintiffs don't need to establish that allegedly false statements were material to the market before they can gain class certification.
Either the SEC is living in its own little bubble world or else the Commission is operating under some masochistic urge to embarrass itself. The Supreme Court simultaneously burst the SEC’s bubble and embarrassed the agency in its yesterday’s decision in Gabelli v. Securities and Exchange Commission. The Court rejected the SEC’s proffered interpretation of 28 U.S.C. § 2462, a general statute of limitations that governs many penalty provisions throughout the federal code.
Amgen is interesting because three justices are annoyed that the materiality requirement in the securities laws has bascially been dispensed with. That's three justices who don't have much use for precedent in this area:
In an unsurprising decision, the Court declined to raise the bar for the certification of securities class actions by requiring plaintiffs to establish the materiality of alleged misstatements to invoke the fraud-on-the-market theory in support of class certification. Instead, it remains sufficient for plaintiffs to simply plead materiality, and establish the traditional requirements of Rule 23 at the certification stage.
I never met Robert Bork, but I was an intern at the DC Court of Appeals in 1985, when he and Antonin Scalia were still on that court. The word among the staff and clerks at the Court was that one of those two would become the next nominee to the United States Supreme Court, if President Reagan were given the opportunity to nominate someone.
The next year, when William Rehnquist was elevated to Chief Justice on the retirement of Warren Burger, President Reagan had an opportunity to nominate a new Associate Justice. Should he nominate Scalia or Bork?
I don't know if this story is true, but I was told later by someone who claimed to be an insider that President Reagan nominated Scalia in part because he was younger than Bork and in better health. (Bork was a smoker.) If you want a justice to leave a legacy, it probably helps if the justice stays on the Court awhile. That was over 26 years ago.
Of course, Robert Bork would also get his nomination the year after Scalia was confirmed. The battle over Bork's nomination happened during my first year of law school, and it consumed much of the time and attention of the students and faculty at the University of Chicago. That seat eventually went to Anthony Kennedy.
After the Senate rejected Bork's nomination, I took Antitrust from Frank Easterbrook, who introduced me to The Antitrust Paradox. I know a lot of antitrust scholars criticize that book, but as a law student, I was enthralled by Bork's command of history and policy. He was a great writer. Reading that book made me think that being a law professor could be both fun and important, and I am grateful to Bork for that.
Robert Bork died today. He was 85 years old.
Tomorrow is the first Monday in October, and the Supremes will be back in session. So far, the Court’s docket includes two securities cases.
First, on November 5, the Court will hear oral argument in Amgen v. Connecticut Retirement Plans. This is the latest in what is becoming a series of Supreme Court cases involving which elements of a 10b-5 claim plaintiffs need to prove in order to have a class action certified. Two years ago, in Erica P. John Fund v. Halliburton, the Court reversed a 5th Circuit ruling that required plaintiffs to prove loss causation to certify a class. (Here at the Conglomerate, we hosted a mini-forum on that case as well as a post-mortem). In this current round, the fraud-on-the market theory returns to the justices. The Court will now rule on whether plaintiffs need to prove materiality before a 10b-5 class can be certified. It might also rule on whether the defendant can offer a rebuttal on materiality at the class certification stage.
Second, the Court just granted cert in an odd SEC enforcement case, Gabelli v. SEC, to resolve when the five year statute of limitations (in 28 U.S.C. § 2462) starts to run for the SEC to bring a case. This particular SEC enforcement action involves a mutual fund market timing case, with Judge Jed Rakoff (who has become the most influential federal judge on securities law matters) issuing the trial court opinion.
And looming in the background, the constitutional challenges to Dodd-Frank are congealing. Several states recently joined that portion of this blunderbuss lawsuit against Dodd-Frank that challenges the FDIC Orderly Liquidation Authority. With plaintiffs casting this broad of a net and a D.C. Circuit that has not been gunshy about striking down financial regulation, it would be surprising if some part of Dodd-Frank does not end up before the Supreme Court within the next two years. There will be that much more of a demand for conversation between public law and financial regulation scholars and practitioners.
Yesterday’s Wall Street Journal ran a story (password required) on federal prosecutors using the “responsible corporate officer” doctrine to impose personal liability on the officers and directors of drug companies for violations of food & drug laws.
This revives an obscure doctrine that I wrote about a few years ago (see here, pages 313-318) for a book that compared director liability for corporate actions across countries. The responsible corporate officer is understandably extremely worrying for corporate boards and executives because it means civil and even criminal liability when a corporation violates a law absent a director or officer knowing about the violation.
It is important to note that the scope of the doctrine is limited. It sprang forth in the 1943 Supreme Court case U.S. v. Dotterweich which interpreted the Federal Food, Drug and Cosmetic Act. The Court upheld the application of the doctrine to the same statute in 1975 in U.S. v. Park. In the 2003 case Meyer v. Holley, the Court revisited the doctrine and stated that Congress must be fairly explicit in a statute that it intends the doctrine to apply. And the current Supreme Court is unlikely to reverse course on this. The responsible corporate officer doctrine is unlikely to apply to new statutes absent explicit Congressional language.
Even so, the doctrine does apply to more than one federal food & drug statute. I list a number of federal cases in that book chapter I mention above. Moreover, state legislatures and courts have also applied the statute to state laws (and Meyer v. Holley does not necessarily constrain the ability of state courts to apply the doctrine to state statutes more liberally). So this dormant doctrinal strain should only give pause to boards and executives in certain heavily regulated industries that are subject to certain statutes. The doctrine is more limited, but potentially vastly more powerful – because lack of knowledge is not a defense -- than other sources of liability for directors that have been much more analyzed in recent years (for example, securities laws and Disney/Caremark/Stone v. Ritter).