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July 18, 2014

Corporations as Aggregates?

Posted by Usha Rodrigues

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

My summer reading consisted in part of Burwell v. Hobby Lobby Stores, Inc. Well, part of it. I skipped all the stuff at the end about governmental interest, substantial burden and least restrictive means, and, heck, I have not gotten around to reading the dissents. But I will, teacher, I will. Overall, I really struggled with the 25 or so pages I actually read that had to deal with corporations and stuff. I could not figure out whether I was reading fiction or nonfiction. I think this was primarily because I could not figure out whether the author was working hard and trying to apply corporate law that he did not quite understand or whether the author was skipping over all that pesky corporate law stuff, without really trying to understand it (law school was a long time ago and the federal courts class was where the action was for us judges and our clerks), in order to get to the conclusion part of the story he was interested in. And, cynical me, maybe that gave him the result he wanted. When I say “author”, I mean 5 Guys, like the burger place. I also thought that the writing was full of rhetorical ploys, and false similes and metaphors (things like, “Hey, it might work for sole proprietors. Why not corporations!”). I walked away dissatisfied. I waited all summer for that book to come out, and this is all they could do? Fortunately, I know that other authors (such as judges in state courts) work with the same materials and that what they say about corporations is probably more important than what the USSC might have said. Therefore, although I know that there are important threads in Hobby Lobby, and that people will argue about it, and that advocates may use it in things like veil piercing cases, I wait for the book to be written. I hope that those authors apply a large discount to the Court’s decision. Much of it was raw dictum anyhow. I really wish that reticent Bainbridge fellow had not run out of things to say. No one else (including me) has.

Now – for the more “serious” part of this post --

The issue in Hobby Lobby is relatively simple - did HHS regulations violate RFRA by requiring the appellee closely-held corporations to provide health-insurance coverage for contraceptive methods that violate the sincerely held beliefs of the corporations' owners. The Court held, first, that RFRA provides protection to corporations since "the plain terms of RFRA make it perfectly clear that Congress did not discriminate … against men and women who wish to run their businesses as for-profit corporations in the manner required by their religious beliefs." In reaching this conclusion, the Court rejected arguments that use of the corporate form distinguishes closely-held corporations from "sole proprietorships or general partnerships." I do not think the Court returned to the general partnership theme, but I do think it ties into the “aggregate” approach to business entities discussed below. It would have been useful to note that under RUPA and all state partnership statutes a general partnership is an “entity”. Second, the Court held that the HHS regulations substantially burden the exercise of religion and that they do not constitute the least restrictive means of serving a compelling governmental interest. Thus, the regulations, as applied to the appellees, violated RFRA.

The Court's decision that RFRA applies to corporations took several steps. First, the Court stated that RFRA applies to "a person's" exercise of religion and that RFRA does not define "person." Therefore, the Court considered the Dictionary Act, which applies "in determining the meaning of any Act of Congress, unless the context requires otherwise." The Court decided that RFRA's context does not "require otherwise," and ruled that under the Dictionary Act, "the wor[d] 'person' includes corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals." The Court's "context requiring otherwise" analysis is somewhat mysterious. Rather than endeavoring to place RFRA's use of "person" into the religion-based context of RFRA, the Court simply accepted the appellant's concession that nonprofit corporations can be persons and stated that "no known definition includes some but not all corporations." Very formal; not very contextual. What’s with the “known definition” trope?– I thought that part of the judicial job is definition. One is left wondering whether an objective analysis would have been different (and what it would have looked like) had the nonprofit corporation question not been "conceded." One is also left wondering about what the Court's analysis would have been if it had undertaken to discuss the obvious question of whether an administrative agency has a valid basis for differentiating religious nonprofit corporations from other nonprofit corporation and for-profit corporations.

The Court then focused on the argument that corporations are not protected by RFRA because they cannot "exercise religion." The Court concluded that corporations can exercise religion, but rather than provide a positive basis for this conclusion the Court debunks several strawperson arguments. First, the Court concludes that "the corporate form" does not militate against religious exercise since, as noted above, it decided that the appellant conceded that nonprofit corporations are protected by RFRA. Again, the Court did not delve into possible distinctions between nonprofit corporations and for-profit corporations. It also concludes that the "profit-making objective" does not militate against religious exercise because a prior case indicated that individuals who attempted to make a profit as retail merchants might have free-exercise claims and "if … a sole proprietorship that seeks to make a profit may assert a free-exercise claim, why can't [a corporations] do the same." Really? In grounding corporate free-exercise rights on the free-exercise rights of sole proprietors, the Court made an egregious mistake. Sole proprietorships are not entities, and "sole proprietor" is simply a label hung on an individual conducting business in personal form. As individuals who can think religiously, sole proprietorships also can think religiously. The "why can't corporations do the same" analysis rests on the nature of corporations as entities that are not individuals, unless one reaches the conclusion that closely-held corporations are mere extensions of the individual owners and thus are akin to sole proprietorships. As discussed below, the Court's analysis supports an argument that corporations are merely extensions of their owners – also known as aggregates.

The second argument raised and debunked by the Court is that "RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money." The Court states that "[t]his argument flies in the face of modern corporate law." In the Court's view not all corporations are soul-less, profit-seeking devices, and modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and that many do not do so. While I believe and hope that this is the case, it should be noted that the Court's bald assertions have been the focus of considerable discussion in recent years, and that the outcome is not as clear as that alleged by the Court. A Court which has not partaken of discussion concerning corporate purpose (and may not have even read any of it – pretty much zero footnotes0 should not be so certain of its assertions. For example, the Court refers to the fact that numerous states recognize "the benefit corporation, a dual purpose entity that seeks to achieve both a benefit for the public and a profit for its owners," but it fails to recognize that the rationale for benefit corporations is to create a new form in which profit is not paramount. None of the appellant corporations in Hobby Lobby were benefit corporations. Further, a conclusion, even if correct, that modern corporate law recognizes that corporations can engage in activities that do not maximize profit does not address the question of whether corporations can exercise religion. To say that Hobby Lobby can do good is not to say that it can think.

Having concluded that corporations are "persons" and that they are capable of "exercising religion," the next question is how exactly corporations, which are legal constructs, go about exercising religion. Although the Court does not engage in extended analysis, it is clear that its conclusion is that corporations can carry out the "sincerely held religious beliefs of their owners," the shareholders. It notes that members of the family that owns and controls appellee Conestoga Wood Specialties are devout members of the Mennonite Church, which opposes abortion and believes that "the fetus in its earliest stages … shares humanity with those who conceived it." The Conestoga Wood shareholders believe that "human life begins at conception." Similarly, family members that own and control appellees Hobby Lobby and Mardel are committed to "honoring the Lord in all [they] do by operating the company in a manner consistent with Biblical principles." The Hobby Lobby/Mardel shareholders y also believe that life begins at conception and that it would violate their religion to facilitate access to contraceptive drugs or devices that operate after conception. The Court clearly focused on the shareholders' religious beliefs and, therefore, Hobby Lobby makes sense only to the extent that the shareholders' beliefs are transported to the corporations they control.

This conclusion is buttressed by the Court's facile repudiation of HHS's argument that it would be difficult to ascertain the sincere beliefs of a corporation. The Court responded to the argument that there could be battles over the religious identity of large corporations with the rejoinder that, "[t]hese cases, however, do not involve publicly traded corporations, and it seems unlikely that the sort of corporate giants to which HHS refers will often assert RFRA claims." The Court also concludes that shareholder disputes over the application of religious principles to corporate activities can be readily resolved by state corporate law. But the Court does not analyze the method for this "ready means" of resolution. I am not sure such ready means exist.

More to the point, by focusing on the shareholders’ beliefs and transporting them to the “person” that is the corporation, the Court seems to conclude that corporations are peculiar persons -- aggregates of their shareholders (and no one else) and not entities separate from their owners. It does not use those words, but the holding, together with references to sole proprietorships and general partnerships indicates to that this is the direction taken. At the end of the day one wonders where a Hobby Lobby analysis leads. Almost a decade ago I wrote a Business Lawyer article on rationalizing limited liability and veil piercing in which I stated that one approach is to treat closely-held entities as agents of their owners, such that there is a rebuttable presumption that the principals are personally liable (“respondeat superior”) for the acts of their agents. I did not base this on aggregate theory, but if one moves toward an aggregate approach to corporations one opens large cans of worms. I also recall that one of my friends, after hearing me talk about this at ABA annual meetings in a SF hotel, moved to throw me out the window. I suspect Lauris would move to throw the Hobby Lobby case out of the window as well.

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