July 16, 2014
Hobby Lobby and Hybrid Firms
Posted by Haskell Murray

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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When Should Corporations Have RFRA Rights?
Posted by Brett McDonnell

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

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

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

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

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

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Corporate RFRA Rights and Complicity
Posted by Amy Sepinwall

    Thanks to Usha for inviting me to participate. My main interest in Hobby Lobby goes to the understandings of complicity underpinning both the majority and dissent. These are deeply problematic, as I intend to argue in an article-length treatment of the case. But, in 'Glom fashion, I want to focus here on corporate law claims -- in particular, claims about the purpose and nature of the corporation that the case and commentary advance.

    The question of whether corporations enjoy rights under RFRA has been called "the fundamental" or the "central" question in Hobby Lobby. In fact, I think it's mostly a red herring. And, even to the extent that the question does matter, it cannot be answered without a developed, cogent theory of complicity -- a theory of when and why one comes to bear responsibility for the wrong (or, in this case, supposed wrong) of another. I won't be providing that theory here, but I do hope to show why it is needed.  

            I focus here on three claims about the corporation, and I address each of them in turn below:

  1. The corporation can/cannot exercise religion in virtue of the kind of entity it is.
  2. Limited liability entails that the corporate owners cannot seek to exercise their religious convictions through the corporate form.
  3. Divergent beliefs among the corporation’s owners and employees entail that the owners may not seek to exercise their religious convictions through the corporate form

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

    I wholeheartedly support the Hobby Lobby majority opinion’s efforts to advance an expansive conception of corporate purpose, which recognizes that corporations are not and need not be brute shareholder value maximizers. Still, the fact that a for-profit corporation can be run consistent with moral or religious beliefs does not make the corporation a moral or religious believer. Instead, and as I have argued here and here, corporations lack capacities central to moral agency. Those same capacities, I now add, are central to having a conscience or exercising religion. If I am right that the corporation lacks these capacities then it would follow that the corporation cannot exercise religion.

    We might think that lots of capacities are necessary to qualify as a moral agent or religious adherent. I focus here on the minimal requirements for religious adherence: first, the capacity to form beliefs, especially beliefs about what one’s religion dictates; and second, the capacity to act in light of those beliefs. It is the “in light of” clause that gets the proponent of corporate religious adherence in trouble. It is one thing for a corporation to act in conformity with a set of religious dictates; it is quite another to say that it is acting in light of them.

    To see this, consider that one abides by the laws of Kashrut (Jewish dietary laws) just so long as one eats only those items that the laws permit. In this regard, vegans are necessarily kosher, because the prohibitions vegans follow overlap completely with those that Kashrut mandates. But it would be a mistake to think that every vegan engages in an exercise of Judaism. The motivation for veganism is different from the motivation to live a life in accordance with Jewish precepts around eating. To qualify as an instance of the latter, one has to know and affirm the Jewish dietary laws, and make choices about what and how one eats precisely because of those laws. This is true of every religious observance – action that merely coincides with a religious precept doesn’t count as a religious exercise; instead, one has to have chosen the observance because one affirms the religious precept upon which it is based.

    But where is the corporate capacity for affirming beliefs? And where can one find the resulting motivation to act in light of the affirmed beliefs? Motivation seems even more important in the religious case than the moral one, because of the focus in religion on the quality of the believer’s soul. While one typically gets a free pass in morality so long as one doesn’t do wrong (even if one’s motivation for refraining from wrongdoing is crass or self-serving) the same isn’t true of religion: One should abide by the precepts of one’s religion because one is committed to doing right by one’s deity. Again, it seems mysterious that an inanimate being would be capable of harboring, letting alone acting in light of, that commitment.

    For all of these reasons, I think we should reject the idea that corporations can exercise religion in their own right. With that said, I think the idea of corporate religious exercise a red herring. Here, I agree with the majority that what matters isn’t whether the corporation can exercise religion but instead whether the corporation’s owners can seek to assert their religious convictions through the corporate form. On that score, things get more complicated.

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

    The HL dissent, along with some lower-court judges and commentators, argues that a corporation’s owners cannot have their cake and eat it too – they cannot claim the protection of the corporate veil where liability is concerned but have the government disregard the veil when it comes to asserting their rights of religious exercise. But it is not clear just why these two things are deemed incompatible. 

    It is undoubtedly true that the corporation is a distinct legal entity. But the fact that some of its obligations, powers and privileges are different from those of its owners does not entail that all must be. There is nothing in the nature of a corporation, or in the nature of limited liability, that makes it improper to treat the corporation as if it enjoyed rights of free exercise as a way of respecting the free exercise rights of its members. Corporations enjoy many rights that are grounded in the rights of their members. Rights of free association, for example, can be ascribed to the corporation in the first instance but their purpose is not to allow the corporation to associate with whomever (or whatever) it wishes but instead to respect the rights of the corporation’s members to associate with one another.

    Perhaps the argument is supposed to be not about some inherent inconsistency between limited liability and an assertion of the owners' constitutional rights through the corporate form but instead about a fear of granting the corporation, or its owners, too much. The thought might then be something like this: "First these people get to protect their personal wealth when the corporation screws up, and now they want to exercise their constitutional rights not only at home, but at work too. The greedy buggers!" As written, the worry is ridiculous.  And yet I am sympathetic to the spirit of the complaint. For-profit corporate owners might well enjoy too much wealth or power or both. We should do something about that. But treading on their constitutional rights just doesn't seem like the right thing to do.

An Interlude: Why Claims About Whether the Corporation, Or Its Owners, Can Claim Rights of Religious Freedom Are Ultimately Irrelevant

    At bottom, Hobby Lobby is about whether an employer may seek a religious exemption from a legal requirement that it provide insurance coverage for contraceptive methods to which the employer objects. Phrased in that way, it is clear that the organizational form of the employer -- whether sole proprietorship, partnership, for-profit corporation, etc. -- is irrelevant. Those who decry the Court's ruling care about women's access to contraceptive coverage, and their concerns arise no matter the organizational form of the employer granted an exemption from the contraceptive mandate, as I argued here. There's a reason why the Democrats' legislative response to HL bears the short title, "Not My Boss's Business," and not "Not My Corporation's Business." And Hobby Lobby's lawyers admit that their concerns don't turn on corporate rights in the first instance either; they turn instead on the interests of the owners. These interests too are independent of the employer's organizational form. Questions about the nature or purpose of the corporation are then beside the point. On the other hand, questions about the way in which the corporation is run -- who has power to determine what the corporation does and upon whom do the corporation's acts reflect -- do matter, as I shall now contend.

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

    Suppose that the owners of a closely-held corporation have religious commitments that diverge from those of their employees, as is the case when it comes to the majority of Hobby Lobby's employees. Whose commitments should the corporation itself reflect -- those of the owners or its employees? The answer, I think, depends on a prior question -- viz., who has reason to feel morally implicated in the subsidization of (some or all of) the contraceptive methods coverage of which the ACA mandates. 

    And the answer to this prior question in turn depends upon more foundational questions still: Who is taken to be an appropriate object of blame or praise for the corporation's acts? Who has authority over the corporation's acts? Why should we think that subsidizing health insurance that includes contraception makes it the case that use of contraception can be attributed to the corporation in the first place, and from there to those individuals who have reason to feel morally implicated in the corporation's acts?

    In short, we cannot know whether the owners' or employees' or no one's moral or religious convictions should dictate the corporation's position on contraceptive coverage until we know who, if anyone, has reason to hold themselves morally responsible for contraceptive use that the corporation subsidizes. And we cannot know the answers to those questions unless we know when and why responsibility for a wrong extends beyond the person who commits it. All of these are questions of complicity, satisfying answers to which cannot be found in the case or in the larger doctrine. It is these questions, then, that deserve our attention going forward.

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The Meaning of Hobby Lobby: Bedrooms, Boardrooms & Burdens
Posted by Anne Tucker

Not the Boardroom, the Bedroom.  The first point that I want to make about the Hobby Lobby opinion has nothing to do with corporate law (which may disqualify me from future GLOM participation).  I want to point out that access to contraceptives is an issue for BOTH women and men.  Dare I say that it is, at its essence, a family issue?  Because of how medical technology has advanced (and a bit of biological incentives) there is a wider variety of pharmaceuticals for women that prevent pregnancies than are available for men. Yes, this technology helps women participate in the workforce, equalize health care costs, and a host of other goals identified by Justice Ginsberg in her dissent.  But men benefit from being able to plan for pregnancies in many of the same ways that it benefits women.  The consequences are magnified for women, of course, and I am in no way diminishing the unequal burden.  But I cannot stand another debate that exclusively talks about a WOMAN’s access to contraceptives as if the need for those contraceptives and the benefits derived from them have nothing to do with their male partners or their families.    

If it is the Boardroom, then WHOSE Boardroom?  Much has been made about the catastrophizing by opponents to the Hobby Lobby exemption suggesting that those who opposed the exemptions were envisioning a parade of implausible horribles.  The opinion limits the holding to closely held entities, but don’t take the bait.  The reasoning behind the holding is broadly stated with no distinction and will prove to be powerful arrows in the quiver of future litigants wanting to extend the scope of the holding to other entities.  For example consider the following analytical building block for future litigation from the Majority: “Any suggestion that for-profit corporations are incapable of exercising religion because their purpose is simply to make money flies in the face of modern corporate law.” 

Some have suggested that Justice Ginsberg’s dissent repeated a fatal error made by Justice Scalia in the DOMA case.  Justice Ginsberg, like Justice Scalia, rejected the Majority’s attempt to limit the scope of the holding providing insight into the Majority’s reasoning that will be quotable by lower courts and future litigants seeking guidance on how to interpret Hobby Lobby.  Take for example, her line that the Majority’s logic “extends to corporations of any size, public or private…..[and] invites for-profit entities to seek religion-based exemptions from regulations they deem offensive to their faith.”

Allow me to repeat myself (see BLPB post) when I also point out that the opinion doesn’t define what qualifies as a closely held entity.  Even if we accept that the reasoning is limited to closely held entities, where should we look for that definition? State law? IRS guidelines?  Common law?  The absence of a clear definition is either evidence that there was no intention to limit the holding to closely held entities, or it suggests an important issue has been left unresolved for future litigation.  While we have a general sense what closely held means, the precise boundaries are more difficult. Will closely held entities become the new pornography where we only know it when we see it?  Take Wal-Mart as an example with 51% of its stock held by the Walton family and insiders (satisfies the IRS definition), but with publically traded stock.  Is it in or out? Of course, larger entities may have difficulty establishing the sincerity of the belief, but that seems to be a prong of RFRA that no one wants to touch.  And Justice Alito pointed to state law as appropriate intra-shareholder dispute resolution mechanisms.  In other words, the controlling shareholder wins, so maybe only the controlling shareholder needs to have a sincere belief.

The Unaccommodating Accommodation.  Not 72 hours after the opinion, the Court in a vote of 6-3 granted Wheaton College, a non-profit Christian institution, a temporary exemption from the accommodation under the All Writs Act.  The same Justices who found that the contraceptive mandate failed the least restrictive means prong of RFRA, within the same week questioned the constitutionality of that very accommodation process. Wheaton asserts that the exemption process itself is an impermissible burden on Wheaton’s free exercise of religion in violation of RFRA because by filing the exemption form they trigger access to contraceptives.   Justice Sotomayor wrote a dissent, joined by Justices Kagan and Ginsberg, highlighting the analytical whiplash resulting from this turn around.  “After expressly relying on the availability of the religious-nonprofit accommodation to hold that the contractive coverage requirement violates RFRA as applied to closely held for-profit corporations, the Court now, as the dissent in Hobby Lobby feared it might…retreats from that position.” 

The Not so Burdensome Burden. First, paying for third party’s access to contraceptives was a substantial burden on religion in Hobby Lobby.  Later that same week in Wheaton College, the issue was filing a form with the government so that third parties could get access to contraceptives that someone else pays for may be a substantial burden on religion.  While granting the injunction is not a clear indication of the Court’s future treatment of the merits, there is powerful language in the Hobby Lobby opinion foreshadowing the Court’s views of acts that merely facilitate any kind of breach of a religious code. The Court framed the case as an “important question of religion and moral philosophy, namely, the circumstances under which it is immoral for a person to perform an act that is innocent in itself but hat has the effect of enabling or facilitating the commission of an import act by another.”  The corporate plaintiff didn’t have to violate its beliefs (that feels like an absurd statement), but taking an action that permitted a third party employee to possibly violate the beliefs of the corporation was a sufficient burden.  This is also ignores that the contraceptives at issue could be used for medical reasons unrelated to lifestyle choices.  Here is where I struggle the most with the reasoning of the Majority.  Employers pay employees subject to minimum wage laws. Employers have no guarantee that the employees will use the compensation in a manner consistent with the employer’s religious views.  Why is it different when the compensation comes in the form of employer-provided health benefits, which is a form of compensation?   

-Anne Tucker

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Religious Freedom, Commerce, and Complicity
Posted by Nate Oman

In Hobby Lobby, I am pretty happy with the way that the Court treated the question of corporate personhood for purposes of RFRA. I am less impressed with the Court’s analysis of whether the contraception mandate imposed a substantial burden on the religious exercise of the challengers. 

Justice Alito analyzed this question by looking at the scope of the penalty in the event that the challengers refused to comply with the law.  Because the penalty was substantial, he argued, the burden must be substantial.  I think that this focus on the penalty is mistaken.  It seems to imply that moderate penalties imposed on core religious activities would not be a substantial burden.  Suppose, for example, that some neutral law had the effect of imposing a $50 fine every time a Catholic priest performed the sacrament of ordination.  As I understand it, priests perform this sacrament fairly infrequently, but it is centrally important to the life of the Church.  Likewise, a massive fine on a relatively trivial religious activity – say putting an ichthus bumper sticker over a license plate – would be a substantial burden.

The analysis in Justice Ginsburg’s dissent strikes me as muddled, but at least it circles toward the real issue in the case.  It’s muddled because she spends a lot of time arguing about harms to third parties.  The problem with the harm principle, in my opinion, is that it is of little help because so much of the real work in the argument is done by the definition of harm.  In Hobby Lobby, granting an exemption to the challengers harms third parties if one assumes that they have a right to contraception provided by their employers as part of their compensation.  If one does not assume the existence of such a right, then there is no harm.  Given that the case here involves a debate over whether such a legal right in fact exists, it doesn’t seem that we can appeal to such a right in the harm analysis without becoming circular.  Alternatively, we might understand harm not in terms of some baseline of rights, but rather in terms of actually disutility or the like.  The problem here, as Amartya Sen long ago pointed out his essay “The Impossibility of a Paretian Liberal”, is that once one links harm to the idea of utility rather than rights, the harm principle becomes impossibly restrictive. 

Justice Ginsburg’s analysis gets closer to the mark, I believe when she talks about the idea of complicity.  The burden asserted by the challengers is that by being required to purchase certain kinds of contraception coverage they are being made complicit in abortion.  Justice Alito suggests that once one asserts complicity, a substantial burden has been established, presumably so long as the sanction for not complying with the law is large enough.  Any attempt to judge the substantiality of the challengers’ complicity, he claims, would involve judging the reasonableness of their religious beliefs.  In contrast, Justice Ginsburg is eager to charge in where Justice Alito fears to tread, arguing that in this case the actual use of the objected to contraception involves the choice of a third party, and, therefore, the challengers cannot assert the their religious exercise is burdened. 

Here, I think Justice Ginsburg’s dissent gets at the hard issue in the case: When does complicity burden religious freedom?  My intuitions on this run in opposite directions.  On one hand, I think that Justice Alito’s deferential attitude toward claims of complicity is dangerous.  If we must simply defer to a challenger’s claim that any forced complicity creates a burden without any inquiry into the scope or attenuation of the complicity, then we have a world where A can claim that his religious exercise has been burdened because B has engaged in conduct that A finds religiously objectionable, so long as A can sincerely claim that there is some law that makes A complicit in B’s activity.  The problem is that in an interconnected society law and commerce arguably makes us complicit in so much of each other’s activities that we run the risk of adopting the perverse view that religious freedom is routinely threatened when others engage in religiously objectionable activity. 

My other intiution is that in some cases complicity becomes a valid way of understanding burdens on religious activity.  The obvious case would be a law requiring an objecting physician to perform abortions when asked to do so by a patient willing to pay for it.  In such a case, one might point out that in this instance the abortion will only be performed if the patient chooses to do so, and if the physician doesn’t perform the operation, the abortion will happen anyway because the patient by definition has the funds to purchase the desired procedure.  Still, I think such a law would be a major imposition on religious freedom.  The difference between my hypothetical abortion law and Hobby Lobby or a case of someone objecting to taxes on the grounds of complicity in religiously objectionable government policies, it seems to me, is simply the extent of the complicity rather than any difference in the nature of the religious burden.  

For those interested in business and corporate law, the issue of complicity is particularly important.  Commerce is a matter of joint enterprises, and, as casuists long ago recognized, it involves ubiquitous complicity in the actions of others.  The easiest solution to the problem of complicity-via-commerce is a regime of freedom of contract.  In this world, consent does the work of mediating the degree to which we wish to become involved in the moral complexities of others’ projects. Of course, to this one can marshal the traditional objections to freedom of contract – inequality of bargaining power (whatever that means), the presence of non-disclaimable contractual and legal duties, problems of monopoly, the countervailing claims of status and the like - and we can turn this debate on religious freedom over to the contract law geeks.

In a world where freedom of contract is subordinated to such concerns, RFRA-like regimes require judgments about the level of complicity at which religious protections should be triggered.  This means making the kind of delicate inquiries Justice Alito believes courts should avoid.  Contra Justice Alito, however, I believe that in making such judgments courts would be defining the scope of religious freedom not the scope of reasonable religious belief. 

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What Hobby Lobby Didn't Decide
Posted by Ronald Colombo

First off, thank you to Usha and everyone at the Glom for inviting me back to participate in this symposium.  I thoroughly enjoyed Round 1, and have eagerly awaited this sequel!

Before commenting upon what the opinion did decide, I thought I'd clear the brush a bit and comment upon what the opinion didn't decide.  Especially because what the opinion didn't decide has been my own particularly scholarly focus for the last few years.

Namely:  do publicly traded business corporations have First Amendment free exercise rights (akin to the First Amendment free speech rights that they possess)?  The Supreme Court expressly decided to sidestep that particular issue (which is not surprising).

That said, the issue remains very much alive.  In its decision, the court held 5-2 that business corporations were persons capable of exercising religion as per the Religious Freedom Restoration Act (RFRA).  More than anythng else, RFRA addresses the standard pursuant to which religious liberty claims are to be adjudicated - not the definition of what constitutes the free exercise of religion.  Therefore, it stands to reason that there are at least 5 justices on the Court who believe that corporations have standing to bring free exercise claims directly under the First Amendment.  In light of the Smith decision, they'd most likely lose these cases if dealing with a law of general applicability, but they'd nevertheless have standing to bring them.

The issue is salient for at least two reasons: (1) Congress could curtail RFRA to reverse Hobby Lobby (and a movement among Democrats to do this is currently afoot), and (2) Hobby Lobby would not apply to similar claims brought against state-decreed (versus federally decreed) mandates.

With regard to the distinction between privately held versus publicly traded corporations, the Court in Hobby Lobby made clear that the decision was limited to the facts before them, thereby limited to privately held corporations.  Nevertheless, the Court was a bit cagey about this, observing at one point that "it seems unlikely that ... corporate giants ... will often assert RFRA claims."  The Court could have more firmly closed this particular door, but instead left it wide open.

Finally, the Court continued to avoid any sustained discussion of corporate theory, and how that might impact its recognition (or non-recognition) of corporate constitutional rights.  Again, that's not at all surprising.  Perhaps their waiting for one of us to pull their decisions together as part of some grand, over-arching theory!

I look forward to addressing the merits and implications of what Hobby Lobby did decide in the posts ahead, and to reading what others here have to say about the case.

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July 15, 2014
Hobby Lobby II
Posted by Usha Rodrigues

Welcome to what promises to be an engaging conversation about one of the biggest Supreme Court cases of the last term, Burwell v. Hobby Lobby (opinion here).  As I observed when it came out, the opinion has much language of interest to corporate scholars as well as con law types.  We look forward to some great discussion!

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July 02, 2014
The Supreme Court's View of the Corporation in Burwell v. Hobby Lobby
Posted by Usha Rodrigues

Home from teaching bar prep, I've just finished the Burwell v. Hobby Lobby opinion.  What does the opinion teach those highly stressed would-be attorneys about corporate law--or at least, the justices view of it?  Let's see, shall we?

Justice Alito's majority opinion:

Entity theory rejected--anyone for a nexus-of-humans theory?:

A corporation is simply a form of organization used by human beings to achieve desired ends. An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people. For example, extending Fourth Amendment protection to corporations protects the privacy interests of employees and others associated with the company. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people...Corporations, “separate and apart from” the human beings who own, run, and are employed by them, cannot do anything at all.

(UR: this sounds like my first day of BA speech, where I reassure the humanities majors that "business law is all about relationships, relationships between people and groups of people).

Shareholder wealth maximization vs. corporate social responsibility:

Some lower court judges have suggested that RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money.  This argument flies in the face of modern corporate law. “Each American jurisdiction today either expressly or by implication authorizes corporations to be formed under its general corporation act for any lawful purpose or business.” 1 J. Cox & T. Hazen, Treatise of the Law of Corporations §4:1, p. 224 (3d ed. 2010) (emphasis added); see 1A W. Fletcher,Cyclopedia of the Law of Corporations §102 (rev. ed. 2010).  While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well.

(UR: Kumbaya, my friends!  Shareholder wealth maximization does not rule with the majority, that's for sure.  Milton Friedman be damned, CSR is alive and well on the Supreme Court.

Tax is always with us:

For example, organizations with religious and charitable aims might organize as for-profit corporations because of the potential advantages of that corporate form, such as the freedom to participate in lobbying for legislation or campaigning for political candidates who promote their religious or charitable goals.

(UR: those pesky IRS 501(c)(3) restrictions! I always stress the importance of tax in BA.)

New corporate forms:

In fact, recognizing the inherent compatibility between establishing a for-profit corporation and pursuing nonprofit goals, States have increasingly adopted laws formally recognizing hybrid corporate forms. Over half of the States, for instance, now recognize the “benefit corporation,” a dual-purpose entity that seeks to achieve both a benefit for the public and a profit for its owners.

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

General incorporation statutes, internal affairs doctrine, and ultra vires:

In any event, the objectives that may properly be pursued by the companies in these cases are governed by the laws of the States in which they were incorporated—Pennsylvania and Oklahoma—and the laws of those States permit for-profit corporations to pursue “any lawful purpose” or “act,” including the pursuit of profit in conformity with the owners’ religious principles. 15 Pa. Cons. Stat. §1301 (2001) (“Corporations may be incorporated under this subpart for any lawful purpose or purposes”);Okla. Stat., Tit. 18, §§1002, 1005 (West 2012) (“[E]very corporation, whether profit or not for profit” may “be incorporated or organized . . . to conduct or promote any lawful business or purposes”); see also §1006(A)(3); Brief for State of Oklahoma as Amicus Curiae in No. 13–354.

Closely-held vs. public corps. 

These 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. HHS has not pointed to any example of a publicly traded corporation asserting RFRA rights, and numerous practical restraints would likely prevent that from occurring. For example, the idea that unrelated shareholders—including institutional investors with their own set ofstakeholders—would agree to run a corporation under the same religious beliefs seems improbable. In any event, we have no occasion in these cases to consider RFRA’s applicability to such companies. The companies in the cases before us are closely held corporations, each owned and controlled by members of a single family, and no one has disputed the sincerity of their religious beliefs.

(UR: what's a closely held corporation, you ask.  I"m so glad you did.  Here's Steve Bainbridge's excellent post on the subject, and Anne Tucker with a solid but shorter treatment.) 

(UR2: One limitation for closely-held is Section 12(g) of the Exchange Act--which requires companies to make public filings when they reach 2000 investors (I'm omitting a lot, but that's the gist).  Look for me for more on this topic soon).

The certificate of incorporation governs the corporation:

The owners of closely held corporations may—and sometimes do— disagree about the conduct of business. 1 Treatise of the Law of Corporations §14:11. And even if RFRA did not exist, the owners of a company might well have a dispute relating to religion. For example, some might want a company’s stores to remain open on the Sabbath in order to make more money, and others might want the stores to close for religious reasons. State corporate law provides a ready means for resolving any conflicts by, for example, dictating how a corporation can establish its governing structure. See, e.g., ibid; id., §3:2; Del. Code Ann., Tit. 8, §351 (2011) (providing that certificate of incorporation may provide how “the business of the corporation shall be managed”). Courts will turn to that structure and the underlying state law in resolving disputes.

(UR: Alito is dead right about this--if you want to change the default rules, don't settle for a puny bylaw--get it in the charter).

Now we move to Justice Ginsburg's dissent.  She doesn't talk about the corporate form or corporate law as much--except to distinguish nonprofits from for-profits (if only she'd cited me!). I'll give one highlight:

Limited liability:

By incorporating a business ,however, an individual separates herself from the entity and escapes personal responsibility for the entity’s obligations. One might ask why the separation should hold only when it serves the interest of those who control the corporation.

I also note that while the conservative majority moves to embrace progressive CSR-style rhetoric, Justice Ginsburg resists the counter-move that for-profit corporations exist to maximize profit or shareholder wealth. 


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March 29, 2014
Concluding our Hobby Lobby Symposium
Posted by Gordon Smith

Many thanks to all of those who participated in our symposium on Sebelius v. Hobby Lobby Stores, Inc. (and its companion cases). You can find all of the posts assembled in one place.

Some of our readers have contacted me with praise for the contributors, not merely for their insights, but also for their professionalism. We look forward to more such interactions on the Glom.

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Persons, Burdens, and Interests -- A Quick and Dirty Response to Jayne
Posted by Nate Oman

In her last post my colleague Jayne Barnard asks some great questions.  Let me take a stab at some answers.  Jayne writes:

[I]s there a difference between businesses like these where religion is at the core of what they do, and other businesses where religion has little if anything to do with the company's products and services?  Must the Court rule that any corporation with 51% religious owners can claim that it is engaged in religious exercise?   Won't that lead to even more mischief?

Many of those opposed to Hobby Lobby's claim -- including the Obama Administration -- have argued that because Hobby Lobby is a for-profit corporation it cannot be a "person" for purposes of RFRA.  As a matter of statutory interpretation, I find this claim implausible.  I also think that it's a misguided way of dealing with the concerns that one might have about Hobby Lobby's claims.

At the end of the day, I suspect that opposition to Hobby Lobby is less nuanced than much of this debate suggests.  Those who are skeptical of their suit think that the ACA contraception mandate is really important, and that letting a bunch of religious zealots avoid their obligations under the ACA will hurt women and that would be really bad.  This argument has nothing to do with the definition of "person" under RFRA.  Rather, it amounts to the claim that in the ACA the government is pursuing a compelling interest.  Furthermore, dealing with this concern -- compelling government interests -- through the definition of "person" is probably not possible.  You'd need to come up with a defintion of "person" such that only persons asserting religious freedom claims that would never conflict with a compelling government interest would be covered.  I suspect that it's impossible to come up with such a definition.  (Perhaps a rule that only moderate Episcopalians or conservative Unitarians are "persons" under RFRA?)

Alternatively, I think that critics of Hobby Lobby just don't think that their religious exercise is really being burdened.  This isn't a church!  It's a for profit business!  Notice that again in this intuition we are trying to make the definition of "person" do work that is already being done elsewhere in the statute.  To make out a RFRA claim you have to show that there is a "substantial burden" on religious exercise.  Again, one could imagine drafting a definition of person such that the only folks that would qualify would be folks whose religion would be substantially burdened by challenged regulation.  Again, I doubt that it's possible to draft a definition of "person" that would do this well.  Especially if the same definition has to weed out cases with compelling government interests.  (Maybe we say that "person" includes only ultra Orthodox Jews whose lives are pervasively structured by detailed religious rules but can't include lapsed Methodists?)

So my answer to Jayne is, "Yes, the Court must rule that any for-profit corporation can claim to exercise religion."  In other words, yes any for-profit corporation is a "person" for purposes of RFRA.  The fact that any for-profit corporation can now claim to be exercising religion does not mean that it in fact is exercising religion.  If General Electric suddenly claims that it has religious objections to the securities laws that simply isn't the same thing as a Kosher butcher claiming religious objections to health codes that cannot be squared with kashrut.  They are both "persons" under RFRA.  One, I take it, has a good claim that their religious exercise is substantially burdened and one does not.

Creating a very broad definition of person means that you are going to have to weed out pretextual religious claims from good faith claims, substantial burdens from de minimis burdens, and compelling government interests from non-compelling government interests.  But we already have to do all of these things under RFRA when it comes to natural persons.  Courts reject RFRA claims that are pretextual or challenge law placing only de minimis burdens.  At times they find that there is a compelling government interest.  They do this without manipulating the definition of "person" to avoid the issue.

I understand if you think that the ACA mandate fufills a compelling government interest.  I get it if you don't think it substantially burdens Hobby Lobby's exercise of religion.  (I have my own doubts on that point.)  I don't think, however, that has anything to do with the definition of persons under RFRA.

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March 27, 2014
The Supreme Court and Corporate Purpose
Posted by Lyman Johnson

The Supreme Court's ruling in the Hobby Lobby/Conestoga Wood Specialties cases could have a profound impact on the perennial, but critically important, debate about corporate purpose in a democratic society. This is a matter my colleague David Millon and I are now addressing in an article, but here I offer a few thoughts.

The two corporations in these cases expressly have purposes that are religious even as they also seek, quite successfully, to make profits. As noted in my Monday post, the PA corporate statute is remarkable in its breadth of permitted purposes. But as Millon and I have argued since the mid-1980s--along with other long-timers like Professors Stout, Greenfield, Bratton, Dallas, O'Connor, Mitchell, and younger scholars like Professors Bruner and Bodie and others--corporate profit or shareholder wealth maximization is not legally mandated under any state law, with a few(ultimately minor) caveats for Delaware.

If the Supreme Court holds that these two corporations have a free exercise right qua corporations--whatever the ultimate outcome on the merits--hasn't the Court "blessed"(I couldn't resist) their non-profit maximizing purpose? Granted, the Court was not asked per se to rule on whether these two corporations could do what they are doing as a matter of the state law of corporate purpose. [ I think they clearly can, however, and that is why I completely disagree with Mark Underberg's March 4 posting on the Harvard site that raises fiduciary duty concerns that are nonexistent given the corporation's broad purpose]. But that certainly is implicit in the Government's whole case: these are money-making profit-maximizers, not "religious." I think a pro-company ruling on the standing issue will, effectively, vindicate the non-maximizing corporate purpose position many of us have long advocated.

Once a diversity of corporate purposes is seen to be legally permitted--again, I believe this already is the case--then corprate founders and directors can select a particular array of purposes to pursue. Some will choose to advance enlightened or benign environmental or other socially responsible goals, along with profits. Others will seek to couple profit making with generous employment practices or charitable endeavors.[Hobby Lobby, by the way, gives one-third of its profits to charitable and religious causes]. And others yet will bring religious convictions into their thinking about business goals. This means at least two things.

First, freed of a (real or imagined) mandated shareholder primacy or profit primacy obligation, corporations in a democracy will pursue an array of different goals. What is wrong with pluralism? Would some seek to replace the supposed stricture of profit or shareholder primacy with a newly-enshrined narrow set of "correct" corporate purposes? Those of us seeking to end wrong thinking on corporate purpose should not, ironically, fight against it because some don't like a particular purpose, i.e., one shaped by religious belief. As a related example, think here of free speech as a matter of principle, however repugnant the words used by some, yet we support free speech for all. Our ideological commitments should not impede our impartial scholarship.

Second, some(I think most) reform on the corporate purpose front will come through norm shifting and volunteerism, not government mandate. I suspect many progressive corporate law scholars favored the Government position because of a well-intentioned desire to help employees, a central plank in many corporate reform agendas. But ironically, I believe, that position actually hobbles the freedom of corporations, through their boards of directors, to combine profit making with one or more other properly chosen goals, be they religious or environmental or otherwise. Sure, some corporate reformers favor government mandates, in corporate law as in healthcare. But many, like me, prefer the long(frustrating) slog of reform from within, and this for one primary reason from which I have not wavered in 30 years.

That reason is that I simply do not believe that shareholder wealth maximization or profit maximization is conguent with widely shared social norms. Profit making certainly is, profit pursuit is, and private enterprise is; but not the belief that the singular goal of such activity is pursuit of some maximand for a single constituency. I simply do not believe that the vast majority of Americans(or other global citizens) believe that their individual role in American working life is to maximize profits--how spiritually deadening and depressing is the thought. Nor do I think most Americans believe that the great institutions in our collective life--including the business corporation--should have as their very institutional raison d'etre the maximizing of a share price or other narrow commitment. Some institutional pursuit of the common good(narrowly or widely conceived) sustains most healthy institutions. I think the founders and directors of Hobby Lobby and Conestoga Wood Specialties, whether you agree with them or not, are resisting just this shrunken vision of life in the American business world today. A win for them will vindicate a larger quest that many of us favor, though by different paths and for different ends.

There are many cross currents in corporate law today besides that pushed so hard by law and econ folks for so long. These have the potential through our young scholarly colleagues to reopen our field to new breakthroughs that can move corporate law into a more central role in our collective life and make it, frankly, more important. One of the ironies of my own thinking on these larger issues in corporate law is that I disagree in these two cases with so many people with whom I typically agree about corporate purpose in other contexts. And that while I agree with my good friend Stephen Bainbridge on these two cases, I disagree with him on corporate purpose. Who said con law has all the fun and that corporate law had to be dull...


Lyman Johnson

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March 26, 2014
Four Questions to Ponder
Posted by Jayne Barnard

Well, the punditocracy has concluded (and I agree) that a majority of the Court is likely to find that a for-profit corporation may be considered a "person exercising religion" under RFRA.  If that is so, and putting aside all the other elements of the RFRA analysis, it seems to me a few questions are still in the air.

First, Chief Justice Roberts indicates that he is inclined to limit his ruling to "a Chapter S corporation [sic] that is closely-held."   Is there some principled basis for concluding that an S corporation is a person capable of exercising religion while a C corporation is not? And, putting aside the tax code, upon what basis will the Court decide which corporations are protected by RFRA and which are not?  Shouldn't the Court offer some kind of guidance on this issue?  Is it enough to say, as Chief Justice Roberts does, that any corporation in which 51% of the shareholders agree to some sort of religious belief may be a "person exercising religion" under RFRA?  Won't that lead to all kinds of mischief?  Should the Court care?

Second, Justice Alito expressed concern about the plight of Kosher and halal slaughterhouses which might find themselves facing regulation requiring humane slaughter.  Shouldn't these businesses, even if incorporated, be able to assert religious claims under RFRA?  Few would say no.  But, is there a difference between businesses like these where religion is at the core of what they do, and other businesses where religion has little if anything to do with the company's products and services?  Must the Court rule that any corporation with 51% religious owners can claim that it is engaged in religious exercise?   Won't that lead to even more mischief?  Should the Court care?

Third, assuming RFRA standing, is it not fair to predict, as Justice Kagan suggested, that corporations will now feel free to assert religious objections to employment discrimination laws, minimum wage laws, the Family and Medical Leave Act, child labor laws and more?  Is there a principled basis upon which the Court might limit its holding to religious objections to health care mandates?  Or will the floodgates open?   Should the Court care?

Finally, (irony alert) Paul Clement argued that the "least restrictive means" of implementing the contraceptive mandate would be for the government to pay for employees' contraceptive care.   Where was Clement when advocates for a single-payer health care system could have used his help?

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