Saturday, July 12, 2014

Yet another person weighs in on Hobby Lobby

Since I suspect there is something of an obligation for all corporate law bloggers to weigh in on Hobby Lobby, I offer my thoughts.  I admit to some trepidation posting them because (and I blush to confess it) I haven’t been as immersed in the case as most other corporate professors have, so I feel like a bit of an outsider to the debate.  So, take these thoughts as coming from someone whose knowledge of the case comes chiefly from, well, the Supreme Court’s opinion.

[More under the cut]

From a corporate governance perspective, I find it difficult even to read this opinion – the internal contradictions and disregard of ordinary corporate concepts is so pervasive that it’s a bit like fingernails on a blackboard.  Or like, well, this .gif:



For example, Justice Alito first says that the reason Congress included for-profit corporations in its definition of “persons” in RFRA is to protect the people who make up the corporation.  Which people?  On this point, he is very specific:

[I]t is important to keep in mind that the purpose of this [the corporate] fiction is to provide protection for human beings. A corporation is simply a form of organization used by human beings to achieve desired ends. An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people. For example, extending Fourth Amendment protection to corporations protects the privacy interests of employees and others associated with the company.  Protecting corporations from government seizure of their property without just compensation protects all those who have a stake in the corporations’ financial well-being.

That’s actually a fairly mainstream conception of the corporation.  But then he immediately switches gears and says:

And protecting the free-exercise rights of corporations like Hobby Lobby, Conestoga, and Mardel protects the religious liberty of the humans who own and control those companies. (emphasis added)

So, Justice Alito immediately went from a conception of corporate rights that protects, essentially, all persons associated with the corporation, to a conception that protects only those who “own and control” the corporation.  (I’ll get to the issue of the separation of ownership and control in a moment.)

Why?  Why is RFRA concerned only with ownership and control, while all the other corporate rights at least include employees?  No explanation is forthcoming.

I read this paragraph and I have a number of immediate reactions.  First, I can’t help but be reminded that in the wake of Citizens United, there was an awful lot of negative publicity basically arguing that the Supreme Court had improperly elevated corporations to the status of people.  Mitt Romney’s quote, “Corporations are people, my friend,” became a rallying cry for Democrats.  So this paragraph strikes me as a demonstration that the Supreme Court was aware of that criticism – and it stung.   And Justice Alito sought to legitimize the Hobby Lobby decision by backtracking and explaining the basis for granting rights to corporations. 

I also think this paragraph hearkens back to the Court’s Citizens United decision where the free speech rights of “corporations” were discussed with little explanation of which natural persons, precisely, were being protected.  Many of the examples offered were clearly cases where the speech of employees was at issue – media companies, for example, or corporate lobbyists.  If the New York Times’s speech is not protected, that oppression is felt by its editors and reporters, not its shareholders.  And it is difficult to claim that passive shareholders in, say, Pepsi or General Electric have any particular free speech interest in whether those companies are able to lobby members of Congress.  So in addition to the precedents discussed in his opinion, after Citizens United, Justice Alito couldn’t neglect employees in his description of the corporation in Hobby Lobby.

Yet immediately after this explanation, he reads employees out of the equation.  This was necessary to reach the result – after all, if Justice Alito admitted that employees, as much as owners and controllers, make up the corporate entity, he would have been forced to recognize that many of these employees do not share the religious beliefs of the owners and controllers, and the religious identity of the corporation as a whole would not have been so clear.

Joan takes this as a type of judicial restraint – but I take it as incoherence and contradiction. 

Justice Alito then repeatedly collapses the distinction between the owners and controllers on the one hand, and the corporation on the other, when he describes the effects of ACA.  For example, he states that “By requiring the Hahns and Greens and their companies to arrange for such coverage, the HHS mandate demands that they engage in conduct that seriously violates their religious beliefs.”  That’s a very vague “they,” which confuses the obligations imposed on the companies, and the obligations imposed on the Hahns and the Greens specifically (which are never specified; and the opinion provides, vaguely, that the Greens manage Hobby Lobby through a trust).  He further writes, “If the Hahns and Greens and their companies do not yield to this demand, the economic consequences will be severe.”  They may be severe, but the consequences will be imposed on the companies – not the Hahns and the Greens. 

Then we come back to the separation of ownership and control.  Read very narrowly – as some have argued – the decision is about close corporations where ownership and control are unified.  After all, Justice Alito states that RFRA is meant to protect those who “own and control” corporations – which could be read to mean both own and control, something that would only occur for corporations with a very tight circle of ownership and management.

But the rest of the opinion does not really bear out that view.  For example, he states that RFRA likely does not concern publicly traded corporations not because they are not “persons” under the statute, but because it is simply unlikely that different shareholder constituencies would agree on a common set of religious principles to employ when running a company.

(Maybe it is implausible, but one could certainly imagine a publicly-traded benefit corporation declaring such a purpose, in which case, passive investors might be said to have tacitly agreed.)

This portion of the opinion suggests, then, that the issue is not close versus not-close, but agreement among shareholders.

But no!  Because later still, Justice Alito claims that even where there is shareholder disagreement, a corporation may select a religious identity based on state law principles for conflict resolution among shareholders.

Which begs the question – which state law principles?  State law has no framework for assessing competing religious claims by shareholders.  State law resolves shareholder disputes via director elections, and the imposition of director fiduciary duties.  And director fiduciary duties are to the corporation as a whole, not the idiosyncratic preferences of the particular constituency that elected them – even when a controlling shareholder dominates the vote.  So the question becomes circular – to determine the religious identity of a corporation where shareholders disagree, we must look to the outcome of a shareholder vote – which in turn will require directors to look to the corporation as a whole.

Justice Alito also invokes cases like Gallagher v. Crown Kosher Super Market, Inc., 366 U.S. 617 (1961), involving a Sunday-closing law, as an example of how corporations can have a religious identity, and why they should therefore have standing to challenge laws as inhibiting their exercise of religion.  But suppose we do what Justice Alito does not, and we define the corporate religious identity to include employees as well as owners, and even the broader community of natural persons who have “a stake in the corporations’ financial well-being.”  Then it is easy to see why the kosher supermarket in Gallagher had a religious identity:  the law in question necessarily impacted not just the corporation, but all of the natural persons with a stake in its well-being – indeed, the plaintiffs did not just include the corporation itself, but its officers (who were also its owners and directors), its customers, and its independent contractors (rabbis).  Gallagher fits neatly within Justice Alito's original explanation of why we grant constitutional protections to corporations - there was unity of interest not only among multiple corporate constituencies, but the corporate purpose itself was tied to that interest.  And the legal analysis in that case involved an evaluation of how the law in question impacted those specific natural persons, with respect to what they were required to do/prohibited from doing.  In such a case, it seems to me that corporate standing might be analogized to situations where we permit associational standing – the corporation itself was sufficiently intertwined with the interests of natural persons, and the corporate purpose sufficiently related to those interests, to allow it to stand in for them.  But the focus would still remain on the interests of natural persons.

This is, of course, not true of ACA and Hobby Lobby, where there was no consideration for employees or anyone else except “owners and controllers” (with the latter's relationship to the former left unclear).  There was no discussion of how the law placed specific burdens on natural persons.  And - with the possible exception of Mardel, a chain of Christian bookstores - the religious right being asserted bore little relationship to the businesses themselves.

Upshot is, I come out of this decision very confused about how the Supreme Court believes a corporation's religious exercise is to be determined.

Ann Lipton | Permalink


Ann, I agree with you that the opinion is doctrinally confusing or confused. I find it very difficult to read from the standpoint of corporate law. The contradictions and questions are, as you suggest, puzzling. I think this is why many folks see the opinion as an exercise in justified goal-orientation. Thanks for collecting this lengthy string of corporate governance-related points from the decision. It’s a very useful aggregation.

BTW, you may be right that I am being too charitable in chocking the Court’s narrowing of corporate constituencies up to judicial restraint. Since the plaintiffs were owners, however, the Court clearly did not have to go beyond dealing with the rights of owners in the opinion. That’s really all I was saying. But your overall points about the coherence of the Court’s reasoning and its overall grasp of corporate governance (and the distinction between the legal entity and the persons that constitute it) are well taken regardless.

Posted by: joanheminway | Jul 13, 2014 6:37:39 AM

Glad you liked the post! True, only the owners/controllers were before the Court - but I do find it striking that in every other example where the Court recognized corporate rights, the Court identified corporate interests by looking to a much broader circle of persons than simply owners and controllers - until RFRA, where it changed its mode of analysis mid paragraph, seemingly without even recognizing it had done so. I'm not an absolutist on any particular theory of the corporation - I mean, I'm fine with the idea that conceptions of the corporation vary depending on the reasons for asking the question. But there still should be some explanation. It can't be that if, say, employees sued because Hobby Lobby failed to provide contraceptive coverage, we'd have gotten a different result.

Posted by: Ann Lipton | Jul 13, 2014 6:49:22 AM

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