‘God created man” (Gn 1:27) and, according to the Declaration of Independence, endowed him with unalienable rights. But men and women created corporations and the laws that protect them. On March 25, 2014, the Supreme Court heard arguments about Hobby Lobby and Conestoga Wood, consolidated cases that arose out of challenges to Health and Human Services regulations issued to implement the Patient Protection and Affordable Care Act. (UPDATE: See my analysis of the oral arguments before the court below.) The lawsuits were brought by for-profit corporations and their pro-life owners, who object to the requirement that they provide their employees with insurance coverage for certain contraceptive methods. These cases are of great practical importance, but they will be decided upon legal abstractions concerning the relationship between a corporate person and its human owners and who, or what, is capable of exercising religion.
The Hobby Lobby case originated in Oklahoma and comes to the Supreme Court on appeal following a ruling from a U.S. Court of Appeals for the 10th Circuit that for-profit corporations are persons entitled to religious freedom rights. The Conestoga Wood case originated in Pennsylvania and is on appeal from a Third Circuit decision that came to the opposite conclusion: “for-profit, secular corporations cannot engage in religious exercise.” The U.S. Supreme Court, the final arbiter of the law, will decide which of these two courts is correct or if an alternative theory will prevail. The court may issue a monumental constitutional ruling, as it did in Citizens United, the 2010 case that granted extensive First Amendment protection to corporate political speech, or it may skirt the constitutional issue and base its decision on narrower statutory grounds. Similarly, the court may issue a decision applicable only to for-profit corporations or make a broader ruling that will affect religious organizations and nonprofit organizations as well.
The Hobby Lobby and Conestoga Wood corporations claim they have free exercise protection under both the First Amendment and the federal Religious Freedom Restoration Act of 1993. Alternatively, they assert the right to bring First Amendment and the R.F.R.A. free exercise claims on behalf of their human owners.
In the United States, organizations of various types, including churches, religious communities and nonprofit and for-profit corporations, are formed and recognized under state law. Recognition of these organizations as entities with existence separate from their members or owners facilitates business transactions. It would be extremely difficult, for example, for a worship community to operate unless it is considered a single entity empowered to buy and sell land, contract for services and purchase supplies. Most states provide for a range of organizational structures with varying degrees of separation between them and their individual owners. In all cases, however, individuals who form corporations consent to comply with additional government regulation, like shareholder meeting requirements, and forfeit some control over corporate assets in exchange for insulation from corporate liabilities. Corporate funds may not be used for the personal needs of shareholders, nor may shareholder assets be usurped to pay corporate expenses. Failure to maintain the distinction between a corporation and its owners may result in a “piercing of the corporate veil” and effective loss of corporate identity, which usually results in a finding of shareholder responsibility for the actions of the corporation. Hobby Lobby and Conestoga Wood are asking, in effect, for a reverse piercing of the corporate veil; a finding of corporate responsibility for the benefit of the individual owners.
Distinctions between nonprofit, for-profit and benefit corporations may be relevant to determine whether a reverse piercing of the corporate veil is appropriate. Nonprofit status is given to organizations that serve the social welfare and accept heightened government regulation of their finances. In return for their commitment to these limitations, nonprofits are given tax-exempt status and free-exercise rights commensurate with their stated social and religious purposes. For-profit corporations, on the other hand, may engage in philanthropic activities, but they have no government-imposed obligation to do so and may be sued by their shareholders if they overdo charitable donations or make decisions that substantially reduce profits. The argument against granting free exercise rights to for-profit corporations is that religiously motivated social policies do not foster the primary corporate purpose and therefore should not be recognized by the courts. Shareholders simply may not use for-profit corporations for their own purposes, whether financial or religious. On the other hand, Hobby Lobby and Conestoga Wood assert that the religiously oriented policies of their family-run businesses are integral to their existence. They allege, in essence, that their businesses are similar to benefit corporations or low-profit, limited liability companies, which are hybrid entities dedicated to both profit-making and specified social causes. These alternative corporate forms have been in existence for only a few years, so it cannot be determined how the Supreme Court will treat them. Nevertheless, the court may decide these cases based on the closely held, family-run nature of the businesses.
Corporations have been considered persons under the law since 1886, but their personhood is not identical to that of human persons. Each time a corporation alleges a constitutional right, the Supreme Court must analyze whether the corporation is entitled to that protection. Hobby Lobby and Conestoga Wood rely on Citizens United, which refused to limit the free speech rights of for-profit corporations, to argue that they, like religious organizations and nonprofit corporations, have free exercise rights. The 10th Circuit, in the Hobby Lobby case, accepted this argument and held that the R.F.R.A., a federal statute that protects “a person’s exercise of religion,” prevents the government from enforcing regulations the corporation deems offensive to its religious values. The court applied the ordinary legal meaning of the word “person,” which includes corporations, “unless the context indicates otherwise.”
The Third Circuit rejected this argument when it ruled against Conestoga Wood; it held the word “person,” when used in the context of religious exercise, refers to human persons or nonprofit organizations formed for the purpose of fostering religious beliefs and principles. The Third Circuit distinguished the corporate need for free speech from the free exercise of religion. Corporations cannot function without speech (in the form of promotional materials, for example), and the Supreme Court has therefore always protected corporate speech. Corporations have no objectively recognizable need for religion, however, and the Supreme Court has never recognized corporate free exercise rights. The First Amendment guarantees religious freedom to individual believers and the faith-based associations those individuals form, but the Third Circuit found nothing in Supreme Court jurisprudence to support the free exercise claims of for-profit, secularly purposed corporations.
The Conestoga Wood decision also rejected an alternative theory that free exercise rights could “pass through” from individuals to the corporations they own; that corporations could, in effect, sue to defend the religious liberties of their owners. This theory was first adopted by the Ninth Circuit, but it was rejected by the Third Circuit because it contradicts the normal rule that the corporate veil is pierced and corporations lose their separate identity whenever they serve as the alter egos of their owners. In another case challenging the mandate, the D.C. Circuit used a slightly different rationale and held that the free exercise rights of individual owners of family run or closely held corporations extend to and, thus, are burdened by offensive laws imposed on their corporations. This is a creative theory, but it may run counter to the traditional “shareholder standing” rule, which provides that shareholders are not separately harmed by injury to their corporations.
The Sixth Circuit rejected the personal burden and pass-through theories when it refused to hear the free exercise claims of another for-profit, family-run corporation that challenged the mandate, but the Seventh Circuit held that both corporations and their owners may challenge the mandate. This disagreement among the circuit courts calls out for a unifying Supreme Court decision. If the Supreme Court determines either that for-profit corporations have free exercise rights, or that individual shareholders are burdened by the mandate, then it must determine whether the mandate violates those rights.
Free Exercise Rights Tests
The First Amendment states, “Congress shall make no law...prohibiting the free exercise [of religion],” but, despite the plain meaning of the words, this prohibition is not absolute. Beginning in 1879, when the Supreme Court upheld an anti-polygamy law (Reynolds v. United States), some restrictions on the free exercise of religion have been permitted. The standard for determining the permissibility of these restrictions, however, has been controversial. In Sherbert v. Verner (1963), the Supreme Court reviewed the denial of unemployment benefits to a worker who refused job opportunities that would require her to work on the Sabbath. The denial was declared unconstitutional because it infringed on a substantial right and was not narrowly tailored to achieve a compelling state interest. The Supreme Court used this same “strict scrutiny” balancing test in Wisconsin v. Yoder (1972), when it determined Amish parents could not be required to send their children to high school.
In Employment Division v. Smith (1990), however, the court specifically rejected the standard of review articulated in Sherbert v. Verner and used instead a test that requires a “valid,” rather than “compelling,” government interest and “neutral,” rather than “narrowly tailored” application. Applying this test, the court upheld a state law that denied unemployment insurance benefits to members of the Native American Church who had been dismissed from their jobs at a drug rehabilitation center for smoking peyote, a controlled substance. Writing for the majority, Justice Antonin Scalia stated, “Subsequent decisions have consistently held that the right of free exercise does not relieve an individual of the obligation to comply with a ‘valid and neutral law of general applicability on the ground that the law proscribes (or prescribes) conduct that his religion prescribes (or proscribes).’”
For advocates of religious freedom, Employment Division v. Smith showed the correctness of the adage of Oliver Wendell Holmes Jr., “Great cases, like hard cases, make bad law.” The intrinsic logic of the facts, that drug rehabilitation centers should have the ability to dismiss employees who themselves use drugs, may have compelled the Supreme Court to make bad law. Religious freedom proponents were so distressed by the diminution of religious liberty protections enunciated in Employment Division v. Smith that they lobbied Congress to pass the Religious Freedom Restoration Act to reinstate the compelling interest test. The act states: “Government may substantially burden a person’s exercise of religion only if it demonstrates that application of the burden to the person 1) is in furtherance of a compelling governmental interest; and 2) is the least restrictive means of furthering that compelling governmental interest.” Congress does not have the power to force the Supreme Court to use this standard when analyzing First Amendment claims, but the R.F.R.A. does provide additional protection for litigants, like those in Hobby Lobby and Conestoga Wood, who challenge federal laws that impinge on the exercise of religion.
The 10th Circuit based its decision in Hobby Lobby on the R.F.R.A. and found the mandate did not meet the required strict scrutiny (compelling interest, narrowly tailored) standard. The federal government’s interest in promoting public health and gender equality were determined to be less than compelling as promoted by the mandate because of the many permitted exceptions, including those for religious employers, which dilute the mandate’s efficacy. According to the court, if the government’s interest in requiring employers to provide this coverage is so essential to the public good, it would have demanded near universal compliance.
The Third Circuit in Conestoga Wood never reached the substantive merits of the free exercise claims and so applied neither the strict scrutiny test of the R.F.R.A. nor the much less restrictive “valid and neutral” First Amendment test of Employment Division v. Smith. The Supreme Court, however, has been presented with both the R.F.R.A. and First Amendment free exercise claims and will have the opportunity to re-examine the appropriate standard of review. Of the nine justices who decided Employment Division v. Smith, only Justice Scalia, who wrote the opinion, and Justice Anthony M. Kennedy, who joined him, remain on the court. It is difficult to predict how the seven new justices will rule, but it is quite possible they will render a decision that will have a deep and lasting impact on the role of religion in secular society.
It is always difficult to tell from questions asked at oral argument how the court will decide, but the tenor of the questioning indicates the court might issue a narrow ruling based on RFRA rather than the First Amendment that is limited to closely-held, family-run businesses. The first question asked by Justice Kennedy, who often is the swing vote in 5-4 decisions, was whether the case could be decided without reaching the constitutional questions. Later in the questioning, Chief Justice Roberts indicated they could “await another case” to decide whether “large publicly-traded corporations” may assert religious rights. It also is possible the court will avoid the free exercise issue altogether and vacate the HHS regulations because they exceed the authority granted by Congress. As Justice Kennedy stated when questioning the government’s attorney, “what kind of constitutional structure do we have if the Congress can give an agency the power to grant or not grant a religious exemption based on what the agency determined? [W]hen we have a First