Hobby Lobby and the Future of Corporations

Hobby Lobby Decision May Have Large Impacts on Corporations

Much has been said about the Supreme Court’s decision in Burwell v. Hobby Lobby, especially as it relates to women’s rights. However, this is a business law blog, and there are some especially important impacts on businesses from the decision. Unfortunately, the case raises far more questions that it hopes to answer, and the majority provided almost no instructions for lower courts. The end result will be increased litigation by corporations seeking to avoid regulation.

First, an overview: In Hobby Lobby, the Supreme Court majority, written by Justice Alito, essentially held that corporations are persons that can claim religious exemptions to federal laws. It’s important to note that this was not decided on First Amendment grounds. Rather, it was based on the Religious Freedom Restoration Act (RFRA), which was a law passed by Congress in 1993. The RFRA gives “persons” the right to demand a religious exemption to certain federal laws, and requires the government to show that the law serves a government interest and is using the least restrictive means in order to overcome the religious exemption. The law has been on the books for quite some time and has been upheld on Constitutional grounds.

In coming to the decision, the Court held that the RFRA applies to closely held corporations, so publically traded corporations are not included. However, Justice Ginsberg pointed out in her dissent that the majority’s reasoning applies just the same to large corporations, so the decision would logically extend to them as well.

There are two potential effects of the case on corporations. First, it may open the door to claiming exemptions to regulations, especially regarding healthcare, that go counter to their shareholders’ religious beliefs. The second is that the concept of corporate personhood has been altered once again, raising the question of whether a corporate person is distinct from the shareholder behind it.

Religious Exemptions from Healthcare Requirements

For obvious reasons, healthcare is probably the most immediate question. Justice Ginsberg’s dissent raised a number of hypothetical, yet very real, situations that could be effected by the Court’s decision:

“Would the exemption the Court holds RFRA demands for employers with religiously grounded objections to the use of certain contraceptives extend to employers with religiously grounded objections to blood transfusions (Jehovah’s Witnesses); antidepressants (Scientologists); medications derived from pigs, including anesthesia, intravenous fluids, and pills coated with gelatin (certain Muslims, Jews, and Hindus); and vaccinations (Christian Scientists, among others)?”

Taken to an extreme, some Christian Scientists and Pentecostals believe only in faith healing and reject modern medicine completely. Could such a corporation deny all health insurance to its employees? Justice Alito suggests that would be bad for business, but doesn’t claim it would be impermissible.

Despite Justice Alito’s assurances that such questions will not come up, it seems very clear that some corporations will suddenly have strong religious convictions where saving money is at stake.

Possible Permitted Discrimination Under Hobby Lobby

Justice Alito tried to limit the decision so that corporations could not opt out of any law they felt was incompatible with their religion. He was especially clear that religious exemptions would not be available for any question of racial discrimination. However, that leaves the very real possibility of other types of illegal discrimination that are common religious exemptions.

LGBT discrimination was at the very heart of a recent debate in Arizona over their version of the RFRA. After supporting it, but receiving significant backlash, Gov. Brewer vetoed a proposed law that would allow companies to choose who they work with based on religion. It was made clear that the point of the law was to specifically permit businesses to discriminate in hiring and serving customers based on sexual orientation. While it failed in Arizona, it was quickly passed in Mississippi. The parallels between these bills and the Hobby Lobby decision are clear, and the possibility for a similar result exists.

Religious non-profits and churches, which already enjoy a number of religious exemptions, may be helpful in determining what could potentially qualify as an exemption under Hobby Lobby. Religious non-profits have used various religious exemptions to discriminate against LGBT employees, unwed pregnant mothers, and women who used in vitro fertilization. The question Hobby Lobby raises is whether corporations can now do the same.

Sometimes an extreme example helps clarify the issues. Churches are currently exempt from certain provisions the Civil Rights Act of 1964, which allow them to require all their employees to be part of their church. This makes sense for churches, but can it now be applied to corporations? Can the corporation demand employees join their church or face termination? Or a less extreme hypothetical – can this be used as a defense in a religious discrimination case?

Is It Even a Corporation Any More?

Under the law, a corporation is considered a new person. This is a “legal fiction” that was created to allow large groups of people to form companies that would then protect the shareholders from liability. In other words, shareholders cannot be forced to pay the corporation’s debts.

This is a very good system, and incredibly necessary in today’s economy. However, the legal fiction only exists so long as the corporation and the shareholders are distinct. The Hobby Lobby decision is part of a string of cases conferring individual rights on corporations, thus separating the distinction between the corporation and the shareholders.

The issue in Hobby Lobby was framed as a religious freedoms problem. If the law requires a corporation to do something the owners believe to be incompatible with their religion, then the owners’ freedoms are infringed. Justice Alito explained:

“[I]t is important to keep in mind that the purpose of this 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.” (emphasis added)

This was similar to the argument in Citizens United, allowing corporations to spend money on political campaigns based on the shareholders’ rights of speech. The problem is that such a simplistic definition leaves the question of liability wide open. If Constitutional rights of the shareholders can pierce the corporate veil up to the corporation, then it stands to reason the liabilities of the corporation could pierce the corporate veil down to the shareholders.

In Hobby Lobby, it was the corporation, not the owners, who was supplying healthcare. The Court brushed away that distinction, and treated the owners as the suppliers. If we read the law like Justice Alito, then are the owners similarly liable for healthcare? If Hobby Lobby impermissibly denies other healthcare rights, will the owners be held personally responsible?

This is a slippery slope that could eventually hurt the concept of the corporate person. That would be harmful to the economy and society in many ways.

What’s Next?

Undoubtedly, there will be a string of cases across the country of corporations trying to claim religious exemptions to any number of federal regulations. Healthcare and discrimination will just be the start. Basically, any regulation that could conceivably be a religious impediment (and would save the company money), will be under attack.

It’s important to recognize that this was not a Constitutional decision. Since the RFRA is just a statute, Congress could simply change it or redefine “person.” Senate Democrats have already declared their intention to do just that, though it’s unlikely to ever pass the House.

Nonetheless, Hobby Lobby shows that the distinction between a corporation and its shareholder is growing blurrier every day. If rights can flow one way, then liabilities may be able to flow the other way. Such a result would be a disaster and destroy a bedrock of the American economy.