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Hobby Lobby Symposium: Hobby Lobby, “unconstitutional conditions,” and corporate law mistakes

Kent Greenfield is a Professor of Law at Boston College Law School.

Yes, this case is a case about statutory definitions, but it reads as a case about unconstitutional conditions. And because the Court made three fundamental corporate law errors, it got the conditions question wrong.

Justice Alito defines the question in Burwell v. Hobby Lobby as whether the shareholders of Hobby Lobby and Conestoga Wood can be put “to a difficult choice: either give up the right to seek judicial protection of their religious liberty or forgo the benefits, available to their competitors, of operating as corporations.” The Court says that putting the shareholders to this choice is a substantial burden on the shareholders’ rights of religious conscience.

Seen in this way, the Court’s opinion granting RFRA standing to for-profit corporations fits into the Roberts Court’s increasingly aggressive application of the unconstitutional conditions doctrine. Two years ago, Sebelius struck down the Medicaid expansion as an unconstitutionally coercive choice for states.  Last year, in Agency for International Development (“AID”) v. Alliance for Open Society Int’l Inc., the Court ruled against a requirement that recipients of government anti-AIDS grants adopt policies opposing prostitution.  Also last year, the Court said in Koontz v. St. Johns River Water Management District that a monetary exaction from a developer as a condition of receiving a building permit was subject to the takings clause. (The most notable counterexample is Rumsfeld v. FAIR, which upheld conditions on funding for universities that required law schools to allow discriminatory military recruiters on campus.  But that was in Roberts’s first Term, and is probably best seen as a military exceptionalism case.)

From the perspectives of evangelical Christians, Hobby Lobby is exactly about onerous conditions – about not having to give up one’s religious beliefs in order to make a living by way of the corporate form.  In their view, the contraceptive mandate is a requirement that they leave their religious rights at the corporation’s gate (to paraphrase Tinker v Des Moines School District).  From the perspective of those supporting the mandate, the condition was simply a straightforward implication of the use of the corporate form to do business.  In today’s opinion, the Court sides with the former view, that the business people should not be forced to give up their religious scruples to gain the benefits of the corporate form.

The difficulty, then, corresponds to the exact conundrum of all unconstitutional conditions cases.  On the one hand, the government routinely creates conditions in awarding benefits and rights, and government only works if such is possible.  But allowing any condition to trump rights would create a race to the bottom.  This is a doctrinal thicket, of course, but one way to bushwhack it (as Roberts did in Alliance last year) is to see some conditions as defining the scope of the government benefit (presumptively allowed) and those that seek to regulate behavior outside the scope of the government benefit or attenuated from the purpose of the grant (presumptively problematic).

But here is where corporate law assumptions should have led the Court to reach the opposite outcome in Hobby Lobby itself.  Whether choosing the corporate form is a burden on the rights of business people’s rights cannot be determined in a vacuum.  Rather, the best way to answer the question is whether the nature of the government benefit – the corporate form – is best seen as closely connected to the exercise of shareholders’ religious beliefs.

As a number of corporate law scholars and I argued in an amicus brief in the case, the very purpose of the corporate form is to separate the shareholders from the corporate entity.  A distinction between shareholders and the company lies at the very foundation of corporate law.  The condition that there be such a distinction is not an add-on; it goes to the definitional nature of the government benefit itself. Hobby Lobby’s presumption that shareholders can be seen as distinct from the company for purposes of, say, limited liability, but identified with the company for purposes of religious freedom changes the nature of the government benefit itself.

In other words, the Court has changed, definitionally, what it means to be a corporation under the state laws in question.

The existential condition of separateness is true even with closely held companies.  The largest such companies – Cargill, Koch Industries, Dell, Bechtel, and Aramark, to name just a handful – have tens of thousands of employees and billions of dollars of revenue.  (In 2008, Forbes reported that the 441 largest closely held companies employed more than 6 million people and enjoyed $1.8 trillion in revenue.) They are created under the same understanding of a wall existing between shareholders and the company.  They could indeed not exist otherwise – the potential liability to individual investors would simply be too great.

So in evaluating whether Congress intended the word “person” in RFRA to cover corporations, the most reasonable assumption is that the states creating such entities intended such separateness and that corporations should not carry the rights of their shareholders. To assume otherwise flies in the face of decades, indeed centuries, of corporate law assumptions.

The Court makes a second corporate law mistake.  In arguing that for-profit companies can have religious purposes, the Court makes hay from the fact that state incorporation statutes typically allow businesses to be chartered for any “lawful purpose or activity.”  The Court uses this corporate law truth to argue, as a descriptive matter, that some corporations in fact engage in behavior that is in conformity with the religious views of their shareholders.

But that’s not the question, of course. No one doubts that, as a matter of fact, a number of such corporations exist.  The question instead is whether such companies should be assumed to expect regulatory waivers for such religious behavior.

And to that question, the quoted language cuts the opposite way.  States create the corporate form and bestow its benefits on entities that agree to certain conditions.  And one such condition – core to the interests of the state – is that the entities act with “lawful” purposes.  That is, that they obey the law. But Hobby Lobby does not want to obey the law.  It wants to do the opposite – to disobey the law and not be held responsible for such disobedience.  From the perspective of states granting corporate charters, to allow companies to opt out of otherwise applicable laws endangers the level playing field that is necessary for businesses to engage in fair competition.  The existential and definitional assumption is that corporations will obey the law and not be claiming legal waivers unavailable to their competitors.

One way to think of this is to ask: could a state  properly create a business form that bestows the benefits of limited liability, unlimited lifespan, and legal separateness, among others, on condition that the resulting companies obey the law?  It strikes me that the answer is clearly yes, even if such a law would be burdensome if applied to the shareholders as individuals.

A third corporate law mistake is the Court’s assumption that its opinion can be limited to closely held companies. The Court admits as much as a matter of statutory construction, saying, “No known understanding of the term ‘person’ includes some but not all corporations.” The Court implies that the reason its opinion will be limited to close corporations is not definitional but practical.  Publicly traded companies will simply not have the shareholder unanimity necessary to adopt corporate statements of religious beliefs.

But I am unpersuaded.  Walmart, for example, is publicly traded. But a majority of its stock is owned by the Walton family, and they could impose their religious beliefs on the company with ease.  Nothing in the logic of today’s opinion would limit the company’s ability to claim a Hobby Lobby waiver from, for example, state laws like those existing in Massachusetts and a number of other states requiring the company to not discriminate against LGBT employees.

Indeed, I will not be surprised if we see, in the coming weeks, a host of closely held corporations – and a few publicly traded ones – asserting the right to discriminate against LGBT job applicants, employees, and customers notwithstanding various state laws to the contrary.

Despite the Court’s efforts to persuade the opinion’s readers to “move along, nothing to see here,” there are reasons to worry that we have seen only the beginning of the dire consequences of today’s ruling.

Recommended Citation: Kent Greenfield, Hobby Lobby Symposium: Hobby Lobby, “unconstitutional conditions,” and corporate law mistakes, SCOTUSblog (Jun. 30, 2014, 9:07 PM),