Shareholders at risk if Hobby Lobby wins

MONDAY, MAR 24, 2014 07:44 AM EDT

Right-wing judges face huge moral dilemma: How Hobby Lobby could expose SCOTUS’ hypocrisy

The coming case will test what’s more sacred to this court: Corporate imperatives or so-called religious liberties

How many Republicans in Congress, would you guess, believe that corporate shareholders should generally be liable for the debts accrued or crimes committed by that corporation? Working in the other direction, how many free market-loving, conservative donor capitalists believe corporate shareholders or board members ought to be able to tip the playing field by voting said corporation into non-compliance with laws and regulations that apply to competitors?

I’d wager that the number is zero. The impermeability of the corporate veil is central to their beliefs about how the economy should be organized, how the market should promote risk taking, encourage investment and so on.

And yet this week, nearly all of them — whether they’ve thought it through or not — will claim to want to pierce the corporate veil in the latter direction. On Tuesday the Supreme Court will hear oral arguments in Sebelius v. Hobby Lobby — a case that will determine whether employers who oppose the use of birth control on religious grounds can deny female workers contraceptive coverage guaranteed to them by the Affordable Care Act.

That’s how the stakes are typically described. The centrality of contraception to the case has united religious conservatives behind Hobby Lobby (a nationwide chain of craft stores) and other companies fighting the mandate. The fact that Obamacare is the vehicle for the mandate has drawn much of the rest of the conservative movement into the fight as well.

But the case carries implications that are far greater than the durability of a fairly marginal provision of the Affordable Care Act. Hobby Lobby’s lawyers are nominally fighting to protect the religious rights of the stores’ owners. But Hobby Lobby is a corporation — a secular, for-profit business — and it’s the corporate entity to which the mandate applies. To obtain a religious exemption from the mandate, Hobby Lobby’s owners need to imbue the corporation with their personally held religious views. And that requires altering the distinction between shareholder and corporation in fundamental and potentially disruptive ways.

I’m borrowing heavily here from this Amicus Curiae brief (PDF) filed in support of the government by 44 corporate and criminal law professors.


I’ve written in fairly general terms about unintended consequences that might attend to providing private businesses with religious exemptions to generally applicable laws. The lawyers in the brief are much more specific, and argue convincingly that the consequences wouldn’t necessarily be limited to female employees who would otherwise be entitled to contraceptive coverage, or to hypothetical job applicants and customers who might find their rights at cross-purposes with the religious beliefs of the owners of secular businesses. The legal channel Hobby Lobby et al. want to dig for themselves would also create tremendous uncertainty in the corporate arena generally, and likely draw the courts into the thorny business of adjudicating the legitimacy of individual claims to religious exemptions.

I encourage you to read the whole brief. But here’s the part that aligns with and expands on arguments I’ve made in other articles.

Hobby Lobby and Conestoga argue that they should be exempt from federal law because of the religious values of their controlling shareholders, while seeking to maintain the benefits of corporate separateness for all other purposes. These corporations have benefited from their separateness in countless ways and their shareholders have been insulated from actual and potential corporate liabilities since inception. Yet now they ask this Court to disregard that separateness in connection with a government regulation applicable solely to the corporate entity. Hobby Lobby and Conestoga want to argue, in effect, that the corporate veil is only a one-way street: its shareholders can get protection from tort or contract liability by standing behind the veil, but the corporation can ask a court to disregard the corporate veil on this occasion. Hobby Lobby and Conestoga cannot have it both ways.

It’s not just that allowing corporations to assume the religious identities of their shareholders might allow them to refuse to employ or serve women or LGBT people, or create an incentive for them to adopt religious identities in order to avoid the burdens of regulatory compliance.

If Hobby Lobby et al. manage to successfully pierce the veil, to the end of avoiding the contraception mandate, the court’s ruling, if drawn broadly enough, could be used to expose shareholders to liabilities that incorporation is intended to eliminate. It stands to reason that this contradiction at least partially explains why major corporate trade associations have either remained neutral in this case or actually come down on the side of the government.

It also creates an interesting test for this particular court, which, under the leadership of Chief Justice John Roberts, has been remarkably solicitous of corporate imperatives, but has also been sensitive to those who claim their religious liberties have been threatened or curtailed.

If they decide to establish a corporate right to free exercise of religion, though, they’ll have to grapple with their own reasoning in a 2006 case called Domino’s Pizza Inc. v. McDonald. In that case, the sole shareholder of a corporation — an African-American man — alleged that Domino’s had been motivated by racial animus to violate several of its contracts with his business, and in so doing had violated his civil rights. The court was not sympathetic.

“[I]t is fundamental corporation and agency law — indeed it can be said to be the whole purpose of corporation and agency law — that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation’s contracts,” the court ruled. “The corporate form and the rules of agency protected his personal assets, even though he negotiated, signed, performed, and sought to enforce contracts for [the corporation] The corporate form and the rules of agency similarly deny him rights under those contracts.”

In other words, the court effectively held that a corporation could not be infused with the racial identity of its owner for the purposes of upholding the owner’s civil rights. The question is whether the atmospheric peculiarities of this case — Obamacare, subsidized contraception — will motivate the court to reverse its own reasoning.

Brian BeutlerBrian Beutler is Salon’s political writer. Email him at bbeutler@salon.com and follow him on Twitter at @brianbeutler.