Sebelius v. Hobby Lobby Stores, Part III: Justiciability of Individual Claims [Updated]

A description of the Ordinary Court project may be read here. Part I of the opinion may be read here. Part II of the opinion may be read here. [NB: The original version of this post neglected to include part III.C]

Thompson, J. delivered the opinion of the Ordinary Court as to this Part III.

A.

Regardless of whether a corporate entity such as Hobby Lobby possesses a conscience capable of exercising religion, it is clear that individuals such as the Greens do. Nonetheless, the Government and various amici curiae assert that the responsibility for compliance with the contraception mandate resides solely with Hobby Lobby and that, as such, any burden associated with that compliance is experienced solely by Hobby Lobby. Because the burden is solely on the corporate entity Hobby Lobby, claims the Government, there can be no burden on the Greens individually, regardless of their personal religious beliefs.

I disagree. Although it is true that under our prudential standing doctrine, a business owner may not ordinarily assert an injury based on harm directed at her corporation, this presents the rare case in which the injury can in fact be reasonably said to be experienced directly by the business owner.

B.

In most circumstances, the threshold for a plaintiff to allege standing under Article III of the Constitution is quite low: they must only assert that they have or will imminently suffer an injury in fact that is only “fairly traceable to the challenged [regulation],” and that the injury will “likely” be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992). Additionally, this Court has long recognized that shareholders who suffer an injury as a result of an action against their business have Article III standing to challenge a law or regulation that causes that injury. Franchise Tax Bd. v. Alcan Alum., 493 U.S. 331, 336 (1990).

Here, it is indisputable that the Greens individually will suffer such an injury if Hobby Lobby is required to comply with the contraception mandate. If the business is fined for non-compliance, the value of their shares in the company will decrease, and if it complies with the regulation, they will be required, in their capacity as managers for Hobby Lobby, to engage in conduct that violates their religious obligation – which the Government does not dispute – to refrain from conduct that would assist others in using certain types of contraceptives.

This does not end the inquiry, though, as it has long been the case that other limits exist on who may assert claims in federal courts beyond Article III’s minimum requirements. Specifically, this includes the so-called “shareholder standing rule,” which generally prohibits shareholders from asserting claims based on conduct that harms the corporation. Alcan Alum., 493 U.S. at 336. Thus it would seem at first glance that the Greens, as shareholders of Hobby Lobby, may not assert standing based on a regulation such as the contraception mandate that is aimed squarely at their corporation.

A first glance would be insufficient, however, as we have also long recognized an important exception to this rule such that “a shareholder with a direct, personal interest in a cause of action may bring suit even if the corporation’s rights are also implicated.” Hobby Lobby Stores v. Sebelius, 723 F. 3d 1114 (10^th Cir. 2013)(Matheson, J., dissenting in part and concurring in part)(quoting Alcan, 493 U.S. at 336). Under this rule, a shareholder may maintain a suit if she can demonstrate an injury independent of the alleged injury to the corporation that is experienced directly by the shareholder.

Though it is not sufficient for a shareholder to obtain this “direct, personal interest” simply by asserting that the value of their shares in the corporation will decline or that they will suffer other equally indirect damage, I believe other factors present in this case demonstrate that the injury is in fact directly and personally experienced by the Greens.

Of greatest importance in this regard is the fundamental significance of the right the Greens seek to vindicate in this suit – namely, their freedom of religion. Freedom of religion is a core liberal value under our Constitution that “look[s] primarily to the preservation of personal liberty, rather than towards the fulfillment of collective goals,” and the Government may not so casually “put an individual to a choice between his business and his religion.” Braunfeld v. Brown, 366 U.S. 599 (1961)(Brennan, J., dissenting). To adopt a rule, such as that advocated by the Government and its amici, that an individual owner may never assert even a Constitutional injury due to actions the government requires he take on behalf of his business would have the potential to do great harm to individual liberty and, in the case of religious freedom, would quite literally “put an individual to a choice between his business and his religion.”

That does not, of course, mean that an individual shareholder may simply disregard the corporate form in order to assert a claim just by asserting that an important right is implicated. Of great significance in this case, however, is that all of the owners have the same beliefs, the sincerity of which is undisputed, they are all actively involved in the management of the business, and they represent the entirety of Hobby Lobby’s active ownership. To avoid directly acting in contravention of their religious beliefs, the owners would need to divest themselves of at least some control of the business and place it in the hands of a third party. It is not necessary to address whether there must be a uniform burden on all of a corporation’s owner in order for one or more of those owners to sue the government based on an action against their business; it is enough for now to acknowledge that in this case, the business is closely held, all of the owners are actively involved with managing the business and all of the owners would suffer the same injury.

Also of great significance in this case is the great degree to which the Greens have affirmatively used their businesses as a vehicle for expressing their religious beliefs. Their faith is expressly referenced in their businesses’ statements of purpose, their businesses do not open on Sundays, they sell an array of Christian-themed products, and they refuse to sell products that they believe promote activities that would violate their faith. The promotion of those religious beliefs within the context of the businesses is the Greens’ decision, and is a set of acts by which someone is surely engaging in the “exercise of religion.” If that “someone” cannot be the businesses, then it must by default be the Greens themselves.

Finally, it cannot pass without note that the Greens’ businesses are registered as “S” corporations with the federal government, and specifically with the Internal Revenue Service. In registering as an “S” corporation, the profits of the businesses are attributed directly by the federal government to the Greens individually. Additionally, should the Greens’ businesses not comply with the mandate, the resulting penalty would be charged as a tax by the IRS. Cf. NFIB v. Sebelius, ___ U.S. ___ (2012)(upholding constitutionality of individual mandate under the ACA as a tax). It is unclear whether the Government would pursue the Greens personally for payment of any non-compliance tax under the mandate, but the potential certainly exists enough to permit the Greens to claim an independent injury. Regardless, even if the Government cannot pursue the Greens directly for payment of the mandate tax penalty, I do not see how the Government may reasonably deny standing to shareholders of an “S” corporation to challenge a penalty enforced by a tax that the Government itself will treat as a reduction of the shareholders’ personal income. Again, this is not to say that only owners of “S” corporations may assert a “direct, personal interest” in cases against the government, nor that they may do so only where the government itself treats the complained-of action as an action directly against the owner. It is, however, difficult to foresee an instance in which the government can treat a business owner as if she is directly injured by a policy yet deny her individual standing to challenge that policy.

C.

                The dissent asserts a parade of horribles that it believes will follow from our decision granting the Greens individual standing in this matter.  We find the dissent’s fears gravely misplaced.  As noted, supra, this Court has long recognized that a shareholder with a direct, personal interest in litigation may under some circumstances bring suit even if her corporation’s rights are also implicated thereby.  Our decision today merely affirms that this doctrine applies with no less force when the shareholder’s rights implicated are in the nature of free exercise rights.

In particular, the dissent frets about the effects of our decision on anti-discrimination laws.  These fears are severely misguided in our view – a finding that individuals have standing to assert violations of their religious freedoms is hardly a finding that individuals will be successful in prosecuting such claims.  Although RFRA permits application of burdens on religious freedom only insofar as applying a burden  on a particular plaintiff “is in furtherance of a compelling governmental interest; and is the least restrictive means of furthering that compelling governmental interest,” we note that this Court’s precedent prior to Employment Division v. Smith was readily willing to find the existence of such an interest, as well as that the means of furthering that interest were indeed the least restrictive such means.  That precedent remains fully intact.  Although we find below that the government in this case has thus far failed to establish its burden, this is in no small part because of the fact that the government here has readily granted exemptions to the law in question to others – in effect admitting that no compelling interest exists with regards to those entities – yet has made no attempt whatsoever to articulate a reason for failing to extend those exemptions to this particular plaintiff.  As to discrimination laws, which are not at issue herein, we further remind the dissent that this Court has consistently held that the government possesses a compelling interest in implementing and enforcing anti-discrimination laws that warrants limitations on religious and associational freedoms.  See, e.g., Roberts v. United States Jaycees, 468 U.S. 609, 629 (1984); Bob Jones Univ. v. United States, 461 U.S. 574, 604 (1983).

The far greater concern, we believe, is the consequence of adopting a blanket rule prohibiting the owners of corporate entities – and especially closely held corporate entities – from even asserting a violation of their religious freedoms, regardless of whether the government intentionally seeks to target their religion.  This is the rule the dissent would propose, and it is a rule that the Constitution, much less RFRA, cannot tolerate.  Under such a rule, for instance, a local ordinance motivated by animus towards Jews or Muslims prohibiting businesses from selling meat that has not been stunned would not only survive any challenges – it would be unchallengeable entirely.  Similarly, an ordinance targeting a disfavored religious group by requiring businesses be open on that religious group’s holy day would be wholly unchallengeable.  We find it unfathomable that either RFRA or the First Amendment could be so limited as to grant governments license to so directly and brazenly target disfavored religious groups without any possibility of judicial review.

Thompson, J., was joined in this part III of the opinion of the Ordinary Court by Kowal, J. and Dave, J. Kowal, J. is further of the opinion that his dissent from part II applies with equal force as to this part III.

 

Likko, C.J., dissenting:

Part II of this Court’s opinion does not dispose of the entirety of the case before the Court. The Greens unquestionably do possess sincere religious beliefs, beliefs which equate use of certain drugs described by the Contraception Mandate with murder and by extension, dispensation of those drugs as facilitating murder. They easily meet the first of their two burdens under the RFRA. Their burden, therefore, is to demonstrate that the Contraception Mandate imposes a substantial burden upon their religious beliefs. In order to consider this, an understanding of the capacity in which the Greens act is helpful.

 

A

In the case of a for-profit corporation (called a “general corporation” under Oklahoma law), there are three classes of persons stand with direct and intimate relationships to the corporate entity. Shareholders are those persons who own fractional interests of the entity.

Shareholders, in turn, hold three principal rights appurtenant to their ownership of stock: the ability to receive a fractional share of the distribution of profits as distributed by the directors of the corporation proportional to the fractional interest of shares owned, the ability to vote pursuant to the legally-valid bylaws of the corporation for directors again in proportion with the fractional amount of stock owned, and the ability to receive proportional, fractional residual distribution of money upon the dissolution of the corporation and liquidation of its assets. Either natural persons or other business entities may be shareholders.

A corporation’s directors, once elected by the shareholders, discharge several duties. They exercise oversight and policy-making control over the affairs of the corporation, and have the power to draft and impose policies that bind the corporation and its agents. Some of these policies are called “bylaws” when they relate to the control and governance of the corporation. They vote on distributions of profits to the shareholders, or in some cases on issuance of offerings of new stock. And, they appoint officers. Directors of a corporation are invariably natural persons rather than other entities, and they are fiduciaries of the corporation.

Officers of a corporation are its agents, and often its employees. They are charged with any of a number of duties, at the discretion of the directors, and are empowered to bind the corporation to contracts. Officers of a corporation are invariably natural persons and not entities, and they too are fiduciaries of the corporation. When we refer to, for instance, David Green as the President of Hobby Lobby, we refer to him acting in his capacity as an officer of that corporation.

There is no formal legal bar to a single person occupying more than one, or all, of these roles simultaneously. In closely-held corporations, individuals often do in fact hold substantial amounts of stock, serve as officers, and serve as directors, all at the same time. Particularly when those people conceived of, incorporated, and built a corporation as their life’s work (as seems to be the case with the Greens today) it is often difficult for those people to remember that the corporations have a separate legal identity from themselves, and they see those corporations as extensions of themselves.

But to do so fundamentally misstates the very reason a corporation exists: it creates a different legal entity through which business is done. Individual stockholders do not personally transact with others, so they do not incur liabilities to them. This is true even in a situation where a person is simultaneously a shareholder, officer, and director of a corporation – that person does not personally do business with the third parties. The corporation does, under the control of that officer. “The distinction between corporate and individual enterprise is one of the deepest in our constitutional law, as it is for the shapers of public policy.” Shapiro v. U.S., 335 U.S. 1, 67 (1948).

More simply put: A corporation is not its owners.[1] A corporation is not its officers. A corporation is not its directors. It is a separate legal entity.

 

B

The fundamental problem with the Greens’ claims today is that they are not the ones who are asked by the Contraception Mandate to dispense the disputed drugs. Only Hobby Lobby and Mardel are asked to do this. The Greens are not obliged to do anything – and they are not Hobby Lobby. Corporations, even closely-held corporations such as Hobby Lobby, have long been held to have identities separate from individuals who own and control them, and their owners may be effectively compelled to act in the capacity of an agent of the corporation sometimes directly contrary to their wishes and desires as individuals.

For instance, in Braswell v. U.S., 487 U.S. 99, 105 (1988), the president, sole director, and sole shareholder of a corporation could not invoke a Fifth Amendment right against self-incrimination with respect to the corporation’s financial records after being served with a subpoena, despite the fact that as an individual, he had already invoked that right. Thus, when acting in his capacity as an officer of the corporation he was required to produce records that, had he been acting in his capacity as an individual, he could have withheld under his claim of privilege.

So too in this case. The Greens do not act as individuals when they act in their capacities as officers and directors of Hobby Lobby. They act on behalf of, for, and as fiduciaries of, Hobby Lobby. Therefore, they cannot invoke their rights as individuals – because they, as individuals, are not participating in the transaction at all. As individuals, they are not asked to dispense the disputed drugs. As individuals, they are not asked to spend any of their money on the disputed drugs. As individuals, they are not asked to make those drugs available to their employees – because the employees in question are not their employees individually. It is “the President of Hobby Lobby,” not “David Green,” who is tasked by operation of law with complying with the Contraception Mandate.

It also bears noting that should Hobby Lobby comply with the Contraception Mandate, an insurance company (yet to be identified) will actually purchase the drugs, and those drugs will presumably be dispensed by medical professionals such as doctors and pharmacists. Thus, the Greens are at least two steps removed from direct commerce with the drugs that their individual consciences forbids them from handling: first by way of Hobby Lobby, a separate corporate entity with an identity separate from themselves, and second by way of Hobby Lobby’s insurance provider, itself a separate corporate entity with an identity separate from Hobby Lobby and certainly separate from the Greens.

 

C

Moreover, the Oklahoma state law of fiduciary duty requires that the Greens, when discharging their duties as corporate officers, not elevate their own interests and preferences above that of the corporations that they administer. In Oklahoma as in all the States, fiduciaries must elevate the financial interests of their wards above even their own.

When faced with a choice between compliance with the law and the inevitability of drawing a crippling liability upon her ward, a fiduciary must set aside her own preferences and desires, and acts in the best interests of her ward. The minimum that a fiduciary can do in this case is to get out of the way of the corporation’s compliance with the law. A fiduciary who cannot do this for whatever reason, including a personal religious objection, is not relieved of her duty to act in the best interests of her ward.

It is clearly in the financial interests of Hobby Lobby to comply with the law, and contrary to its interests to defy the law. This is particularly true if the fines threatened for violation of the Contraception Mandate are indeed as draconian as Respondents have suggested. The Greens, in their capacity as fiduciaries of the corporation, flirt with breach of fiduciary duty by elevating their personal religious beliefs above the interest of the corporation to conduct its business in compliance with the law. It would appear that only the fact that the Greens are also, in their capacity as stockholders, the ones to enforce fiduciary obligations upon themselves in their capacity as officers, would protect the Greens from running afoul of this law as well, provided that a reasonable means is available (as it is here) to bring the company in compliance with the law.

 

D

Three significant risks are raised by the majority’s holding today.

First, the distinction between a corporation and its owners is blurred. There is an increased risk of abuse of the corporate privilege, and indeed I would find that invocation of the limitation of liability and other benefits of separate legal personhood by Hobby Lobby to protect its shareholders in the future would be estopped given that the shareholders today successfully claim an identity of interest between the corporation and themselves. If individuals are able to impute their personal beliefs to the corporations they control and thus exempt the corporation from laws of general application, yet still invoke the form of a corporation as a shield against liability, we open the door wide to abuse of the corporate privilege.

Second, nothing will stop a future corporation, guided by the invoked sincere religious beliefs of its owners, from asking for exemptions from other laws of general application on religious grounds. Religious beliefs were once invoked to justify slavery and all manner of racial discrimination; text from the Bible can be read in such a fashion as to suggest that those who bear dark skin are the accursed sons of Ham and that the chosen people of God may have naught to do with them. That such a belief is out of step with mainstream Christian thought today is quite irrelevant: any one individual might invoke this interpretation of the Bible as a defense against the application of general ban on racial discrimination in employment and public accommodations found in our civil rights legislation.

I can find no reason why this could not happen, consistent with the reasoning of the majority as to this point. The majority’s suggestion that enforcement of anti-discrimination laws constitutes a compelling governmental interest does not close the circle: a law with the sweeping scope of the Civil Rights Act cannot be deemed “narrowly-tailored” so as to protect religious freedom and so even if the compelling nature of the government’s interest is conceded, it still cannot meet the final prong of the RFRA test. The majority thus converts RFRA into an exception powerful enough to swallow this or any other rule.

Nor can this slope regain traction even after the Civil Rights Acts are left with such a gaping wound. Nothing (nothing principled, anyway) will prevent invocation of RFRA against other laws of general application. Tax collection will become varied based on the religion of the taxpayer: Quakers, for instance, could object to the use of their money to pay for acts of violence and aggression and therefore might seek to exempt themselves from paying a percentage of the taxes they owe proportional to the amount of money spent on military defense, the FBI and other armed agents of the Government, and subsidies and assistance to local police. Jehovah’s Witnesses will be able to opt in or out of public health subsidies based on their objection to blood transfusions paid for in part or in whole by public funds. Members of other Christian sects who object to contraceptives that are not even colorably abortifacients will seek more expansive waivers than those which the Greens will imminently pursue in the District Court.

The majority raises a concern that laws could be in fact aimed at specific disfavored religions and cloaked under the law of general applicability, hypothesizing a mandatory Saturday-open law intruding upon the preferences of a Jewish-owed or Muslim-owned business. But courts are well able to make findings of fact that a putatively neutral law is not such, and in fact specifically targets a disfavored religion, e.g., Church of Lukumi Babalu Aye v. City of Hialeah, 503 U.S. 520 (1993) No such finding has been made, nor credibly suggested, in this case; the Contraception Mandate was very obviously not drafted with an intent to drive so-called “Christian businesses” from the marketplace for labor, but rather with an intent to advance health and welfare.

Minorities have rights that are beyond the scope of the majority to regulate, but at some point in a democratic system of government, the majority rule must apply.

All of this is made that much more pernicious because religious beliefs are entirely internal to an individual. Courts typically do not challenge religious beliefs once invoked (and in the typical case, this is appropriate). Religious beliefs are subjective, may be individualized, and are not susceptible of proof or disproof.

While we need not doubt the sincerity and good faith of the Greens, imputing and disseminating functionally unproven and unprovable assertions about the ultimately unknowable to unhuman entities on the basis of an incomplete and widely-misunderstood legal fiction is an invitation for clever and cynical litigants to dodge application of the laws at their convenience. People of all manner of beliefs will be able to object to all manner of things that they dislike the government doing or requiring them to do, and some of them will not have the good faith of the Greens but instead will cynically cloak their personal preferences in the noble mantle of religious faith, and the government will be powerless to enforce the law against them.

This, finally, leads us to the final problem – the endgame of the religious opt-out seemingly available to anyone, any time, against any law. In order to have a meaningful government enforcing laws in a meaningful fashion, individuals will need to declare their religious beliefs in advance so as to allow governmental officials to know whether or not they can enforce a particular law against them. As matters stand now, one’s beliefs and faith (or lack thereof) are a personal, private matter, which no citizen may be compelled to reveal by the government. But how else, other than through a sacrifice of privacy, will a governmental official know in advance that a law does not apply?

The opinion of Kowal, J. admirably attests to the power and importance of individual conscience, and is appropriately considered when contemplating the magnitude of the importance of the Religion Clauses. He is right to urge us to be as deferential as we can to religious liberties.

Yet in a system of ordered liberty, in a constitutional democracy, there is necessarily a limit to those individual rights, as there are necessarily limits to all individual rights. Speech is free, yet defamation is not protected and speaking in public may be regulated reasonably as to time, place and manner. Freedom from warrantless searches by police have exceptions when exigent circumstances or public safety issues are in play. Litigants have rights to juries, but not as to all claims and states may condition the invocation of the right to jury trial based on a variety of procedural issues. Most people have the rights to keep and bear firearms, and to vote, but those convicted of felonies may find that those rights have been rendered forfeit.

The rights embodied in the Religion Clauses are no different. And when those rights are not even appropriately implicated, permitting them to be selectively invoked as a shield against application of the laws marks an erosion of the ability of the political branches of government to discharge their duties at all. We are a society governed by the rule of law, but when laws do not apply generally and anyone can claim a religious belief to avoid whatever law they find inconvenient, the concept of “law” itself is shaken as by an earthquake.

The earthquake triggered by the majority’s ruling today is mild, and the structure of the law will require but a small patch to remedy should Congress or a future decision of this Court wisely address the issue. How many more such earthquakes will we endure in the future, though, before the foundations of a society governed by the rule of law begin to crack?

 

E

Nothing in my opinion would, and nothing in the Contraception Mandate does, forbid any of the Greens from personally abstaining from participating in Hobby Lobby’ compliance with the Contraception Mandate. They may delegate compliance with the Contraception Mandate to someone else who lacks their personal religious beliefs. Indeed, the easiest solution to the purported conundrum in which the Greens claim to find themselves is to cause Hobby Lobby to hire a third-party agent to procure insurance. Should they do this, they will then have a third layer of remove between themselves and the procurement of the drugs to which they object – their third-party agent will use corporate (not personal) money to pay an insurance company to procure those drugs.

Further, nothing in this opinion and nothing in the Contraception Mandate would forbid either the Greens or Hobby Lobby from using whatever powers of speech and persuasion are at their disposal to discourage Hobby Lobby’ employees from availing themselves of the disputed drugs described in the Contraception Mandate.

Respondents may, for instance, distribute a memo or modify their employee handbook to include a disclaimer asking employees to please not use Plan B ‘contraception’ because it is an abortion pill, or to make clear that the scope of the insurance plan is mandated by law and contrary to their own personal wishes. Respondents may offer whatever argument they wish to persuade their employees not to use these drugs.[2]

Likko, C.J., was joined in this dissent by Togut, J.

 

Burt Likko is the pseudonym of an attorney in Southern California. His interests include Constitutional law with a special interest in law relating to the concept of separation of church and state, cooking, good wine, and bad science fiction movies. Follow his sporadic Tweets at @burtlikko, and his Flipboard at Burt Likko.