The Religious Freedom Rights of Corporations and Shareholders

A late and grateful hat tip to Charlotte Garden, who posted last week about the Seventh Circuit's decision in Korte v. Sebelius.  The court granted a preliminary injunction against the enforcement of provisions of the Patient Protection and Affordable Care Act (“ACA”) and related regulations requiring that K & L Contractors purchase health care coverage for employees that included abortifacient, contraception, and sterilization coverage.  Accourding to the majority, the plaintiffs had some likelihood of success on their Religious Freedom Restoration Act (RFRA) claim that the required health care coverage put a substantial burden on their free exercise of religion.

Although the case raises a number of interesting issues, I want to focus on the religious freedom rights of corporations and shareholders.  It is the corporation that has the obligations to provide health care coverage with certain coverages.  However, the court seems to find that the corporation's obligations infringe on the religious liberties of the shareholders.  As the court states:

[T]he government’s primary argument is that because K & L Contractors is a secular, for‐profit enterprise, no rights under RFRA are implicated at all. This ignores that Cyril and Jane Korte are also plaintiffs. Together they own nearly 88% of K & L Contractors. It is a family‐run business, and they manage the company in accordance with their religious beliefs. This includes the health plan that the company sponsors and funds for the benefit of its nonunion workforce. That the Kortes operate their business in the corporate form is not dispositive of their claim. See generally Citizens United v. Fed. Election Comm’n, 130 S. Ct. 876 (2010). The contraception mandate applies to K & L Contractors as an employer of more than 50 employees, and the Kortes would have to violate their religious beliefs to operate their company in compliance with it.

In dissent, Judge Rovner took issue with this, but in a somewhat indirect fashion:

Although the Kortes contend that complying with the Patient Protection and Affordable Care Act’s insurance mandate violates their religious liberties, they are removed by multiple steps from the contraceptive services to which they object. First, it is the corporation rather than the Kortes individually which will pay for the insurance coverage. The corporate form may not be dispositive of the claims raised in this litigation, but neither is it meaningless: it does separate the Kortes, in some real measure, from the actions of their company.

Charlotte Garden takes on the issue of whose religious freedom rights are at issue in her post:

This analysis raises an interesting question about the interplay among the rights of majority shareholders, managers, and corporations after Citizens United. The Seventh Circuit seems to treat them as essentially overlapping, so that government regulation of corporations would be unlawful if it violates the rights of one, two, or all three of the above.  But it seems to me that Citizens United could also support the contrary result. For example, if the funds of dissenting shareholders can be used for political speech without violating the First Amendment, then why can’t the Kortes’ funds be used for K&L’s contraception coverage without violating their RFRA rights? The Seventh Circuit doesn’t answer this question, though it seems its answer would have to turn on whether or not the shareholders in question were in the majority—a result that seems both counterintuitive and at odds with the Supreme Court’s approach to dissenters’ rights in other context, including the union dues context.

I agree with Charlotte's thinking here.  It is the corporation that is being forced to provide a certain level of health insurance to employees.  When does a corporation have rights of religious freedom?  The court characterizes the company as "secular," and it is clearly not a religious organization. And if it is the Kortes, rather than the corporation, whose rights are being infringed, when do actions taken with respect to a business entity impinge upon the rights of stakeholders?  The court mentions that the Kortes are 88% shareholders and that the business is run by the family according to their religious beliefs.  Are these material facts?  What if they owned 51% of the company, but it was run by someone else?  What if they owned 33% but had de facto control?  What if they owned a single share?

This case reminds me in part of Thinket Ink Information Systems v. Sun Microsoft, 368 F.3d 1053 (9th Cir. 2004).  In that case, the court held that a corporation had a right to bring suit under 42 U.S.C. Sec. 1981 for discrimination based on race.  Although noting that a corporation generally does not have a racial identity, the court found that in the particular case, Thinket had "acquired an imputed racial identity" sufficient to bring a claim.  The court stated that: "[t]o receive certain governmental benefits, Thinket was required to be certified as a corporation with a racial identity; further, it alleges that it suffered discrimination because all of its shareholders were African–American."  This was enough to give the corporation itself standing under Sec. 1981.

At the time, Stephen Bainbridge characterized the Thinket decision as "just nuts" because the corporation was just a legal fiction and instead represented a nexus of contracts.  However, he did allow that "[i]t may be useful to invoke that fiction here, so as to promote administrative convenience by allowing the entity rather than its individual constituents to sue, but it doesn't  change the basic theory."  A similar problem may be presented here.  But at the least, a court should establish whether it is the corporation or the shareholders who have standing to sue for actions required of the corporation.  And if it's the shareholders who have standing to sue, it seems unclear when they would be sufficiently entwined with the corporation to get that standing.