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Will the Supreme Court apply RFRA and Free Exercise protections to for-profit corporations?

December 5th, 2013  |  Joy Waltemath

Recently, the U.S. Supreme Court agreed to hear two major cases involving disputes over insurance coverage for contraceptives mandated by the Patient Protection and Affordable Care Act (ACA). The two cases, Sebelius v. Hobby Lobby Stores, Inc. and Conestoga Wood Specialties v. Sebelius are both suits where corporate employers are requesting an exemption from the ACA mandate to provide contraceptive coverage to their employees on the basis of religious objection by the owners.

The government’s petition for writ of certiorari in Hobby Lobby poses the question whether the Religious Freedom Restoration Act allows a for-profit corporation to deny its employees the health coverage of contraceptives to which the employees are otherwise entitled by federal law, based on the religious objections of the corporation’s owners.

The players before the Supreme Court

Hobby Lobby. In the Hobby Lobby case, the companies are Hobby Lobby, a craft store chain, and Mardel, a Christian bookstore chain. Their owners, the Greens, run both companies as closely held family businesses according to what they describe as Christian principles. Hobby Lobby, a closely held family business organized as an S-corp, is an arts and crafts chain with over 500 stores and about 13,000 full-time employees. Mardel is an affiliated chain of 35 Christian bookstores with just under 400 employees, also run on a for-profit basis.

The Greens objected to the ACA requirement to provide certain contraceptive services as a part of their employer-sponsored health care plan, specifically drugs and devices that they believe to be abortifacients. (Note that abortion coverage itself is not required.) Media reports are that the Greens are Baptists, an evangelical Christian denomination. The Greens allege that the contraceptive mandate violates the Free Exercise Clause of the First Amendment, as well as the Religious Freedom Restoration Act (RFRA), which states that the government “shall not substantially burden a person’s exercise of religion” unless it is the least restrictive means to further a compelling government interest. The Tenth Circuit ruled that for-profit corporations could deny contraceptive coverage to employees, even if otherwise entitled by federal law, on the basis of religious objections by the individuals controlling the corporation.

Conestoga Wood Specialties. Conestoga Wood Specialties, a secular, for-profit corporation, was denied an injunction preventing enforcement of the contraceptive mandate. The Hahns, a Mennonite family, objected to two types of contraceptives as well. The Hahns own 100 percent of the voting shares of Conestoga, which is a Pennsylvania for-profit corporation that manufactures wood cabinets and has 950 employees. As Mennonites, the Hahns say their church teaches that taking of life, which includes anything that terminates a fertilized embryo, is intrinsic evil and a sin against God to which they are held accountable. According to the Mennonite.net website, pacifism is one of the cornerstones of the Mennonite faith, prompting many young Mennonites to elect service to the church rather than military service.

In its decision, the Third Circuit stated that the Free Exercise Clause protects religious freedom of individuals from government interference. However, secular corporations, which do not pray, worship, observe sacraments, or engage in other religious activity, are not entitled to Free Exercise Clause protection, and the rights of the owners do not pass through to the corporation. Conestoga petitioned for certiorari.

Similar cases

Corporations not protected. Autocam Corp. v Sebelius involved similar RFRA and free exercise arguments against the contraceptive coverage requirement. Autocam Corporation and Autocam Medical, LLC, are for-profit, secular corporations engaged in high-volume manufacturing for the automotive and medical industries. Members of the Kennedy family, all of whom are practicing Roman Catholics, own “a controlling interest” in the two corporate entities, which have 1,500 employees worldwide, including 661 in the U.S. The Kennedys believe that they cannot direct their closely held company’s health insurance plan to “provide, fund, or participate in health care insurance that covers artificial contraception, including abortifacient contraception, sterilization, and related education and counseling.” They object that under ACA, Autocam’s health plan would have “to directly pay for the purchase of drugs and services” that the Kennedys find objectionable.

The Sixth Circuit found in the Autocam case that if the free exercise clause were expanded to cover corporations as if they were persons, it would “lead to a significant expansion of the scope of the rights the Free Exercise Clause [previously] protected.” The RFRA claims raised by Autocam’s owners were also dismissed for lack of standing because of a longstanding rule barring claims by shareholders “intended to redress injuries to a corporation.”

Generally, shareholders of a corporation cannot bring claims intended to redress injuries to a corporation, even when the corporation is closely held. This shareholder standing rule prevented the Kennedys from bringing a RFRA claim arising from a legal obligation on Autocam. The Kennedys’ actions with respect to Autocam were not actions taken in an individual capacity, but as officers and directors of the corporation, said the court. The decision to comply with the mandate falls on Autocam, not the Kennedys, the court concluded.

S-corp owners’ rights infringed. In Gilardi v Department of Health and Human Services, a divided D.C. Circuit  ruled that the ACA requirement that most health plans cover FDA-approved contraceptives infringed the rights of two owners of Subchapter S corporations under RFRA. Although the court did not go so far as to rule that secular, for-profit corporations have a right to free exercise of religion, it did find that the connection between the Gilardis’ payment for health insurance coverage and the use of the premiums to cover contraceptive services was direct enough to infringe on their individual rights under RFRA and the Free Exercise Clause of the First Amendment. It affirmed the district court’s denial of a preliminary injunction with respect to the companies, however.

The Gilardi brothers owned two businesses that provide fresh-cut and repack produce solutions and services. Because they operated as S corporations for tax purposes, the two companies paid no income tax; the income and tax obligations were passed through to them as individuals. They alleged that as practicing Catholics, they felt a moral obligation to provide health insurance for their 400 employees but had never covered contraception, sterilization, or abortion under their self-insured plan, and they claimed that the mandate to cover contraceptives violated the rights of both the individuals and the corporations under the RFRA, the Freedom of Speech and Free Exercise Clauses of the First Amendment.

The court reasoned that closely held, Subchapter S corporations are distinguished from larger, publicly held entities because the income is attributed to the individual owners, who pay the taxes. Further, the burden on the owners did not occur when the employees purchased contraceptives but when the employers were compelled to pay for the benefits to be covered under the health plan.

Similarly, in Korte v Sebelius, the Seventh Circuit ruled that the contraceptive coverage requirement violates the rights of both individual business owners and closely held business corporations under RFRA. The relationship between the prohibited conduct and the owners’ Catholic religion was direct because it was their financial contribution that supported contraception that violated their religious beliefs, not the employees’ choice to use the benefits.

The plaintiffs here were two closely held business corporations and the Catholic families who own them. The Kortes own and operate a construction company with approximately 90 full-time employees, 70 of whom belong to a union that sponsors their health-insurance plan. The company provides a health-care plan for the remaining 20 or so. The Grote family owns and manages Grote Industries, Inc., a manufacturer of vehicle safety systems with 1,148 full-time employees at various locations, including 464 in the U.S. The members of both families are Catholic and they follow Catholic moral teaching regarding the sanctity of human life and the wrongfulness of abortion, abortifacient drugs, artificial contraception, and sterilization.

To find that commercial corporations could engage in religious activity, the court reasoned that RFRA contains findings that its purpose was to restore the interpretation of the Free Exercise Clause under certain cases, including a couple of cases that involved individuals and their jobs. These cases protected conduct and the employee’s livelihood, or profit-making activity, said the court, extrapolating that the conduct of secular, for-profit corporations also was protected by RFRA.

Law of unintended consequences

These cases involve a craft store chain, a wood cabinet manufacturer, an automotive and medical industries manufacturer, a produce company, a construction company, a manufacturer of vehicle safety systems, and a Christian bookstore. Which corporate entity on its face seems capable of exercising religious beliefs and practices? Which one seems not like the others? Or is the similarity among these entities, and their practices, really based on the beliefs and behaviors of the individuals behind them?

The decision whether facially secular for-profit corporations, which have a primary purpose that is not obviously religious in nature, should be protected by either RFRA or the Free Exercise Clause could have profound and far-reaching consequences well beyond the contraception cases the Court is considering.

For example, what if the Catholic or evangelical Christian individuals whose religious beliefs were being exercised through a corporate form, albeit closely held, felt their beliefs compelled them to reject other mandated prescription drug coverage, say, for unmarried or divorced men who wanted to treat erectile dysfunction, given that recognized church teachings reject sexual conduct outside of marriage?

What if  individual Scientologists, whose sincerely held religious beliefs include rejection of psychotropic drugs specifically, and the principle that psychiatric disorders can have physical roots generally, owned a closely held corporation and objected to providing coverage for  antidepressants? After all, the ACA significantly extends the reach of the Mental Health Parity and Addiction Equity Act’s requirement that insurance coverage for mental health or substance use disorders must provide the same level of benefits as for general medical treatment. Starting in 2014, the ACA will require all small group and individual market plans created before March 23, 2010, to comply with federal parity requirements.

The Court has had enough difficulty balancing the Establishment and Free Exercise Clause with respect to individuals’ religious beliefs. Applying RFRA and Free Exercise protections to for-profit corporations could take us somewhere we don’t really want to go.