The Supreme Court's decision in June that some companies did not have to provide contraceptive coverage for their employees only started the debate.In Burwell v. Hobby Lobby Stores, the Supreme Court decided that under the Religious Freedom Restoration Act of 1993, the religious convictions of a company's owners could apply to the company itself. However, the court did not apply the decision to all corporations. Instead, it merely held that for-profit "closely held corporations" could be exempt from providing the coverage under the Affordable Care Act.
For the first time, the Supreme Court applied religious protections to companies that were in the business of earning money instead of providing charity, and in doing so, it put a chink in the armor of the Affordable Care Act.
The debate continues over religious protections and whether corporations can be considered people, but it misses a more immediate issue from the court's opinion: What exactly is a "closely held corporation"?
Regulators are grappling with this issue as they consider which corporations get to opt out of the law's requirement on contraceptive coverage. And more than contraception is at stake; deciding which companies can assert religious principles determines who among millions will receive other services like abortion.
In the case of Hobby Lobby, the arts and crafts chain, the court seemed taken with the fact that all of the shareholders were aligned in their beliefs and concluded that these beliefs could be attributed to the corporation. Five family members - a father, mother and three children - own the company. They described themselves as Christians who had signed a pledge to run the stores in accordance with "biblical principles," including being closed on Sundays.
The court was also careful to say that public corporations did not qualify. Justice Samuel A. Alito Jr., writing for the majority, rested this rationale on the problem of divining shareholder beliefs, stating that "the idea that unrelated shareholders - including institutional investors with their own set of stakeholders - would agree to run a corporation under the same religious beliefs seems improbable." Instead, the decision was limited to what Justice Alito termed "closely held corporations." But he didn't state exactly what that meant.
Hobby Lobby is an outlier though - how many company shareholders sign religious pledges? And so we are left to figure out the difference between Hobby Lobby, owned by a small religious family, and General Electric, with tens of thousands of shareholders.
The federal government is the first to deal with this issue. The Department of Health and Human Services and other government agencies including the Internal Revenue Service have proposed new rules that would define a "closely held corporation" for purposes of asserting a religious exemption from the contraceptive requirements of the Affordable Care Act.
The problem is the government has no idea what to do.
In the rule proposal, the government does not even try to define a "closely held corporation." Instead, it has solicited comments from the public on what the definition should be. In other words, when you have a question you cannot answer, ask it back to divert attention.
In fairness to the government, it did suggest two possible approaches, though neither seems to comport with the court's ruling.
The first approach suggested by the agencies is to define a "closely held corporation" as one "where none of the ownership interests in the entity is publicly traded and where the entity has fewer than a specified number of shareholders or owners. " In other words, a closely held corporation could have only a set number of shareholders. How many shareholders? Well, the government refers to tax provisions that could define a closely held corporation as one with up to 100 shareholders, which could describe most private corporations.
The second approach would define a "closely held corporation" as one in which "a specified fraction of the ownership interest is concentrated in a limited and specified number of owners." Here, the government means that the number of shareholders is not as important as having the bulk of the corporation held by a limited number of them.
Both government approaches appear to ignore the real basis of the Supreme Court's decision. Justice Alito held that a corporation could assert religious protections under the Religious Freedom Restoration Act when the interests of the corporation and the shareholders were identical so that the religion of the owners could be imputed to the corporation. After all, it would be hard to say that G.E. or even Google, with its "don't be evil" mantra, followed a religion, given that companies typically have no common set of interests other than profit.
If you adopt this approach, the rule that the government should be exploring is one that picks up corporations whose shareholders' interests are identical to the company's. It is difficult to think that a for-profit company with 100 shareholders could have interests that aligned perfectly.
In this vein, perhaps the government might do better to go back to the basics and focus on corporate law. Many corporate law experts have been skeptical of the logic behind the Hobby Lobby decision. The reason is that one of the chief benefits of a for-profit company is that it has limited liability. Shareholders cannot be held responsible for the debts of the company because it exists separately. Because of this, imputing the intent of the shareholders has always been on thin ice from a corporate law perspective because having a separate existence is the whole reason for creating a corporation in the first place.
Corporate law also has an answer to this issue, though: veil-piercing. This is an age-old doctrine that courts use to ignore the limited liability shield of a corporation and hold shareholders personally liable. Courts pierce the corporate veil when there is no difference between the shareholders and the company. In other words, veil-piercing looks to whether the identity of the shareholders and the corporation is indistinguishable and they are acting as one. It is typically limited to companies that have only a few shareholders - certainly fewer than five or so because of the difficulty in identifying mutual interests.
Whether the court intended to or not, it implicitly endorsed this solution. In his majority opinion, Justice Alito stated: "State corporate law provides a ready means for resolving any conflicts by, for example, dictating how a corporation can establish its governing structure." He then wrote, "Courts will turn to that structure and the underlying state law in resolving disputes."
In other words, if you follow the court's inclination, the test appears to be a small number of shareholders - full stop. Even then, you need to determine that the interests are aligned using veil-piercing doctrine.
The irony is that the shareholders of companies that assert they can take advantage of the Hobby Lobby decision may find that they are liable for the company's debts as they acknowledge grounds to pierce the corporate veil.
For now, we await the public's input and the government's decision. Of course, any rule is likely to face a court challenge and could wind up before the Supreme Court again. And perhaps Congress may even get its act together and weigh in. In other words, the fight over which among millions of corporations can assert religious protections has only just begun.
An earlier version of this column misstated when the Supreme Court issued its decision in Burwell v. Hobby Lobby. The decision was issued in June, not May.
Because of an editing error, an earlier version of this column misstated when the Religious Freedom Restoration Act was enacted. It was 1993, not 1933.