My Business, Myself: Piercing the Corporate Veil

On January 8, a small Minnesota-based medical device company, Annex Medical, Inc., lost its preliminary bid to avoid offering its employees health insurance policies that cover contraception.

Because Annex has only 16 full-time and two part-time employees, the Affordable Care Act, or “Obamacare,” does not require it to provide health insurance to its workers at all. (Only businesses with 50 or more employees are required by the new law to provide insurance.) However, if Annex chooses to offer its employees insurance, its plan—like those of larger companies—must comply with the minimum requirements for preventive health care services, including contraceptive services.

In keeping with emphasis of the Affordable Care Act (ACA) on “wellness,” the law requires most insurance plans to cover preventive health care services without co-pays. Government regulations spell out which services are covered, and among women’s preventive services are all FDA-approved contraceptive methods and sterilization procedures, along with patient education and counseling.

Since the regulations were announced, the “contraception mandate” has been the cause of great controversy, as many non-profit religious organizations, including Catholic hospitals and religiously-affiliated colleges, have objected to offering birth control services through their insurance plans.

The narrow exemption in the original rules, which were not broad enough to cover Catholic schools like Notre Dame, is undergoing a reevaluation. However, in addition to objections by religious non-profits, more than a dozen for-profit small businesses have filed lawsuits objecting to furnishing coverage for some or all contraceptive services because of the owners’ religious beliefs. That’s the case with Annex Medical.

Annex’s owner, Stuart Lind, is a devout Catholic. In 2001, he made a formal commitment to operate his business in accordance with the teachings of Jesus through a Catholic ceremony that consecrated the business to the Sacred Heart of Jesus. Like challenges made by other Catholic-owned small businesses, Lind objects to all aspects of the contraceptive coverage mandate. Challenges by non-Catholic Christian-owned firms usually object only to emergency contraceptive methods, which some argue may prevent implantation of an already fertilized egg, and to IUDs which can prevent implantation. These methods are seen by some anti-abortion advocates as not merely a form of contraception but as “abortifacients” that stop a pregnancy after conception.

The lawsuits that have been filed by businesses like Annex challenge the ACA’s contraception mandate on a number of grounds. The most significant challenge invokes the federal Religious Freedom Restoration Act, claiming that the insurance coverage mandate imposes a substantial burden on the free exercise of religion. Annex Medical lost its claim because the court concluded that the mandate does not impose a substantial burden on religious exercise and in the widely-publicized Hobby Lobby case, the court reached the same result. But other judges have reached the opposite conclusion.

The Affordable Care Act generally imposes its insurance requirements on businesses that operate either as corporations or as limited liability companies (LLC)—a hybrid business model that combines elements of a corporation and a partnership. For either sort of company, the contraceptive mandate applies to the business itself, not its owners. For large businesses, this distinction is clear: the health insurance mandate applies to General Motors, not its thousands of shareholders. However, with small businesses, the line between business and owner is often more blurred, creating a multitude of legal complications.

When companies like Annex sue over the contraception mandate, the lawsuits are usually filed in the name of both the business and its owners, and the complaint about whose rights to the free exercise of religion are at issue can become ambiguous. Can business owners assert that their free exercise is being burdened when the coverage mandate is imposed not on them, but on their business? Does the for-profit corporation or LLC have religious beliefs of its own? Does General Motors practice religion? If not, do smaller corporations exercise religion? Or are the small businesses really asserting the religious rights of their owners?

It might seem strange to claim that a corporation (or an LLC) has religious freedom rights separate from those of the “real people” who own or manage it. An Oklahoma federal district court, rejecting a challenge by Hobby Lobby Stores to the coverage mandate, thought it was, finding:

General business corporations do not, separate and apart from the actions or belief systems of their individual owners or employees, exercise religion. They do not pray, worship, observe sacraments or take other religiously-motivated actions separate and apart from the intention and direction of their individual actors. Religious exercise is, by its nature, one of those “purely personal” matters… which is not the province of a general business corporation.

Hobby Lobby appealed, but the 10th Circuit Court refused to enjoin enforcement while the appeal is pending. So did Supreme Court Justice Sonia Sotomayor. Neither resolved the question of whether the business entity itself has religious rights.

However, in other ways, corporations often do have constitutional rights. A corporation cannot be convicted of a criminal offense without the protections given by the Constitution to criminal defendants. And in the famous 2010 Citizens United case, the Supreme Court held that corporations have the same First Amendment rights of political speech that “real people” do. If the First Amendment has been interpreted to guarantee a corporation’s free speech rights, does it also have free religious exercise rights guaranteed by the same Amendment? Annex Medical claims it does, citing as evidence its formal Mission Statement

to manufacture medical products of high quality and good value, while conducting business in a way that is pleasing to God and is faithful to Biblical principles and values. We will accomplish this mission from a Christian perspective that respects others who believe differently while sharing the joy we have received from Jesus Christ.

A Corporation as Alter Ego of its Owners

Whether a corporation can be seen as having non-economic rights—whether it is to be considered fully a “person” under the law—is not a new question. In the 18th century, the Lord Chancellor of England famously scoffed at the claim, asking, “Did you ever expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked?” In the Affordable Care Act cases, some courts have avoided the difficult issue of whether a business has religious conscience rights by instead concluding that the business is so closely identified with its owners that it may assert the owners’ religious objections as its own.

This idea—that a corporation and its owners should be treated as the same person—is a well-known concept in corporate law, commonly referred to it as “piercing the corporate veil.” Most of the time, lawyers warn their corporate clients to do everything possible to avoid this “piercing,” since the doctrine is usually invoked when creditors of a business are making claims against the personal assets of a company’s shareholders, seeking to recoup their losses from an insolvent business by going after its owners. There is a vast amount of case law on when a court should allow “piercing the corporate veil” to reach shareholders’ personal assets, often focusing on abuse of the corporate form, misleading of creditors, or lack of corporate formalities. Business lawyers look to whether the corporation is the mere alter ego of its owners and routinely advise their corporate clients to emphasize the corporation’s separate existence from its owners.

However, the pleadings filed in many of the contraceptive mandate challenges purposely blur this line, collapsing the beliefs of the business with its owners, inviting “piercing.” As the district court concluded in a challenge brought by Tyndale House, a for-profit publisher of Bibles and Christian books:

when the beliefs of a closely-held corporation and its owners are inseparable, the corporation should be deemed the alter-ego of its owners for religious purposes.

Courts that have allowed businesses to assert the religious exercise rights of their owners have rarely, if ever, referred to the “piercing” cases brought by corporate creditors against business owners. This omission hides the unintended consequences that may be in store for small business owners who identify too closely with their business firms. These owners may be unaware of the new personal liability for business debts—including liabilities to the government—that they are risking by equating themselves with their business for purposes of religious expression. They may be inadvertently inviting the government to hold them to their word—that they and the business are one—when it comes to other matters as well.

Hobby Lobby Stores has become the poster child for business resistance to the contraceptive coverage mandate, drawing supportive “shopping campaigns” from advocates including Fox commentator Mike Huckabee. The company emphasizes that it faces potentially bankrupting fines of up to $1.3 million per day if it refuses to comply with the coverage mandate. The courts in this case have so far avoided ruling on whether the company should be seen as the alter ego of its owners in asserting religious objections to offering contraception coverage. In its petition to the Supreme Court seeking a temporary injunction on enforcement, Hobby Lobby argued that “individuals can assert religious exercise claims for burdens imposed on the businesses they own and operate.” This is implicitly an argument that Hobby Lobby is the alter ego of its owners.

If the courts ultimately agree with the trial court that the mandate does not impose a substantial burden on plaintiffs’ free exercise rights, the reality of the crushing fines will come home. If Hobby Lobby cannot afford to satisfy those huge amounts, the government might well hold the firm’s owners to their claim that they are one with their business—and hold the owners accountable for their business’s debt. If the government is successful in this piercing argument, suddenly not only is the business at risk, so are the personal fortunes of its owners. That is a lawyer’s—and a business owner’s—worst nightmare.

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Howard M. Friedman is a law professor emeritus from the University of Toledo, living in Atlanta, Georgia. He is the editor of Religion Clause blog.