The Problem with the Notion of “Closely-Held Corporations” in Hobby Lobby

There’s been a lot of talk about the religious rights of “closely-held corporations” since the Supreme Court’s opinion in Hobby Lobby back in June. So you might be surprised to learn, as I did, that “closely-held corporation” is not actually a thing. Who knew?

It certainly sounds like a real thing, and the Supreme Court seemed to think it was a real thing. But in the course of drafting and submitting several sets of comments on behalf of my day job at PRPCP (and the 60+ professors who signed on with us) on the Administration’s proposed definition of the for-profit entities who can seek an accommodation to avoid complying with the ACA’s contraceptive coverage requirement, I discovered that “closely-held corporation” is not a universally-understood term in corporate law. Or even a nationally-understood term. There are statutes in some states called “close corporation” statutes, but fewer than half the states have them, and even in the states that do have them, the requirements and limitations differ.

That may sound like a corporate law issue, not a religious rights issue, but it gets to one of the complications of free exercise rights. Some areas of law operate vertically, let’s say, since they’re mostly self-referential and one can acquire expertise in them without much reference to other areas of law. But religious rights work horizontally, as they come into interaction, and conflict, with many other categories of law. And it’s impossible to be expert in all types of law, even for the Supreme Court (although arguably one doesn’t need to be that much of an expert to realize this particular close corporation point).

In this case, that means it doesn’t actually make sense to say that the type of for-profit entity that has standing to raise RFRA claims is a “closely-held corporation,” because that’s not actually a standard type of entity in corporate law. Instead, as our comments argued, it makes more sense to ask what types of for-profit entities the Supreme Court was trying to protect in its decision.

The Court’s theory of corporate rights in Hobby Lobby was associational–the individuals who come together to make up a for-profit entity have individual religious rights, and so the entity is simply the vehicle through which they act on them. As the Court explained:

It is important to keep in mind that the purpose of this fiction is to provide protection for human beings. A corporation is simply a form of organization used by human beings to achieve desired ends. . . . protecting the free-exercise rights of corporations like Hobby Lobby . . . protects the religious liberty of the humans who own and control those companies.

Given that, it makes sense only to recognize religious rights for a for-profit entity when the entity’s owners are unanimous in their beliefs and their desired action. If half of the owners of a company believe their religion requires them to seek an exemption and the other half of the owners believe their religion requires them to help women access health care including contraception, it would make no sense to say that a corporation was “protect[ing] the religious liberty of the humans who own it,” because whichever action it took (seeking an exemption or not seeking an exemption), half the owners would not only not be represented but would actively be thwarted in their own religious exercise.

That is why our comments, joined by 40+ corporate law experts, urged the Department to limit the exemption to privately-held for-profit entities of a limited size that could produce proof of a religious mission in their governance documents and could produce documentation of an annual owner agreement to seek an exemption. Now we wait and see what the Department will do, and how they will choose to interpret the opinion’s imprecise terms.