Balkinization: <i>Hobby Lobby</i> Part XIII--Shareholder claims, Professor Bainbridge, and the red herring of "insider reverse veil piercing"

Hobby Lobby Part XIII--Shareholder claims, Professor Bainbridge, and the red herring of "insider reverse veil piercing"

Marty Lederman

The Supreme Court hears argument tomorrow morning in the Hobby Lobby and Conestoga Wood cases. Earlier in the weekend I published a post about the role of abortion in the cases. And a compendium of Balkinization and other posts about the cases can be found here.

In this post, I'll address a discrete aspect of the cases that has recently received some inordinate attention in the literature and in the briefs--namely, the status of shareholder claims under RFRA, under the corporate law doctrine of so-called "insider reverse veil piercing."

In an earlier post, I explained that although perhaps for-profit corporations can exercise religion in certain contexts, the religious claims in Hobby Lobby and Conestoga Wood--allegations that the government has compelled actions that the plaintiffs' religion prohibits--cannot be asserted by the corporations themselves, since no religion imposes such obligations on those corporations (nor have plaintiffs made any claims to that effect).

The cases are, instead, I suggested, about whether federal law substantially burdens the religious exercise of the individual plaintiffs--the Greens and the Hahns. I further explained that in answering this question, it is essential to distinguish the various roles these plaintiffs play within the corporations.

It has been widely assumed that Hobby Lobby and Conestoga Wood are cases about the use of money--about the government compelling the plaintiffs as shareholders to expend their funds to reimburse employees for the purchase of contraception, in (alleged) violation of the shareholders' religious obligation to avoid complicity in the use of contraception.

I don't think that's the proper focus of the cases, however.

For starters, the federal legal obligations in these cases run against the corporations themselves, and/or their insurance plans, not against the shareholders. So the shareholders are not directly burdened by federal law. The question, then, is whether shareholders nevertheless can obtain relief for injuries that they allegedly suffer derivatively, by virtue of the state's regulation of the corporation, notwithstanding the black-letter law that corporations and their shareholders are distinct entities for purposes of liability and benefits.

Individuals typically form a corporation so that they will not be personally liable for any claims against the corporation--indeed, that's one of the principal reasons state law creates the corporate form. Does it follow that shareholders cannot complain about injuries they suffer derivatively when other actors, including the government, take action against the corporation? By accepting the “sweet” (limited liability), must shareholders also accept the “bitter,” in the form of abandonment of rights they otherwise might have had to recover for injuries they suffer by virtue of their ownership of the corporate shares? As Judge Matheson put the question in his separate concurrence in Hobby Lobby, should “[t]he structural barriers of corporate law give [one] pause about whether the plaintiffs can have their corporate veil and pierce it too”?

In response to this question, Professor Steve Bainbridge published an article suggesting that the Court should make use of a corporate law doctrine called "insider reverse veil piercing" in order to allow the Greens and the Hahns to assert RFRA claims as shareholders notwithstanding the fact that they are generally immune from liability for any wrongs committed by their corporations--i.e., to allow them to reap the sweet and also avoid the bitter.

Subsequently, a group of 44 corporate and criminal law professors filed an amicus brief arguing that "reverse veil piercing" would be inappropriate here, and that the Court should not allow the plaintiffs to sue as shareholders.

Professor Bainbridge has now responded with a follow-up article critiquing the corporate law professors' brief. He argues again that the Court should use "insider reverse veil piercing," or "RVP-I," "to allow . . . shareholder standing to sue if the [C]ourt is unwilling to allow the corporation to do so."

What (if anything) should the Court make of this corporate law dispute about RVP-I?

1. First of all, it's not clear that these cases are even about injuries to the individuals in their capacities as shareholders. Indeed, it appears that the individual plaintiffs in Hobby Lobby, members of the Green family, are not shareholders of Hobby Lobby and Mardel, the two corporate plaintiffs in that case; they are, instead, trustees of a management trust that owns the companies. The Greens do not allege that they own the companies; and unless I've missed something, their complaint does not allege any way in which their funds would be used to "pay for" contraception. As I explained in a recent post, Hobby Lobby's brief confirms that the case is not fundamentally about coercing the Greens to pay for contraception, or about the Greens' religious exercise in their capacity as shareholders. The Greens' fundamental complaint, instead, is that federal law coerces them to violate a religious obligation in their capacities as corporate directors, i.e., decision-makers. "[T]he precise religious [religious] exercise at issue here," the brief explains, is that "the Greens cannot in good conscience direct their corporations to provide insurance coverage for the four drugs and devices at issue because doing so would 'facilitat[e] harms against human beings.'”

A decision by the Court limited to shareholder rights, therefore, would not resolve Hobby Lobby.

That leaves the Conestoga Wood case. The individual plaintiffs in that case, members of the Hahn family, also primarily complain about federal law burdening them in their capacity as corporate directors, or decision-makers. In addition, however, paragraph 11 of their complaint alleges that the Hahns are collectively the “principal[]” owners of the shares of Conestoga Wood. So perhaps the RVP-I question does arise vis-a-vis the Hahns, whose shareholder funds presumably would be used, not to pay for contraception reimbursement directly, but instead to pay for part of the overall premiums to the plan insurance carrier. (Remarkably, the Conestoga Wood complaint does not specify whether CW has a self-insured employee health insurance plan or a plan issued through an independent insurer. But in its Supreme Court brief, it refers to its (unidentified) "issuer" as having "inserted coverage of the contraceptives into its plan over Petitioners’ objection" after the district court denied a preliminary injunction.) So, in some very attenuated sense, the Hahns' shareholder funds are subsidizing the plan's reimbursement for employees' use of contraception . . . and the complaint might be read to suggest that this use of the Hahns' funds would make the Hahns complicit in their employees' use of so-called "abortifacients" in the rare case (if any) in which use of certain contraceptive methods prevented a fertilized egg from implanting in the uterine wall.

2. But even if the "shareholders' complicity" issue is teed up in Conestoga Wood . . . Honestly?

Can it really be the case that the Supreme Court of the United States ought to decide Conestoga Wood based upon the assumption that the corporate law "RVP-I doctrine" would apply in this unprecedented context? This is a state law question, the answer to which depends upon the legal relationship between a corporation and its principal shareholders . . . presumably under Pennsylvania law.

Professor Bainbridge cites as his primary authorities two 30-year-old state-law cases--one from Minnesota, the other from Michigan--both involving questions far-flung from the RFRA context in Conestoga Wood. To be sure, he also cites one Pennsylvania case--Barium Steel Corp. v. Wiley, 108 A.2d 336 (1954). But in that case, which was decided 60 years ago, the Pennsylvania Supreme Court split 3-3 on what we (well, what corporations law professors) would today apparently call an "insider reverse veil piercing" theory, in a case that has almost nothing in common with Conestoga Wood. And the three Pennsylvania Justices who would not have recognized the RVP-I in Barium Steel wrote this: "The decisions in this State will be searched in vain for a single instance where a piercing of the corporate veil has been judicially sanctioned in order to confer a benefit upon the ones responsible for the presence of the veil. Certainly, the opinion for this court in the instant case cites no such decision."

That exhausts my knowledge of how Pennsylvania law treats insider reverse veil-piercing. Perhaps Professor Bainbridge is right that Pennsylvania (and other state) courts would or should "reverse-pierce" the veil in this RFRA context, in which a federal statute is implicated. Perhaps he's wrong. But how should the Supreme Court of the United States resolve that question?

Bainbridge argues that courts have historically "pierced the corporate veil" in 13.41% of RVP cases, and that the Court should decide whether Conestoga Wood should be among that number based upon the simple test of whether piercing here would advance a "significant public policy." But he does not cite any other Pennsylvania authority in support of this view, or any case at all involving RVP and RFRA, or RVP and shareholders' religious exercise more broadly, from any jurisdiction.

This absence of precedent ought to be a serious problem for his RVP-I argument, particularly in light of the principal case cited in the corporate professors' brief (and in the government's brief), Domino's Pizza, Inc. v. McDonald, 546 U.S. 470 (2006).

McDonald was the sole shareholder of a Nevada corporation. He alleged that Domino's had broken contracts with that corporation because of racial animus toward him, in violation of 42 U.S.C. § 1981. The Court held that section 1981 offers relief to a plaintiff when racial discrimination impairs an existing contractual relationship, so long as the plaintiff himself has or would have rights under the existing or proposed contractual relationship. Of course, the contracts themselves, between corporations, did not afford McDonald any rights, because he was merely a shareholder. Citing some of the same Minnesota cases Professor Bainbridge cites, however, McDonald argued that "under state law shareholders are at times permitted to disregard the existence of the intermediate corporate entity where failing to do so would impair full enforcement of important . . . statutes." Resp. Br at 32 n.34.

At oral argument, Justice Kennedy identified this claim as "kind of an inverse corporate veil piercing," and asked: "[A]re there any cases where we pierced the corporate veil in order to help the shareholder?" (The answer, of course, is that the Court has never done so.)

Not surprisingly, the Court unanimously rejected McDonald's inverse veil piercing claim. Justice Scalia's opinion for the Court explained that "it is fundamental corporation and agency law—indeed, it can be said to be the whole purpose of corporation and agency law—that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation's contracts."

The Court presumably was able to issue such a categorical interpretation of state law because it had been offered no examples, in any jurisdiction, of reverse veil piercing to vindicate shareholder contract rights. To be sure, Conestoga Wood does not involve shareholders' contract rights, so McDonald does not directly resolve the RVP-I question here. But the Hahns have the burden to show a RFRA burden, and neither they nor Professor Bainbridge have cited any case, from Pennsylvania or elsewhere, in which shareholders have been permitted to use RVP-I to allege harms to their religious exercise, under a state or local RFRA, resulting from a law that has an impact on corporate funds. The Court presumably should, therefore, treat the RVP-I argument here the way in which it treated the equally unsupported and unprecedented argument in Domino's--i.e., summarily reject it.

Domino's appears to be the one and only occasion in which the Supreme Court has specifically considered the relationship between the "RVP" doctrine and a federal statute. You'd think, therefore, that Professor Bainbridge would devote serious attention to the case. His analysis of Domino's is relegated to a footnote, however. And his efforts to distinguish the holding in that case are unpersuasive. For example, he notes that the shareholder in Domino's raised "only" contractual and statutory rights. But Conestoga Wood's claim here (the only claim with any traction, anyway) is based on a federal statute (RFRA), just as McDonald's was. Bainbridge's suggestion that the federal statutory right established by RFRA is more "fundamental" than the federal statutory right against race discrimination established by section 1981--indeed, so much more "fundamental" that it ought to result in an about-face on the Court's RVP-I holding--is so implausible that it doesn't warrant a response.

His principal argument fares no better. He insists that Domino's is a "weak precedential reed" because the Court in that case "made no effort to analyze the issues raised by RVP, but simply dismissed it out of hand," without addressing "any of the points made [by Prof. Bainbridge] in defense of the doctrine." In other words, Bainbridge thinks that the Court should ignore its unanimous holding in Domino's because the Court did not do its homework in that case, even after Justice Kennedy had specifically teed up the question as whether the Court should recognize a claim of "inverse corporate veil piercing." Suffice it to say that that argument is unlikely to have any traction with the Court. Moreover, it misses the point: The Court rejected the RVP-I claim in Domino's because the plaintiff there gave the Court absolutely no basis for concluding that state law would recognize such an exception to the default "fundamental corporation and agency law" principle that a corporate shareholder has no rights and is exposed to no liability under the corporation's contracts. The same thing is true in this case: Neither the Hahns nor Professor Bainbridge has offered the Court any authority at all in support of the proposition that the Pennsylvania Supreme Court -- or other state courts, for that matter -- would recognize an RVP-I claim in a case involving RFRA.


Moreover, even if the Court were somehow able to answer the RVP-I question as a matter of Pennsylvania law (after certifying it to the Pennsylvania Supreme Court, perhaps?), that state-law-based judgment would not govern similar cases arising in the other 49 states and the District of Columbia, and therefore would hardly be a satisfactory resolution of the question on which the Court granted certiorari in Conestoga Wood. (And it wouldn't have any impact on a non-shareholder case such as Hobby Lobby.)

* * * *

In the absence of any indication that Pennsylvania law would allow RVP-I in this novel context, the more appropriate approach for the Court would be to follow its example in Domino's, and simply move on from a shareholder-injury inquiry to address the principal question raised both in Conestoga Wood and in Hobby Lobby--namely, whether federal law coerces the individual plaintiffs (the Hahns and the Greens) to violate religious injunctions in their capacities as decision-makers, or directors, of the three corporations in question in these two cases. In an earlier post, I discuss why I think the plaintiffs have failed to adequately plead facts to support such a claim.

Compendium of posts on Hobby Lobby and related cases

Posted 1:56 PM by Marty Lederman [link]