By Mike Appleton, Guest Blogger
Lawyers who do commercial litigation are familiar with the concept known as “piercing the corporate veil.” A principal purpose for doing business in corporate form is to avoid personal liability for business debts. But the veil of protection afforded by the corporate entity can be lost under certain circumstances, exposing a controlling shareholder to personal liability. Although the application of the concept varies a bit from state to state, the general rule is that “courts will look through the screen of a corporate entity to the individuals who compose it in cases in which the corporation was a mere device or sham to accomplish some ulterior purpose, or is a mere instrumentality or agent of another corporation or individual owning all or most of its stock, or where the purpose is to evade some statute or to accomplish some fraud or illegal purpose.” Biscayne Realty & Insurance Co. v. Ostend Realty Co., 109 Fla. 1, 148 So. 460, 564 (1933).
In short, no majority shareholder would concede that his company is his alter ego. Right? Well, maybe not. Recently some shareholders have been arguing, and successfully, that their companies are indeed mere instrumentalities.
Thomas Monaghan is the founder and one-time owner of Domino’s Pizza. He is also the sole shareholder of Domino’s Farms Corp., a for-profit company. As a strict Catholic, Mr. Monaghan opposes all forms of contraception and objects to the contraception coverage mandate in the Affordable Care Act. Since his company is not a religious organization and cannot qualify for an exemption from the mandate, he sued the Department of Health and Human Services seeking a declaration that the mandate violates his rights under the Free Exercise Clause and the Religious Freedom Restoration Act (“RFRA”), and enjoining its enforcement. On March 14th, a federal judge in Michigan agreed and granted a preliminary injunction, finding that Mr. Monaghan’s company may assert his free exercise rights and that the mandate represents an unconstitutional burden on those rights. Thomas Monaghan and Domino’s Farms Corp. v. Kathleen Sebelius, et al., No. 12-cv-15488 (E.D. Mich., March 14, 2013).
The court in Monaghan acknowledged that the Supreme Court has never ruled on whether a secular, for-profit corporation has free exercise rights under the First Amendment. However, relying on two cases out of the Ninth Circuit, and a currently pending case challenging the same mandate, the court held that a corporation has standing to claim the free exercise rights of its owner “where the beliefs of a closely-held corporation and its owner are indistinguishable… .”
The first Ninth Circuit case is Equal Employment Opportunity Commission v. Townley Engineering & Manufacturing Co., 859 F2d 610 (9th Cir. 1988), in which the court upheld a ruling that an atheist employee could not be compelled to attend mandatory religious services at his place of employment, but reversed an injunction prohibiting the services. In a footnote to its ruling, the court stated that the company had standing to assert the free exercise rights of a couple who owned 94% of the stock. Twenty years later, the court in Stormans, Inc. v. Selecky, 586 F.3d 1109 (9th Cir. 2009), cited Townley for the proposition that a for-profit corporation may claim the rights of its owners under the Free Exercise Clause. Stormans involved a family-owned pharmacy that refused on religious grounds to stock Plan B contraceptives as required under rules adopted by the State of Washington.
Neither Stormans nor Townley addressed whether a for-profit corporation has free exercise rights under the First Amendment, and neither case concerned the contraception coverage mandate under the ACA. But in Tyndale House Publishers, Inc. v. Sebelius, No. 12-1635 (D.D.C., Nov. 16, 2012), the court cited both the the Ninth Circuit cases to support its holding that a for-profit publisher of religious materials may assert the free exercise rights of its ownership group, a religious foundation and three trusts controlled by the Tyndale family, concluding that “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.”
The alter ego theory of corporate standing has been approved in a number of other cases challenging the contraception coverage mandate. Grote v. Sebelius, No. 13-1077 (7th Cir., Jan. 20, 2013); Korte v. Sebelius, 2012 U.S. App. LEXIS 26734 (7th Cir. 2012); Legatus v. Sebelius, No. 12-12061 (E.D Mich., October 31, 2012). As a consequence, in none of these cases has the court found it necessary to discuss the free exercise rights of secular, for-profit corporations.
In my view, the application of the mere instrumentality doctrine to the Free Exercise Clause is illogical, unsound and, frankly, silly. The contention that the religious views of a secular entity are indistinguishable from those of its owners makes no sense unless one assumes that a corporation actually has religious views, the very issue carefully avoided in these decisions. And what does it mean to say that a company in the business of selling outdoor power equipment has religious beliefs? It is reasonable to assume that most family-owned businesses (and most businesses are family-owned) reflect the religious views of their owners to some extent. So should all laws of general application be subject to the veto of the owner of the dry cleaners down the street? How can a company be the alter ego of its owners for religious purposes only? What is the future of a social and political structure committed to cultural diversity and religious pluralism if employee benefits mandated by legislative enactments are unavailable to those who through mere circumstance happen to be employed by a company whose owners have subjective religious objections to those benefits?
Fortunately, there is a second line of cases developing that categorically rejects the alter ego theory of religious exercise. In Hobby Lobby Stores, Inc. v. Sebelius, 870 F.Supp. 2d 1278 (W.D. Okla. 2012), the court squarely held that secular, for-profit companies do not have free exercise rights and are not classified as persons withing the meaning of the RFRA. The rationale in that case has been followed in Conestoga Wood Specialties Corporation v. Sebelius, No. 12-6744 (E.D. Pa., Jan. 11, 2013), in which the court noted that it found no “historical support for the proposition that a secular, for-profit corporation possesses the right to free exercise of religion.” The judge in that case also rejected an argument that the free speech language in Citizens United v. Federal Election Commission, 558 U.S. 2010 (2010) extended to include the Free Exercise Clause. See also Briscoe v. Sebelius, No. 13-cv-00285 (D. Colo., Feb. 27, 2013) (“I find Judge Heaton’s analysis in Hobby Lobby clear, concise and persuasive.”); Gilardi v. Sebelius, No. 13-104 (D.D.C., Mar. 3, 2013) (“The Court finds that the corporate form is dispositive in this case and should not be disregarded.”)
There are literally dozens of pending cases seeking to avoid compliance with the contraceptive coverage mandate. Plaintiffs are aggressively attempting to superimpose personal religious views on secular, for-profit entities. There is no doubt that the Supreme Court will ultimately have to resolve the conflicting rulings in the lower courts. For my part, I have never debated religious doctrine with the telephone company. My supermarket was not in my First Communion class and my drugstore did not attend my wedding. One has to hope that the Supreme Court will bring some sanity and common sense to deliberations on this issue.
Finally, in pondering Mr. Monaghan’s mere instrumentality logic, I found myself imagining a field trip taken by the parochial school run by Garrison Keillor’s favorite Catholic church, Our Lady of Perpetual Responsibility, from Minnesota to Michigan to visit Domino’s Farms. Then I imagined one of the children tripping and injuring herself on a defective kneeler in the farm chapel. What, I thought, would Mr. Monaghan have to say about the applicability of the alter ego doctrine to this incident?