Why Hobby Lobby Is Bad For Business

Hobby Lobby. The infamous June 30, 2014 U.S. Supreme Court decision blew up on social media, blogging websites, and television satiric news programs. The plurality opinion [see footnote 1] was controversial for numerous reasons such as: Women’s voices versus a corporate’ voice. Business owner’s exercising control over medical decisions. Secular companies having religious beliefs. And so on.

Despite all the contentious arguments that arise from this decision, I’m going to focus on one: Whether small business owners should rely on the U.S. Supreme Court decision to assert its corporate voice. The answer: Absolutely not! Simply put, it is bad for business and may in fact destroy it.

Before delving into the Hobby Lobby decision, let’s start with some basic legal lingo:

• Limited Liability: Owners form business entities such as corporations or limited liability companies (“LLCs”) in order to protect their personal assets from their business debts and liabilities, i.e., limit their liability. Limited liability limits what is at stake to the amount owners invested into their companies and nothing more.
• Piercing the Corporate Veil: Losing limited liability status occurs when owners fail to maintain the integrity of their business, thus, invoking a legal doctrine called Piercing the Corporate Veil. This doctrine allows courts to hold the owners personally liable for business debts and liabilities. (And I guarantee that the majority of plaintiffs suing businesses will bring this concept into play.)
• Alter Ego Theory: A legal theory used to pierce the corporate veil.

To invoke alter ego, two conditions must be met: 1) there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist; and 2) there must be an inequitable result if the acts in question are treated as those of the corporation alone. Hoffman-La Roche v. Superior Court, 130 Cal. App. 4th 782, 796 (2005)

“Unity of Interest” happens when a business owner commingles funds, fails to adequately capitalize the company, and ignores company formalities, among other things.

Keeping this legal jargon in mind, let’s look at snippets from the U.S. Supreme Court’s plurality opinion: In the first sentence of the introductory paragraph, Justice Alito writes: “We must decide … whether the Religious Freedom Restoration Act of 1993 … permits the [U.S.] Department of Health and Human Services … to demand that three closely held corporations provide health-insurance coverage for methods of contraception that violate the sincerely held religious beliefs of the companies’ owners.” Burwell et al. v. Hobby Lobby Stores, Inc., et al., 573 U. S. ____ (2014) (emphasis added).

Hmmm. The “religious beliefs of the companies’ owners.” Not the religious beliefs of the company are at issue. You may think: Well, of course, how can a secular, for-profit company have a religious belief? The Third Circuit agrees with you as it correctly noted:

General business corporations do not, separate and apart from the actions or belief systems of their individual owners or employees, exercise religion. They don’t pray, worship, observe sacraments or take other religiously-motivated actions separate and apart from the intention and direction of their individual actors. Id.

 To take this one step further, corporations and LLCs are legal fictions created for the sole purpose that business owners can take advantage of limited liability. “As Chief Justice Marshall observed nearly two centuries ago, a corporation is ‘an artificial being, invisible, intangible, and existing only in contemplation of law.’” Id. (Ginsburg dissent) (internal citations omitted). “By incorporating a business…, an individual separates herself from the entity and escapes personal responsibility for the entity’s obligations. One might ask why the separation should hold only when it serves the interest of those who control the corporation.” Id. (Ginsburg dissent) (emphasis added). “Indeed, … religious exemptions had never been extended to any entity operating in ‘the commercial, profit-making world.’” Id. (Ginsburg dissent) (citation omitted).

And the reality of for-profit corporations or LLCs is: They aren’t religious and have no religious purpose. Their purpose is to generate money by selling goods and/or services to consumers. Yet, ignoring this reality, riddled throughout the decision, Justice Alito focuses only on the personal beliefs of the owners:

• It is “against [the Hahns’] moral conviction to be involved in the termination of human life” after conception….”
• “[T]he Hahns and Greens have a sincere religious belief that life begins at conception.”
• “They therefore object on religious grounds to providing health insurance that covers methods of birth control….”
• “By requiring the Hahns and Greens and their companies to arrange for such coverage, the HHS mandate demands that they engage in conduct that seriously violates their religious beliefs.” (emphasis added).

The effect of Justice Alito’s reasoning will have the courts grappling with questions: Can owner now deny “blood transfusions (Jehovah’s Witnesses); antidepressants (Scientologists); medications derived from pigs, including anesthesia, intravenous fluids, and pills coated with gelatin (certain Muslims, Jews, and Hindus); and vaccinations (Christian Scientists, among others)?” Id. (Ginsburg dissent).

But business owners should NOT even bring these cases to court. The main reason why? Justice Alito’s opinion melds the personality of the company with its owners. He fails to keep the legal fiction alive. For now, the beliefs of the shareholders and the beliefs of a for-profit closely-held company are one and the same. And this creates a Unity of Interest!

And so Hobby Lobby Stores, Inc. cut off its nose to spite its face.  Yes, the company may now deny certain contraceptive methods to its female employees because it asserts the religious beliefs of its equitable owners. But, these equitable owners made themselves vulnerable to challenges to their limited liability. By making the beliefs of Hobby Lobby interchangeable with the David and Barbara Green and their three children, the Hobby Lobby tore down the barrier keeping companies separate and apart from their owners.

What does this really mean for business owners? Well, let’s look at this scenario: A corporate executive and mother of three children, all under the ages of ten, walks into a Hobby Lobby store in West Covina, California during her spare time. While perusing the aisles of arts and crafts, she trips on some yarn, breaking her leg, arm, and a few teeth. A personal injury attorney appears out of the Wood Crafting Supplies section, takes the mother on as a client, and sues Hobby Lobby Stores, Inc. and its owners for personal injury, loss of business, loss of profits, loss of consortium, emotional distress, among other things.

In the complaint, the savvy attorney alleges that Hobby Lobby Stores, Inc. is the alter ego of David and Barbara Green and their three children. During the litigation process, the attorney request that the court takes Judicial Notice [see footnote 2] Justice Alito’s opinion to be used as evidence that the company and its owners are one and the same. Hence, this opinion makes it easier for the plaintiff to pierce Hobby Lobby Stores, Inc.’s corporate veil, potentially resulting in the Green family’s loss of their limited liability protection. Of course, a lot of other things have to happen but the plaintiff is now on her way to potentially recover damages not only from Hobby Lobby Stores, Inc. but also out of the owner’s own pockets.

So, the question I have to the business owner is: Do you want to be in Hobby Lobby Stores, Inc.’s shoes and potentially place your personal assets on the line should litigation arise? Is asserting your voice and beliefs, religious or not, through your for-profit company worth it? I hope not.

In sum, I recommend that business owners do not rely on the Hobby Lobby decision because it is bad for business.

[1] Justice Kennedy concurred with the majority side but wrote his own take on the case.

[2] Judicial Notice “allows [a] court to recognize and accept the existence of a particular fact commonly known by persons of average intelligence without establishing its existence by admitting evidence in a civil or criminal action.” (See http://legal-dictionary.thefreedictionary.com/Judicial+Notice.)

Legal Disclaimer: The information contained in this article is intended to provide general information and does not constitute and is not intended to constitute legal advice.  Further, any analyses of facts contained herein are the mere opinions and interpretations of Erica based upon her viewpoint. The content provided is not warranted or checked to ensure that the content contained herein is up-to-date.  Should you wish to seek Erica’s counsel please visit contact her to schedule an appointment.