July 2013 FBA Labor and Employment Law Third Circuit Update

Posted on Friday, August 9th, 2013.

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July 2013 FBA Labor and Employment Law Third Circuit Update

Stephen E. Trimboli, Esq.
Trimboli & Prusinowski, LLC


In Conestoga Wood Specialties Corp., et al.  v. Secretary, Health and Human Services, released July 26, 2013, the Third Circuit addressed the controversial issue whether the federal requirement that employer health insurance provide coverage for contraceptives violates the Free Exercise Clause of the First Amendment or the Religious Freedom Restoration Act, 42 U.S.C. § 2000bb, when applied to private, for-profit corporations.   By a 2-1 majority, a Third Circuit held that private, for-profit corporations cannot engage in religious exercise under the Free Exercise Clause or the RFRA, splitting with the Ninth Circuit on this threshold issue.  Given this determination, the majority did not reach the underlying free exercise/RFRA issue.


The case was an appeal taken by the corporation and it sole shareholder, the Hahn family, from a District Court denial of a preliminary injunction.


Appellants alleged that regulations promulgated by the Department of Health and Human Services, (HHS), which require group health plans and health insurance issues to provide coverage for contraceptives, violated the RFRA and the Free Exercise Clause.


The Patient Protection and Affordable Care Act requires non-exempt group plans to provide coverage, without cost-sharing, for preventative care and screening for women in accordance with guidelines created by the Health Resources and Services Administration, a subagency of HHS.


The HRSA delegated the creation of guidelines on this issue to the Institute of Medicine.  The IOM recommended that the HRSA adopt guidelines that require non-exempt group plans to cover all approved contraceptive methods, sterilization procedures, and patient education and counseling for women with reproductive capacity.


Under regulations adopted February 15, 2012, 77 Fed. Reg. 8725, group health plans and health insurance issuers are required to provide coverage consistent with the HRSA guidelines in plan years beginning on or after August 1, 2012, unless the employer or the plan is exempt. These regulations were updated on July 2, 2013, but the updates had no impact on the litigation.


The Hahns own 100 percent of the voting shares of Conestoga.  Conestoga is a Pennsylvania for-profit corporation that manufactures wood cabinets and has 950 employees.  The Hahns practice the Mennonite religion.  The Hahns objected to two drugs that, in their view, may cause the demise of an already conceived but not yet attached human embryo.  Specifically, they objected to being obligated to provide emergency contraception drugs such as Plan B (the “morning after pill”) and ella (the “week after pill”).


The Third Circuit reviews a district court’s denial of a preliminary injunction for abuse of discretion, but also reviews the underlying factual findings for clear error and questions of law de novo.  A party seeking a preliminary injuction must show: (1) a likelihood of success on the merits; (2) that it will suffer irreparable harm if the injunction is denied; (3) that granting preliminary relief will not result in even greater harm to the nonmoving party; and (4) that the public interest favors such relief.  A plaintiff seeking an injunction must meet all four criteria.


The threshold question was whether a for-profit, secular corporation can exercise religion.  Appellants offered two theories under which a private corporation could exercise religion.  The majority rejected each.

In Citizens United, the Supreme Court held that the Government may not suppress political speech on the basis of the speaker’s corporation identity, and struck down statutory restrictions on corporate independent political expenditure.  Citizens United v. Fed. Election Comm’n, 558 U.S. 310, 365 (2010).  Citizens United “recognizes the application of the First Amendment to corporations generally without distinguishing between the Free Exercise Clause and the Free Speech Clause, both which are contained within the First Amendment.  Accordingly, whether Citizens United is applicable to the Free Exercise Clause is a question of first impression.”


The majority then cited First National Bank of Boston v. Bellotti, 435 U.S. 765, 778, n. 14 (1978), as the controlling precedent.  “Certain ‘purely personal’ guarantees, such as the privilege against compulsory self-incrimination, are unavailable to corporations and other organizations because the ‘historic function’ of the particular guarantee has been limited to the protection of individuals…Whether or not a particular guarantee is ‘purely personal’ or is unavailable to corporations for some other reason depends on the nature, history, and purpose of the particular constitutional provision.”  Id.  Based on Bellotti, the majority was required to consider whether the Free Exercise Clause has historically protected corporations, or whether the guarantee is purely personal.


The majority found Citizens United to be “grounded in the notion that the Court has a long history of protecting corporations’ rights to free speech.”  The majority found no such history with respect to the Free Exercise Clause.  “In fact, we are not aware of any case preceding the commencement of litigation about the {contraceptive} Mandate, in which a for-profit, secular corporation was itself found to have free exercise rights.”


The majority then reasoned that it could not see how a for-profit “artificial being, invisible, intangible, and existing only in contemplation of law,” that was “created to make money could exercise such an inherently human right.  We simply cannot understand how a for-profit, secular corporation apart from its owners, can exercise religion.”


Appellants, as well as the dissent, cited to cases in which courts have ruled in favor of free exercise claims advanced by religious organizations.  None of these cases involved secular, for-profit corporations.  “We will not draw the conclusion that, just because courts have recognized the free exercise rights of churches and other religious entities, it necessarily follows that for-profit, secular corporations can exercise religion.”


Appellants argued that the free exercise and free-speech clauses must be interpreted the same because they are separated in the First Amendment by a semicolon, which supposedly shows intent that the two clauses be interpreted the same.  The majority did not accept this argument.  Historically, each clause had been interpreted separately and independently.  The majority found no support for the textual argument that the two clauses must be interpreted identically.

Appellants also argued that Conestoga can exercise religion under a “passed through” theory developed by the Court of Appeals for the Ninth Circuit in EEOC v. Townley Engineering & Manufacturing Company, 859 F.2d 610 (9th Cir. 1988), and in Stormans, Inc. v. Selecky, 586 F.3d 1109 (9th Cir. 2009), in which the Ninth Circuit held that for-profit corporations can assert the free exercise claims of their owners. The majority rejected this theory outright.


After carefully considering the Ninth Circuit’s reasoning, we are not persuaded.  We decline to adopt the Townley/Stormans theory, as we believe that it rests on erroneous assumptions regarding the very nature of the corporate form.  In fact, the Ninth Circuit did not mention certain basic legal principles governing the status of a corporation and its relationship with the individuals who create and own the entity.  It is a fundamental principle that “incorporation’s basic purpose is to create a distinct legal entity, with legal rights, obligations, powers, and privileges different from those of the natural individuals who created” the corporation.  Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 163 (2001). The “passed through”doctrine fails to acknowledge that, by incorporating their business, the Hanhs themselves created a distinct legal entity that has legally distinct rights and responsibilities from the Hahns, as the owners of the corporation.


Because Conestoga is an entity separate and distinct from the Hahns, the mandate does not actually require the Hahns to do anything.  “All responsibility for complying with the Mandate falls on Conestoga.  We recognize that, as the sole shareholders of Conestoga, ultimately the corporation’s profits will flow to the Hahns.  But  … [t]he owners of an LLC or corporation, even a closely-held one, have an obligation to respect the corporate form, on pain of losing the benefits of that form should they fail to do so.”


Under the RFRA, “[g]overnment shall not substantially burden a person’s exercise of religion even if the burden results from a rule of general applicability {unless the burden} (1) is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest.”  42 U.S.C. §§ 2000bb-1(a)-(b).  As with the inquiry under the Free Exercise Clause, the court’s preliminary inquiry is whether a for-profit, secular corporation can assert a claim under the RFRA.  Under the plain language of the statute, the RFRA only applies to a “person’s exercise of religion” Id. at §2000bb-1(a).  The majority’s “conclusion that a for-profit, secular corporation cannot assert a claim under the Free Exercise Clause necessitates the conclusion that a for-profit, secular corporation cannot engage in the exercise of religion.”


Finally, the majority found that the Hahns had no viable claim.  “The Mandate does not impose any requirements on the Hahns.  Rather, compliance is placed squarely on Conestoga.”  The Hahns chose to utilize the corporate form and cannot “move freely between corporate and individual status to gain the advantages and avoid the disadvantages of the respective forms.”


Judge Jordan authored a lengthy dissent.  He not only would find the Free Exercise Clause and RFRA applicable to private corporations.  He would also find that those enactments prohibited the mandate from being applied to Conestoga.

The majority decision in Conestoga has logical appeal but leave open many questions: Does the absence of a “long history” of cases extended free exercise rights to corporations in and of itself mean that corporations can have no such rights in any case?  Should closely-held family corporations be treated differently than publically-traded corporations with thousand of shareholders?   What about business entities such as true partnerships or sole proprietorships?  Would the court’s analysis be affected if the corporation’s bylaws or articles of incorporation included a religious purpose?


These questions, together with the vigorous dissent and the split with the Ninth Circuit, suggest that the majority decision will not be the last word on the subject.  The case is a strong candidate for en banc and Supreme Court review.


  1. A.     The Citizens United Theory
  2. B.     The “Passed Through” Theory


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