We the Corporations

by Adam Winkler

  AT THE IOWA STATE FAIR SOAPBOX, PRESIDENTIAL CANDIDATE MITT ROMNEY SAID, “CORPORATIONS ARE PEOPLE, MY FRIEND.”

  There was, however, one legal challenge to a smaller piece of Obamacare that succeeded, and it involved the rights of corporations. Hobby Lobby Stores, Incorporated, a national chain of craft stores with over 23,000 employees, filed suit against an Obamacare regulation that required large employers to include birth control in their employees’ health insurance plans. The owners of Hobby Lobby, David and Barbara Green and their three children, were Evangelical Christians who believed some of the mandated forms of birth control caused abortion, which the Greens opposed on religious grounds. Although technically the Greens themselves were not required by the law to provide birth control coverage—the mandate fell on the corporate entity, not the owners personally—the Greens felt the law interfered with their religious freedom and directed the company to challenge the requirement.3

  Hobby Lobby, joined by another for-profit company with religious owners, Conestoga Wood Specialties, sued the federal government, claiming the mandatory birth control coverage violated the Religious Freedom Restoration Act, or RFRA. Enacted by a nearly unanimous vote in 1993 after a Supreme Court ruling narrowing the scope of the First Amendment’s free exercise clause, RFRA entitled people to an exemption from federal laws that imposed a substantial burden on their sincerely held religious beliefs. Hobby Lobby’s claim, in other words, was not based on the Constitution, like the other corporate rights cases that have arisen in the Supreme Court over the past two centuries. Nonetheless, RFRA was designed to enhance rights of religious liberty associated with the First Amendment. And although the law was enacted with the religious rights of individuals in mind, Hobby Lobby and Conestoga Wood Specialties were constitutional leveragers that sought to use the statute to protect their businesses.4

  In June of 2014, the Supreme Court, in another 5–4 ruling, sided with the company in Burwell v. Hobby Lobby Stores, Inc. Justice Sam Alito wrote the majority opinion for the same five justices who voted to strike down limits on corporate political spending in Citizens United, including the chief justice. Alito’s opinion held that Hobby Lobby and Conestoga Wood Specialties, even though they were for-profit companies, had religious liberty rights under RFRA and were entitled to an exemption from the birth control coverage requirement. Over the dissent of the four liberal justices, including Elena Kagan, who had replaced Justice John Paul Stevens, the Supreme Court for the first time explicitly recognized that business corporations had religious freedom.5

  The Supreme Court’s decision in Hobby Lobby was a near perfect embodiment of the more than two-hundred-year history of corporate rights jurisprudence. Although the case was formally about a federal statute, not the Constitution, the decision hewed closely to the reasoning and logic of so many previous cases extending constitutional rights to corporations. Like the late nineteenth-century rulings that extended due process and equal protection rights to corporations, Hobby Lobby said that corporations were people. Under RFRA, the federal government was prohibited from substantially burdening “a person’s exercise of religion.” The court held that business corporations were included, largely because of the Dictionary Act, another federal law that officially defined the terms used in federal statutes. The Dictionary Act provided that “unless the context indicates otherwise,” the word person should be read to apply to “corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals.” As a result, the court expansively read the law to protect the rights of corporations, which deployed those rights to overturn a regulation of their business practices.

  Yet, as with many previous Supreme Court cases invoking corporate personhood, the underlying logic of Hobby Lobby reflected instead piercing the corporate veil. “A corporation is simply a form of organization used by human beings to achieve desired ends,” Justice Alito explained. “When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people.” Protecting the “free-exercise rights of corporations like Hobby Lobby, Conestoga, and [others] protects the religious liberty of the humans who own and control those companies.” Hobby Lobby was entitled to assert religious rights, Alito wrote, to protect “the religious liberty of the Greens.” Alito, in other words, looked right through the corporate form and focused instead on the people who made up the corporation. Properly understood, Alito’s decision, like Citizens United, represented a rejection of corporate personhood. Instead of treating the corporation as an independent legal entity, with rights separate from those of its members—as the Taney court did in the mid-1800s—the Supreme Court once again collapsed the distinction. Hobby Lobby was the Greens, and the Greens were Hobby Lobby.6

  In dissent, Justice Ruth Bader Ginsburg called the majority’s opinion one of “startling breadth.” Any corporation, public or private, closely held or public, could claim those same rights in order to gain an exemption from other forms of business regulation to which the owners of a company objected. Indeed, in the months after the Hobby Lobby decision came down, a number of businesses asserted a religious right to discriminate against same-sex couples—although, at least at first, with little success. Alito insisted that Ginsburg was wrong and that “our holding is very specific.” The court had only held this one regulation invalid, and there were other ways for the government to provide birth control to women. Moreover, Alito also emphasized that Hobby Lobby was a closely held corporation and “it seems unlikely” that publicly held corporations “will often assert” religious rights. In the Citizens United case, Alito had helped transform Ted Olson’s narrow claim into a broad, groundbreaking decision that significantly changed the law; in the Hobby Lobby case, Alito sought to portray his broad, groundbreaking decision as a narrow one that barely moved the law at all.

  * * *

  WITH INTRICATELY ETCHED WOOD paneling on the walls and ornate stained glass in the windows, the faculty lounge at the Yale Law School exuded the formality and tradition of the Ivy League, and that did not suit Leo Strine at all. The brilliant and outspoken chief justice of the Delaware Supreme Court, Strine had been invited to deliver the Ralph K. Winter Lecture, a prestigious speaking engagement named after a federal judge and Yale alumnus known for his rulings on business and corporate law issues. After a laudatory introduction by the law school’s dean, Strine stood up in front of the faculty, students, and distinguished visitors gathered in the solemn room and immediately began to undress. “I’m a judge, so I’m going to do this,” he announced, and with the ardor of an escaped convict shedding his prison jumpsuit Strine pulled off his suit jacket, revealing colorful suspenders busy with vivid cartoons of jazz musicians.7

  Strine’s lecture at Yale—a school, you may recall, named after Elihu Yale, one of the stockholders made rich by the East India Company—took place in October of 2015, a year after the Hobby Lobby decision. By then, the 51-year-old jurist had already proven himself to be the most influential and charismatic figure in the world of corporate law. Prior to becoming the chief justice of Delaware, Strine served for sixteen years on Delaware’s Court of Chancery, the nation’s leading court for corporate law. Delaware, with over 60 percent of Fortune 500 companies and more than 900,000 businesses incorporated in the state, had won the so-called “race to the bottom” begun at the end of the nineteenth century when New Jersey loosened its laws to attract Rockefeller’s Standard Oil and other trusts. Although New Jersey eventually strengthened its corporate code, Delaware followed the Garden State’s earlier example and continually made its corporate law rules more permissive and friendly to management, becoming the leading state of choice for America’s corporations. To handle the legal disputes arising from all these corporations, the judges on the Court of Chancery developed special expertise in corporate law, unique in the nation.8

  When Strine was first appointed to the Chancery court, he was only 34, a precocious age for a judge. Nonetheles
s, he quickly dispelled any skepticism stemming from his inexperience by working around the clock and writing clear, learned opinions that proved his mastery of the nuances of corporate law. Strine’s rulings were “extremely well crafted legally,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. Indeed, within a few years, Strine was being called the Chancery court’s “leading voice.” Certainly he was the court’s most entertaining one, sprinkling into his opinions and proceedings references to music and pop culture, from reality television star Snooki to the novelist John Cheever. Unlike many judges, Strine did not shy away from public speaking—or from speaking his mind. The Wall Street Journal called him “about the closest thing to a celebrity in the buttoned-up world of corporate law.”9

  “It’s a little bit daunting to be here,” Strine began his Winter Lecture, acknowledging with a touch of false modesty the presence of some of the nation’s leading legal scholars. In fact, no one was more qualified to speak about the topic of Strine’s address: how the Supreme Court decisions in the Citizens United and Hobby Lobby cases were profoundly mistaken from the perspective of corporate law. In Strine’s view, the court’s rulings reflected serious confusion about the nature of corporations and how they operated. Strine, a modern-day Louis Brandeis who favored legal rules built around the empirical reality of human behavior, suggested that the justices who wrote those opinions, simply put, “don’t know much corporate law.”

  Strine was a strong proponent of free markets and often opposed heavy-handed regulation of business. Unlike many critics of the Citizens United decision, for example, Strine was a vocal critic of the Sarbanes-Oxley Act, calling the federal law imposing strict new rules on corporate executives to increase transparency “misguided.” Yet he was not a corporationalist committed to expansive rights for corporations, and he believed that judges should base their decisions in corporate rights cases on an accurate understanding of how corporations and corporate law actually work. By that metric, at least, the Citizens United and Hobby Lobby decisions went awry.

  DELAWARE CHIEF JUSTICE LEO STRINE DELIVERS THE 2015 RALPH K. WINTER LECTURE AT YALE LAW SCHOOL.

  Stine took issue with the view expressed in Citizens United that stockholders unhappy with corporate political spending could use “the procedures of corporate democracy” to stop it, or simply sell their shares. “Now, that’s not really true,” Strine said. The Supreme Court had misunderstood “how ordinary humans now invest in corporations. It’s just not the same as it was back in the day—back in the 70s, before Disco and New Wave,” he added with a smirk. Today, most “stockholders own stock through intermediaries,” such as pension and mutual funds, “not directly.” Individual investors in pension and mutual funds are not entitled to vote in corporate elections, so they have no access to the procedures of corporate democracy. Even if they could vote, the widespread use of proxy voting gives management nearly unfettered control over corporate election outcomes—as revealed by the Great Wall Street Scandal more than a century earlier. Echoing Charles Evans Hughes, Strine insisted that the “reality is so-called stockholder democracy provides little restraint on management’s political spending.”

  Nor was it realistic, in Strine’s view, to believe that dissatisfied stockholders could sell their shares. Pension and mutual fund investors “don’t choose which stocks the intermediaries invest in or even which intermediary manages their funds in some circumstances.” Funds do not typically allow individual investors to pick which corporations they will own. And while mutual fund investors may be able to move in and out of fund portfolios, people who invest through pension funds are typically, according to Strine, “stuck in.”

  Strine’s understanding of how ordinary people invest in corporations stemmed not just from his expertise in corporate law but also from his experience growing up in a working-class family. His parents were row house kids in Baltimore who married as teenagers and skipped college to work and raise a family. While his father worked for a department store, his mother worked her way up the ladder of a bank in Wilmington. If people like Strine’s parents had retirement savings, it would most likely be in a pension. Yet they could not control which companies their retirement money was invested in—at least not without significant legal penalties. “If you take your money out of your 401(k), there is expropriatory levels of taxation,” even if you sell because of political dissent, Strine noted. “So once you entrust that money to the market, it stays there.” The law, in other words, strongly discourages people from selling their shares. Contrary to the assumptions behind Citizens United, Strine said, “investors have little control over the day-to-day business decisions of corporations and little choice but to invest.”

  One of the Supreme Court’s most glaring errors, in Strine’s view, was piercing the corporate veil. As he wrote in a law review article published the same year as his lecture at Yale, such an approach was “at odds with historical understandings of the corporation and the reality of diverse stockholder ownership.” From the perspective of corporate law, “it was not credible to equate the view of the corporation to those of its diverse and changing stockholders.” Perhaps it might have made sense for the court to treat a corporation as an association back in the day of Horace Binney and Daniel Webster, when corporations typically were made up of small groups of local investors and had only a handful of employees. Today, however, a corporation seeking to spend on politics could be a multinational enterprise with tens of thousands of employees and an equally large number of stockholders. Many of those stockholders might hold their shares only for minutes—or less—as a play on the stock market; others, such as the majority of Americans who own stock in companies through pension and mutual funds, likely do not even know the names of the companies in which they are invested. Corporations were not political associations like the NAACP or a PAC. Given the reality of modern-day stockholding, Strine said it was hard to believe that “General Electric, Wal-Mart, McDonald’s, etc., exist because their stockholders wish to come together and have those corporations, through their managers, ‘speak’ on behalf of the stockholders” on matters of electoral politics.10

  Corporations were not associations under the long-standing law of corporations, they were people. A corporation is “a distinct entity that is legally separate from its stockholders, managers, and creditors. This is the whole point of corporate law after all.” Pick up any textbook on the law of corporations and the first lesson is always the same: the corporation is a legal person—an independent legal entity separate from the people who own and work for it. Because of that personhood, stockholders in the modern corporation were not personally responsible for the company’s debts; if a corporation broke a contract or harmed someone, the victim had to sue the corporate entity, not the members of the corporation. As the Supreme Court itself has said in ordinary business law cases, a “corporation and its stockholders are generally to be treated as separate entities.”11

  The Hobby Lobby decision, in Strine’s view, similarly failed to recognize the separate personhood of the corporation. “There’s a whole, deep corporate law problem with figuring out whether a corporation has a religion,” Strine argued. “And what [the justices] did was conflate the family which controlled Hobby Lobby with the corporation.” The court looked right past the distinct legal status of the corporation and based the decision on the religious beliefs of the Green family. By allowing the company to claim the religious rights of its shareholders, the Hobby Lobby decision abandoned the principles of corporate personhood.

  Strine’s remarks raised an important question: What if the Supreme Court had taken corporate personhood seriously in a case like Hobby Lobby? If so, the justices would not have asked whether the Green family had religious beliefs that were offended by the birth control coverage requirement. They would have asked instead whether Hobby Lobby, the corporation itself, as an independent entity in the eyes of the law, should be recognized to have religious beliefs. T
he members of the Green family were wholly distinct legal persons, whose rights were not at issue. The Green family depended on that separation to protect their personal assets; they would have insisted on a strict boundary between them and the corporate entity if a customer had fallen in a Hobby Lobby store and sued the Greens personally for damages. Like the liability for the customer’s injury, the birth control mandate was imposed on the corporate entity alone. Whatever reasons there might be for recognizing for-profit corporations to have religious beliefs—and there were good arguments to be made on both sides—at least the court would be focused on the corporation, not the Greens.12

  Over the course of American history, corporate personhood has not led to expansive constitutional protections. In fact, when the Supreme Court has broken from its usual pattern and treated a corporation as a truly separate legal person with distinct rights of its own, the result has usually been more limited rights for business. Under Chief Justice Roger Taney, the court viewed the corporation as a legal person separate from its members but nonetheless scaled back corporate constitutional protections, much to the displeasure of Daniel Webster. In the Lochner era, the courts vacillated but often did treat the corporation as a person—and cabined the ability of corporations to claim the protections of the right against self-incrimination, the freedom of association, and the freedom of speech. The court held that corporations have a Fourth Amendment right against unreasonable searches and seizures, yet the scope of that protection was less than it was for individuals. Because those judges did not confound the rights of the corporation with the rights of the corporation’s members, they properly asked which rights corporations, as such, should have and then tailored those rights to the particular circumstances of the corporate form. Corporations were legal persons but they were not necessarily the same as human beings and, as a result of those distinctions, were afforded fewer and more circumscribed constitutional rights.