Corporations Aren’t People — But People Are, Even When They Act Through Corporations

Hobby LobbyThe question isn’t, “Should we give corporations rights?” but rather, “Should we deny individuals rights when they act through corporations?”

Yesterday, I had a discussion with a good friend about what I view as the only interesting aspect of the Supreme Court’s Hobby Lobby ruling — that Hobby Lobby, as a for-profit corporation, is protected under the Religious Freedom Restoration Act (RFRA).

My friend’s point was this:  why should we allow someone who makes the decision to incorporate to claim both that he is not the corporation (for purposes of liability protection) and that he is the corporation (for purposes of free speech and asserting religious beliefs)?

It’s a good point, but one that gives me little pause, and I’ll explain why.

As a preliminary matter, there are a couple things that you should understand about corporations.

First, let’s get out of the way the idea that we’re talking in any literal sense about “the religious beliefs of corporations.”  A corporation, although usually referred to in the law as a “person,” is nothing more than a legal construct through which individual humans act.  It can’t think or act on its own; it’s an empty shell.  Whenever you talk about the actions of a corporation, you’re talking about the actions of human beings taken through the corporate form.

Second, let’s acknowledge that corporate action — even though it’s ultimately the action of individuals — isn’t the same as individual action.  The most significant difference is that, while an individual’s actions can always be attributed to a single human being, a corporation’s might or might not be.  For example, while you could (and do) have corporations with a single shareholders or members, you can have corporations with multiple shareholders as well, and the decisions of the corporation are a function of collective action taken according to rules set out by state law.  So, while a corporation can quite clearly take a position on issues, attributing that position to individuals — especially for purpose of asserting constitutional (or, in this case, statutory) rights — can get quite fuzzy.

Taking these two things into consideration the question addressed by the Supreme Court in Hobby Lobby and other so-called “corporate personhood” cases comes into sharper focus.  It’s not, “should we be giving corporations constitutional (or, in this case, statutory) rights.” Rather, it’s really a twofold issue:

  1. To what extent should people’s constitutional (or, in this case, statutory) rights be altered by virtue of acting through the corporate form; and
  2. Under what circumstances can you untangle the individual/collective assertion of constitutional (or, in this case, statutory) rights in the corporate context?

With things set up in that way, here are a few thoughts.

1. The line between corporations and people isn’t as sharp as it seems.

I often tell clients who want to set up a business entity for purpose of limiting liability that the law will respect the separateness of the entity to the extent they do.  If they treat their corporation as separate (with different accounts and rules), the law will respect that distinction when it comes to liability; conversely, if they mingle funds and treat the corporation as an extension of themselves, the law will not respect the corporate liability shield.  Shouldn’t the same principle apply in cases like Hobby Lobby?

No.  My explanation to clients, is, of necessity, overly simplistic.  The line between corporations and the people behind them isn’t as absolute or as sharp as we often believe.

For example, corporations can’t be put in jail.  But that doesn’t mean that, when a corporation takes actions that are illegal, say, defrauding people of millions of dollars in a ponzi scheme, we throw up our hands and say, “Can’t punish anyone for this because it was corporate action!”  Realizing that would be ridiculous, we instead recognize that, in this case, individuals are responsible for their actions — even though they may have been carried out through the corporate form — and can be convicted and then punished.  And in the process of the criminal conviction, those individuals who acted through the corporate form are still eligible for the constitutional right to due process and all it confers in the context of a criminal proceeding.

The point is that we often recognize the fact that individuals act through the corporate form (and attribute those actions to individuals).

2. There is no societal bargain that individuals surrender rights when they elect to act through the corporate form.

Corporations (and other entities that limit liability) are part of a societal bargain designed to encourage taking risk and to generate economic activity.  The deal between society and the incorporator is, essentially, we (society) will give you limited liability in exchange for your undertaking of an enterprise that will encourage commerce and promote innovation.

This doesn’t mean that the price for incorporation is that you, the owner, become voiceless and unprotected.  It’s important to remember what it means when we say that “corporate personhood is a legal fiction.”

It does not mean that the people behind the corporation are fictions; it means that the corporation itself is the fiction.  Corporations may provide a limited liability shield, but they do not eliminate responsibility.  Nothing in the doctrine of limited liability or the societal bargain underlying it suggests to me that as a condition of incorporation and acting through the corporate form, individuals tacitly agree to limitations on their ability to assert constitutional and/or statutory rights.

In fact, one should ask himself why a person who operates a business as a sole proprietorship (and remains personally responsible for all business obligations) should be placed in a superior position with respect to his or her constitutional or statutory rights than a person who has set up a single shareholder corporation?  Simply because they bear more risk for contractual obligations?  Nothing in the Constitution (and, in this case, RFRA) suggests such a calculus.

3.  For the purpose of asserting individual rights by corporations, you still have attribute action.

If you allow a corporation to assert rights on behalf of individuals, you need to be able to attribute action in a meaningful sense.

When you have a single shareholder corporation, or even, as in Hobby Lobby, a closely held family corporation, this is quite easy and straightforward.

But when you have a large corporation with many shareholders, the line becomes very fuzzy.  The Hobby Lobby majority suggests that this fuzziness can be resolved simply by resort to state law (i.e., determining what constitutes the action of the corporation under state law).  I view this as the most controversial and ill-reasoned part of the majority opinion, and I suspect in further cases it will not win majority support.  I think the issue of attribution will need to be fleshed out more, and will present some difficult cases — but that is what the Supreme Court exists to do.  And the fact that the line drawing may be difficult isn’t a reason to relegate individual action through corporations to a general subclass of constitutional and statutory protection.


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