United States: "Hobby Lobby" Decision Cuts Unique Exemption into Affordable Care Act’s Contraceptive Coverage Requirement

On June 30, 2014, in a 5-4 decision, the U.S. Supreme Court ruled in Burwell v. Hobby Lobby Stores, Inc. ("Hobby Lobby") that closely held for-profit companies that formed their companies for a religious purpose can qualify for an exemption from the Patient Protection and Affordable Care Act ("ACA") requirement to pay for certain contraceptive benefits ("the contraceptive mandate").  The decision, written by Justice Samuel Alito, held that, as applied to these closely held corporations, the Health and Human Services ("HHS") preventive services regulations imposing the contraceptive mandate violate the Religious Freedom Restoration Act of 1993 ("RFRA").  The Court also ruled that for-profit corporations may bring RFRA claims, and owners of those corporations may sue based on restrictions imposed on those corporations.

Key Facts

The Hobby Lobby decision involved three family-owned businesses ("the Companies") owned by two families whose owners claimed a religious exemption from the ACA's contraceptive mandate.  The contraceptive benefits at issue were among the mandated preventive services  that employers are required to provide to women without participant cost sharing under HHS-promulgated regulations. Specifically, under these regulations, nonexempt employers are generally required to provide coverage for the twenty contraceptive methods approved by the Food and Drug Administration, including the four methods that may have the effect of preventing an already fertilized egg from developing any further by inhibiting its attachment to the uterus. These four methods were of particular concern to the owners of the Companies because of their sincere Christian beliefs that life begins at conception and that facilitating access to contraceptive drugs or devices that operate after that point would violate their religion.

In separate actions, the owners of the Companies, and the Companies, sued HHS and other federal officials and agencies under RFRA and the First Amendment's Free Exercise Clause, seeking to enjoin application of the contraceptive mandate. The RFRA provides that the federal government shall not "substantially burden a person's exercise of religion" unless that burden is the least restrictive means to further a compelling governmental interest.

In both cases, the District Courts denied injunctive relief to the owners.  However, the Tenth Circuit Court of Appeals reversed the District Courts' denial of the injunction, holding that the Companies are "persons" under RFRA, and that the Companies had established a likelihood of success on their RFRA claim because the contraceptive mandate substantially burdened their exercise of religion and HHS had not demonstrated a compelling interest in enforcing the mandate against them.  In the alternative, the Tenth Circuit held that HHS had not proved that the contraceptive mandate was the least restrictive means of furthering a compelling governmental interest.

The Decision

In holding that the HHS regulations imposing the contraceptive mandate violate RFRA, the Supreme Court noted that Congress designed the RFRA statute to provide very broad protection for religious liberty and did not intend to put merchants to such a difficult choice. The Court noted that for the government to prevail, it needed to demonstrate a compelling state interest and to show that its application was the least restrictive means to achieving its objectives.  While the Court assumed a compelling governmental interest, it concluded that there were less restrictive alternatives available to the government for achieving its objectives.  The Court noted that the government could, for example, simply provide these benefits to all without charge.  Further, the Court recognized that protecting the free-exercise rights of closely held corporations protects the religious liberty of the individuals who own and control those corporations.

Implications for Business Owners and Employee Benefit Plans

Significantly, the Court's decision applies to a very small category of businesses—closely held, faith-based, for-profit corporations (religious nonprofit employers, such as churches, are already exempt from the contraceptive mandate).  In addition to interpreting the scope of "persons" protected under the RFRA broadly, the Court supported its decision by emphasizing the fact that corporations can have a broad range of purposes:

Some lower court judges have suggested that RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money. This argument flies in the face of modern corporate law. 'Each American jurisdiction today either expressly or by implication authorizes corporations to be formed under its general corporate act for any lawful purpose or business.

While it is possible that some owners of closely held for-profit companies might change their businesses to make them "faith-based" companies, and then begin to pick and choose which mandated benefits are objectionable to them as owners (probably the expensive ones), it is unlikely that many businesses will do this.  Even though corporations can indeed have a broad range of purposes, revenues and "the bottom line" constitute the motivating purpose for most corporations today.  Accordingly, in our view, this decision has only a very limited practical impact on most businesses and their benefit plans.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Keith R. McMurdy
 
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