Comment on the Definition of ‘Eligible Organization’ for Purposes of Coverage of Certain Preventive Services under the Affordable Care Act

Abstract

This comment letter was submitted by U.C. Berkeley corporate law professors in response to a request for comment by the Health and Human Services Department on the definition of "eligible organization" under the Affordable Care Act in light of the Supreme Court's decision in Burwell v. Hobby Lobby. "Eligible organizations" will be permitted under the Hobby Lobby decision to assert the religious principles of their shareholders to exempt themselves from the Affordable Care Act's contraceptive mandate for employees. In Hobby Lobby, the Supreme Court held that the nexus of identity between several closely-held, for-profit corporations and their shareholders holding “a sincere religious belief that life begins at conception” was sufficiently close to justify granting such corporations an exemption from the Affordable Care Act's contraceptive mandate pursuant to the Religious Freedom Restoration Act of 1993. More specifically, the Court ascertained that the overall interests of the corporations and their natural-person shareholders were sufficiently identical to warrant ascribing the religious commitments of the shareholders to their corporations. Notably, the Court stopped short of articulating a diagnostic test for determining when a sufficient overlap of interests exists; instead, it concluded that well-established principles in state corporate law should provide such guidance. We believe that state corporate law does in fact provide the diagnostic test the Court desires for determining when it is appropriate to disregard the distinct identity of a corporation for the identity of its shareholders. This test is rooted in the long-standing case law that constitutes the alter ego doctrine (commonly referred to as “veil piercing”). To sustain a claim of veil piercing, state corporate law uniformly requires there to be “unity of ownership and interest” between the corporation and its shareholders. If a corporation is operated as the effective alter ego of its shareholders to such an extent that its separate corporate existence ceases to exist as a practical matter, then a veil piercing claim can be established that effectively attributes the corporation’s legal rights and obligations to its shareholders, and vice versa. A veil piercing conclusion effectively holds that there is no practical difference between the corporation and the shareholders themselves.We therefore propose that for purposes of defining an “eligible organization” under Hobby Lobby, the HHS and other federal organizations should follow the corporate law doctrine of veil piercing. Indeed, to make this doctrine administratively feasible, we further suggest that shareholders of a corporation should have to certify that they and the corporation have a unity in identity and interests, and therefore the corporation should be viewed as the shareholders’ alter ego.