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From Health Law Daily, November 11, 2013

Court orders injunction against contraceptive coverage mandate for business corporation

By Michelle L. Oxman, JD, LLM

The contraceptive coverage requirement violates the rights of both individual business owners and closely held business corporations under the Religious Freedom Restoration Act (RFRA), according to the Seventh Circuit Court of Appeals. The threat of a tax or penalty of $100 per employee per day for violation of the requirement imposed a substantial financial burden on both the corporations and their Catholic shareholders. The relationship between the prohibited conduct and the owners’ religion was direct because it was their financial contribution that supported contraception that violated their religious beliefs, not the employees’ choice to use the benefits (Korte v SebeliusNovember 8, 2013, Sykes, D).

Background. The Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) requires employer-sponsored comprehensive health plans to cover preventive services designated by the Health Resources Service Administration (HRSA). Based on findings of the Institute of Medicine, HRSA determined that contraception should be included among the required preventive services. The plaintiffs are two closely held business corporations and the Catholic families who own them. One corporation operates a construction business with 90 employees, and the other is a manufacturer of vehicle safety systems and has more than 400 employees in the United States. In August 2012, when the contraceptive coverage requirement became effective, the Kortes, who operate the construction business, learned that their current plan already provided coverage. They then started to look for other coverage that would exclude contraception. The Grotes’ business has a self-insured health plan; it has never covered contraceptives.

Both the families and the corporations sued in federal court, claiming that the application of the mandate to their respective health plans violated their rights under the Free Exercise Clause of the First Amendment to the United States Constitution and the RFRA. In each case, the trial court denied their requests for preliminary injunctions, ruling that the claims were not likely to succeed on the merits. In Korte, the district court ruled that the requirements posed only an insubstantial burden on their rights under RFRA. In Grote, the decision was the same for the individual owners. However, the court also ruled that a secular, profitmaking entity like Grote Industries was not protected by RFRA because it did not exercise religion. Before setting the case for argument, the Seventh Circuit stayed the mandate, so that the trial court decision would not be effective pending appeal.

Jurisdiction. Although none of the parties had raised the issue of jurisdiction, the court did so sua sponte. First, the court addressed standing, whether a concrete injury to the plaintiffs was involved. The court determined that all parties had standing because the violation of constitutional rights always is a concrete injury, and failure to comply with the law could result in substantial financial penalties. It also considered whether the case was barred under the Anti-Injunction Act, which bars challenges to any tax before the tax has been collected. The court ruled that it was not. Although the penalties are described as a tax in PPACA, Congress also referred to them as penalties, and the purpose of the law was regulatory, unrelated to the production of revenue.

Corporations’ exercise of religion. The RFRA provides, “Government shall not substantially burden a person’s exercise of religion even if the burden results from a rule of general applicability,” except when two conditions are met: (1) it serves a compelling government interest; and (2) it is the least restrictive means of doing so. The government argued that secular, profitmaking entities are not protected by RFRA or the Free Exercise Clause because they do not practice or exercise religion; only individuals do so. The court disagreed. First, it analyzed the meaning of “free exercise of religion,” noting that Congress had amended the RFRA definition to match the Religious Land Use and Institutionalized Persons Act, “The term ‘religious exercise’ includes any exercise of religion whether or not compelled by, or central to, a system of religious belief.” This definition was quite broad, leading the court to conclude that the term should be interpreted generously.

Next, the court examined the use of “person” in the RFRA. Because the RFRA did not define the term, the court looked to the Dictionary Act, which provides that “person” includes corporations, companies, firms, and several other types of entities “unless the context indicates otherwise.” The rights of religious organizations to protection under the RFRA was established by the Supreme Court’s application of the law in cases brought by incorporated churches or church organizations.

The government argued that commercial corporations did not engage in religious activity. The court took a series of steps to rule otherwise. First, RFRA contains findings that its purpose was to restore the interpretation of the Free Exercise Clause under certain cases, including Sherbert v VernerThe Sherbertcase held that the denial of unemployment compensation to a Seventh Day Adventist worker who refused to work on her Sabbath violated the Free Exercise Clause. A post-RFRA case, Thomas v. Review Bd. of the Ind. Emp’t Sec. Div. ruled similarly that a Jehovah’s Witness who refused a transfer to a department that made war materials could not be denied unemployment compensation. The court observed that these cases protected conduct and the employee’s livelihood, or profit-making activity. It then concluded that the conduct of secular, for-profit corporations also was protected by the RFRA.

The compelling interest requirement. The court did not accept that either the protection of public health or the promotion of gender equality was a compelling interest because they were too general; such broadly stated goals could be furthered in many ways. The provision of free contraception to preserve women’s reproductive health, the court decided, was a legitimate government interest, but whether that interest was compelling was “both contestable and contested.”

Assuming, however, that the interest was compelling, the means to achieve the goal was not narrowly tailored. There were many other ways for the government to ensure access to free contraception. In addition, there were too many exceptions from the requirement because “grandfathered” plans and religious employers were excluded.

Judge Rovner’s dissent. In a detailed dissent, Judge Rovner reasoned that the employers, as commercial corporations, had no religious purposes; she noted that none were included in the corporate charters. The connection between the individual plaintiffs and the support of contraception was too attenuated to be a substantial burden upon their religious exercise. The coverage mandate did not require them to take any action at all. The employers were legal entities separate from their owners, with different obligations. Judge Rovner noted that the separation of obligations was the point of creating the corporation. To apply RFRA to the contraceptive mandate would pave the way for many more claims of exception to generally applicable laws by employers who sought to avoid ordinary obligation.

The case numbers are 12-3841 and 13-1077.

Attorneys: Edward Lawrence White for Cyril B. Korte. Bradley Phillip Humphreys, U.S. Department of Justice, for Kathleen Sebelius, Secretary of Health and Human Services and U.S. Department of the Treasury.

Companies: Korte & Luitjohan Contractors, Inc.; Grote Industries, LLC; Grote Industries, Inc.; U.S. Department of the Treasury; U.S Department of Health and Human Services

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