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Mayer Brown's Supreme Court and Appellate Practice Group distributes a Docket Report whenever the Supreme Court grants certiorari in a case of interest to the business community. We also email the Docket Report to our subscribed members and if you don't already subscribe to the Docket Report and would like to, please click here.

October Term 2013 - November 26, 2013

November 26, 2013

Today, the Supreme Court granted certiorari in two cases of interest to the business community:

Religious Freedom Restoration Act and the Free Exercise Clause—Protection of Religious-Exercise Rights of For-Profit Corporations and Their Owners—Standard for Finding a Substantial Burden on Religious Exercise and a Compelling Government Interest

Section 2000bb-1 of the Religious Freedom Restoration Act of 1993 provides that the government “shall not substantially burden a person’s exercise of religion” unless that burden is the least restrictive means to further a compelling government interest. Before 1990, the rule in cases brought under the Free Exercise Clause of the First Amendment was that strict scrutiny applied to generally applicable laws that infringed a plaintiff’s exercise of religion. In Employment Division v. Smith, 494 U.S. 872 (1990), the Supreme Court jettisoned that approach, holding instead that generally applicable laws that burden religious exercise are subject to the less demanding rational-basis standard. Congress passed RFRA to restore use of strict scrutiny in those cases.

The Patient Protection and Affordable Care Act requires group health plans to include insurance coverage for FDA-approved contraceptives unless the plans or the businesses offering the plans fall into one of several exceptions. Among the FDA-approved contraceptives are two drugs (Plan B and Ella) and two intrauterine devices, which work by preventing the implantation of fertilized eggs in the womb.

Today, the Supreme Court granted certiorari in Sebelius v. Hobby Lobby Stores, Inc., No. 13-354, and Conestoga Wood Specialties v. Sebelius, No. 13-356, to determine whether RFRA exempts for-profit corporations from complying with the Affordable Care Act’s contraception-coverage requirement when the corporation’s owners assert a sincerely held religious belief against contraception. Conestoga also presents the question whether the contraception-coverage requirement violates the Free Exercise Clause.

The corporate respondents in No. 13-354, Hobby Lobby Stores and Mardel, are for-profit, closely held corporations that are owned through a trust by the individual respondents, five members of the Green family. The Greens are Christians who believe that enabling the use of contraceptives that prevent the implantation of embryos is a sin. Although Hobby Lobby and Mardel are for-profit enterprises, the Greens have run them in accordance with their Christian beliefs, including a long-standing refusal to provide insurance coverage for contraceptives that they consider to be abortifacients. The Affordable Care Act would force them to change that policy or incur fines of roughly $1.3 million per day if they offer a plan that does not cover the four contraceptives to which they object, or else $26 million per year if they decide instead to cease offering health insurance altogether. Accordingly, the respondents sued the federal government under RFRA and sought a preliminary injunction barring enforcement of the Affordable Care Act’s contraception provision against Hobby Lobby and Mardel.

The Tenth Circuit, sitting en banc, held that the corporate respondents have Article III standing to pursue their RFRA claim, and that they are likely to succeed on the merits because “for-profit corporations, such as Hobby Lobby and Mardel, are persons exercising religion for purposes of RFRA,” and the contraception requirement is not the least restrictive means of advancing a compelling interest of the federal government. 723 F.3d 1114, 1128-29 (10th Cir. 2013). The en banc court also held that the corporations would suffer an irreparable injury if the preliminary injunction were not granted, but the court remanded to the district court for consideration of the remaining factors relating to preliminary injunctive relief. Also, although the view did not command a majority and is not a question presented by the petition for certiorari in Hobby Lobby, four judges rejected the application of the shareholder-standing prudential limitation on federal standing and would have allowed the individual respondents to pursue their own RFRA claims on the ground that, as the owners and managers of the corporate respondents, it falls to them to implement the policies to which they object. On remand, the district court entered a preliminary injunction in favor of the respondent corporations.

The corporate petitioner in No. 13-356, Conestoga Wood Specialties Corp., is a for-profit, closely held Subchapter S corporation that is wholly owned by the individual petitioners, the Hahn family. The Hahns are Mennonites and, like the Greens in Hobby Lobby, believe that they may not enable the use of abortifacients. Like Hobby Lobby, Conestoga traditionally has not provided insurance coverage for such drugs and devices. (That practice changed recently, following the district court’s denial of the petitioners’ motion for a preliminary injunction, when, in order to avoid penalties, Conestoga’s health-insurance provider included the coverage over Conestoga’s objections.)

On appeal from the district court’s denial of a preliminary injunction, the Third Circuit affirmed. A divided panel held that “for-profit, secular corporations cannot engage in religious exercise” under the Free Exercise Clause and RFRA. 724 F.3d 377, 381 (3d Cir. 2013). The court reasoned that there is no history of the Free Exercise Clause protecting the rights of for-profit corporations, and thus neither the First Amendment nor RFRA (which was enacted to codify the Court’s pre-Smith Free Exercise Clause jurisprudence) protects the corporate petitioner. Further, the court rejected the corporation’s “passed through” theory that closely held, for-profit corporations may assert the free-exercise claims of their owners, holding that this theory disregards corporations’ distinct legal existence. Finally, and for the same reason, the court held that the individual petitioners could not assert any statutory or constitutional free-exercise claim related to the contraception-coverage requirement.

Since the issuance of these two decisions, the division among the courts of appeals with respect to the application of RFRA has widened. The Sixth and D.C. Circuits have joined the Third Circuit in holding that RFRA’s protections do not extend to for-profit corporations, while the Seventh Circuit has agreed with the Tenth Circuit that for-profit corporations may invoke Section 2000bb-1(a) and (b) and that the contraception-coverage requirement violates RFRA. In addition, the Sixth Circuit has agreed with the Third Circuit that individual owners of for-profit corporations may not assert free-exercise rights under RFRA, but the D.C. Circuit has recognized the rights of such individual owners and held that the contraception-coverage requirement violates such individuals’ free-exercise rights under RFRA. No other circuit, however, has addressed the constitutional question.

The Supreme Court granted certiorari today to address the availability of RFRA’s protections to for-profit businesses and their owners, as well as whether, if RFRA applies, the statute exempts those businesses from complying with the Affordable Care Act. It will also address whether challengers have a claim under the Free Exercise Clause itself. The Court’s decision will be important to all for-profit business organizations that exercise religious beliefs in ways that conflict with federal statutes or regulations (or may do so in the future). The decision will likely also clarify the extent to which RFRA will as a practical matter preclude the federal government from enacting generally applicable workplace regulations in a variety of different contexts.

Because the federal government is the petitioner in one of the granted cases and the respondent in the other, application of the Court’s rules would impose inconsistent filing deadlines; the Court seems likely to issue an order specifying a unified briefing schedule. Absent extensions, the first set of amicus briefs will be due on January 17, 2014, and the second set will be due on February 18, 2014. Any questions about the case should be directed to Andrew J. Pincus (+1 202 263 3220) in our Washington office.

Inherited Individual Retirement Accounts (IRAs)—Bankruptcy—Exemptions

Section 522 of the Bankruptcy Code provides that “retirement funds” are excluded from the bankrupt estate “to the extent that those funds are in a fund or account that is exempt from taxation under” certain sections of the Internal Revenue Code. 11 U.S.C. §§ 522(b)(3)(C), (d)(12). A debtor’s own individual retirement account (“IRA”) is exempt from the bankrupt estate by virtue of these provisions. Today, the Supreme Court granted certiorari in Clark v. Rameker, No. 13-299, to consider whether so-called “inherited IRAs” are exempt from a debtor’s estate under Section 522 of the Bankruptcy Code.

Inherited IRAs are IRAs acquired “by reason of the death of another individual.” 26 U.S.C. § 408(d)(3)(C)(ii)(I). Like ordinary IRAs, inherited IRAs are sheltered from taxation until the beneficiary begins making withdrawals. Id. §§ 408(e)(1), 408A(a). But the beneficiary of an inherited IRA may not make contributions to the inherited IRA or merge it into another account. Id. § 408(d)(3)(C). Further, the inherited IRA must begin distributing its assets within a year of the original owner’s death, rather than waiting until the beneficiary’s retirement. Id. § 402(c)(11)(A).

Petitioner Heidi Heffron-Clark and her husband Brandon Clark filed for bankruptcy in 2010. Many years before, Heffron-Clark had inherited an IRA worth approximately $300,000 from her mother. The Clarks contended that the inherited IRA—which constituted the bulk of their personal property—qualifies for the “retirement funds” exemption from the bankruptcy estate under Section 522. The bankruptcy court disagreed, holding that the IRA could not qualify as “retirement funds” because distribution of the funds preceded the debtor’s (i.e., Heffron-Clark’s) retirement. The district court reversed on the ground that the plain language of the statute does not distinguish between a debtor’s own IRA, which clearly qualifies for the exemption, and an IRA inherited by the debtor. The Seventh Circuit reversed the district court. In conflict with a recent decision of the Fifth Circuit, the Seventh Circuit held that, although an inherited IRA is tax-exempt, it “does not have the economic attributes of a retirement vehicle” necessary to qualify for the Section 522 exemption because “the money cannot be held in the account until the current owner’s retirement.”

The Supreme Court’s decision in this case will be of interest to lenders and other creditors in light of the increasing number and amount of tax-deferred retirement funds that are being passed by inheritance. The decision will determine whether those often-substantial assets are sheltered from creditors’ claims in bankruptcy.

Absent extensions, amicus briefs in support of the petitioners will be due on January 17, 2014, and amicus briefs in support of the respondent will be due on February 18, 2014. Any questions about this case should be directed to Donald M. Falk (+1 650 331 2030) in our Palo Alto office.

Mayer Brown's Supreme Court & Appellate practice ordinarily distributes a Docket Report when the Supreme Court grants certiorari in a case of interest to the business community and a Docket Report-Decision Alert when the Court decides such a case. We hope that you find the Docket Reports and Decision Alerts useful. We welcome feedback on them, which should be addressed to the general editors, Richard B. Katskee (at rkatskee@mayerbrown.com or +1 202 263 3222) and Brian D. Netter (at bnetter@mayerbrown.com or +1 202 263 3339).

Mayer Brown Supreme Court Docket Reports provide information and comments on legal issues and developments of interest to our clients and friends. They are not a comprehensive treatment of the subject matter covered and are not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed. 

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