Markets in everything and another view of the cathedral: religious freedom and Coasian bargaining.

AuthorDecker, Joshua A.


Religion is the first freedom protected by the Bill of Rights, which it divides into two guarantees: neither the federal nor state governments may "establish[]" a religion (the "Establishment Clause"), nor may they "prohibit[] the free exercise thereof" (the "Free Exercise Clause"). (1) These guarantees, particularly the right to freely practice one's religion, are often pressed against other rights and social aims, such as: if society thinks it's bad to use psychoactive drugs, may the government criminalize the religious use of peyote? (2) Or, if the ever-diminishing runs of king salmon to their spawning grounds threaten their long-term viability as a species, may the government flatly ban the fishing of king salmon, even by Alaska Natives for whom this fishing is an integral part of their religious beliefs and practice? (3) And, may the government require corporations, including those that are closely held by religiously observant individuals, to provide health insurance coverage that their employees may use to buy contraceptives? (4)

Insofar as these questions share a common root--what are the perimeters of the free exercise right when pitted against other important social goals?--their answers should similarly share a common theoretical thread. This Article tries to stitch that string and to contribute three new ideas to free exercise law.

First, we can use the Coase Theorem to analyze free exercise cases: we can understand the majority opinion in Burwell v. Hobby Lobby Stores, Inc. (5) as imposing a Coasian bargain (6) on the two sides, the religious employers and their employees who want their health insurance to include no-cost contraceptive coverage. Similarly, we can use this Coasian lens to view the Alaska Free Exercise case of Alaska v. Ivan, (7) a prosecution of Alaska Natives for their allegedly illegal fishing of religiously significant king salmon: the defendants' free exercise defense illustrates a possible Coasian bargain.

Second, with Ivan and Employment Division, Department of Human Resources of Oregon v. Smith (8) on one side and with Hobby Lobby and Hosanna-Tabor Evangelical Lutheran Church & School v. EEOC (9) on the other, the Article argues that we can divide free exercise claims into two categories: those that seek an exemption from a purely governmental interest compared to those that also impinge upon the private right of other individuals.

Third, we can use Coasian analysis to decide which side should win in free exercise challenges. In the first category of individuals versus the government, the Coase Theorem helps to illuminate if the government used the least restrictive means to limit the religious expression: it is a litmus test that can resolve otherwise analytically thorny free exercise cases. And, for free exercise challenges in the individuals versus individuals category, the Article concludes that we should use the Coase Theorem to resolve them: first, decide if the vying parties could have reached a Coasian bargain and if so, the decision should emulate that bargain; if not, the prevailing side should be the one who is not the cheapest cost avoider.


    1. Hobby Lobby As an Imposed Coasian Bargain

      The Patient Protection and Affordable Care Act of 2010, (10) colloquially known as "Obamacare," generally requires employers with at least fifty full (11) time employees to "offer ... minimum essential coverage," (12) including "preventative care and screenings," (13) such as all FDA-approved contraceptives, (14) at no cost to women. Recognizing that contraception is religiously objectionable to some, the government offered nonprofit religious employers an exemption from this contraceptive mandate:15 the employees still have contraceptive coverage at no cost, but the insurance issuer pays for it--it may not charge the employees or the religiously exempted employer for that coverage. (16) (This saves the insurance companies money: it is less expensive to cover contraceptives than to pay for the pregnancies and medical complications of women who lack it. 17) This exemption, however, was limited to nonprofits; for-profit employers with at least fifty full-time employees were not exempt from the contraceptive mandate, even if contraception was anathema to the employer's sincere religious belief.

      Three closely held for-profit corporations, Hobby Lobby Stores, Inc., Mardel, Inc., and Conestoga Wood Specialties Corporation, and their owners (19) sued, arguing that the requirement to pay for health insurance that covered four specific contraceptives (two morning-after pills, Ella and Plan B, and two types of intrauterine devices (20)) violated their free exercise rights under the Constitution and the Religious Freedom Restoration Act ("RFRA"), (21) which Congress passed to rescind Employment Division, Department of Human Resources of Oregon v. Smith's rejection of the Sherbert v. Verner (23) test that "governmental actions that substantially burden a religious practice must be justified by a compelling governmental interest." (24)

      Using the RFRA standard, the Court concluded that the contraceptive mandate, as applied to religious closely held corporations, violated RFRA. (25) But, rather than simply exempting them from the contraceptive mandate, the Court squared the plaintiffs' free exercise right with the compelling government interest of cost-free access to all FDA-approved contraceptives by grafting their accommodation onto the existing religious nonprofits' one: employees at those religious for-profits would receive contraceptive coverage in the same way as employees at religious nonprofits. (26)

      This judicially created accommodation can be viewed as a forced Coasian bargain: forced, because the Court imposed it on the parties (the Hobby Lobby plaintiffs wanted the Court to strike down the contraceptive mandate and the government wanted their challenge dismissed), (27) and Coasian because viewed from behind a Rawlsian veil of ignorance, the parties might have independently reached that same accommodation. (28)

      Independent bargaining is the heart of the Coase Theorem. In the absence of transaction costs, parties will bargain to the same outcome independent of the initial allocation of rights: the initial allocation doesn't matter and everyone wins. (29) To illustrate, assume that a physician's office is next to a factory, and its loud noise prevents the physician from comfortably examining her patients. There are two ways to fix this problem: either the factory can pay the physician to be noisy or she can pay the factory to be quiet.

      As with the two solutions, there are two possible initial legal rules. If the physician can sue the factory for being noisy, then the initial legal rule favors her: she can either prevent the factory from making noise at all (through an injunction) or unless it pays her (through money damages). (30) If she cannot sue, the initial legal rule favors the factory.

      In the Coasian world of no barriers to bargaining, if the physician has the legal right to stop the factory, she will let the factory continue to make noise if it pays her. The final price will be when the marginal value to the factory of being noisy equals her marginal cost of enduring it; once her marginal costs reach the factory's marginal value, it will not pay for any increase in noise--the parties would have reached their Coasian bargain. Alternatively, if the factory has the legal right to make noise, the physician will pay it to be softer until her marginal value of silence reaches the factory's marginal cost of being quiet.

      To simplify this concept and put numbers on it, assume the factory normally closes at 4 p.m., but though its workers are less productive as the night wears on, it can stay open and make noise until 5 p.m., 6 p.m., and 7 p.m. So, it can make

      4 to 5 p.m.: $300 more ($300 total)

      5 to 6 p.m.: $200 more ($500 total)

      6 to 7 p.m.: $100 more ($600 total)

      From the physician's view, assume that her patients like to come after work, so she loses

      4 to 5 p.m.: $100 more ($100 total)

      5 to 6 p.m.: $200 more ($300 total)

      6 to 7 p.m.: $300 more ($600 total)

      If the physician has the initial legal right, she can get a court order that stops the factory from making any noise after 4 p.m., but she will let it be noisy if it compensates her for the lost patients. So, with her initial legal right, we have

      4 to 5 p.m.: Factory pays physician $100 for $200 profit; open until 5 p.m.

      5 to 6 p.m.: Factory pays physician $300 for a $200 profit; open until 6 p.m.

      6 to 7 p.m.: Factory would break even paying $600 so it does not pay to stay open for this extra hour and instead closes at 6 p.m.

      If the factory has the initial legal right, the physician cannot stop it from being noisy. The factory wants to maximize its money, so it plans to be open until 7 p.m., but it is willing to close earlier if the physician compensates it for its lost income. Under the factory's initial legal right, we have

      7 to 6 p.m.: Physician pays $100 for $200 profit; the factory closes an hour earlier at 6 p.m.

      6 to 5 p.m.: Physician would break even paying $300 so she does not pay and the factory stays open until 6 p.m.

      In either scenario, no matter who has the initial right to stop or allow the other's behavior, the factory will close at 6 p.m., which is when the factory and physician's marginal values and costs are equal at $200. (31) "No matter the default rule, the parties will bargain their way to a result that is both efficient and the same." (32) And, this bargaining away from the initial position is a compromise, not a binary winner-take-all outcome: whether the factory is noisier or softer, there is an exchange of money and both it and the physician are better off; moving away from the initial position improves both parties.

      So, how can one respect the Hobby Lobby plaintiffs' conviction that contraceptive coverage violates their...

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