On April 1, 2022, the Superior Court of California for the County of Los Angeles entered an order striking down the California law requiring that publicly held companies with principal offices in the state have a minimum number of directors from underrepresented communities on their boards.  The Court held that the statute violates the Equal Protection Clause of the California Constitution. 

This decision comes close on the heels of measures in other parts of the country that put limitations on diversity efforts, such as Florida’s “Stop Woke Act.” 

The Statute

Governor Gavin Newsom signed Assembly Bill 979 on September 30, 2020, creating California Corporations Code section 301.4.  To recap, the  law required that:

  • By the end of 2021, publicly held domestic or foreign corporations whose principal executive offices are located in California have a minimum of one director from an underrepresented community on its board.

     

  • By the end of 2022, such corporations with nine or more directors have a minimum of three directors from underrepresented communities; five to eight directors have a minimum of two directors from underrepresented communities; four or fewer directors have a minimum of one director from an underrepresented community.

The law also gave the California Secretary of State power to impose fines on corporations not in compliance as well as to collect data for a report on compliance with the law.

This statute came two years after (and is modeled on) Senate Bill 826 (enacting California Corporations Code section 301.3), requiring the boards of public corporations headquartered in California to have a minimum number of female directors on the board.  That law, too, has been challenged in the courts.

The Lawsuit

The same day that Governor Newsom signed the bill into law, three individuals filed a lawsuit, requesting declaratory and injunctive relief asking for the law to be deemed facially unconstitutional.  The lawsuit named the California Secretary of State as the defendant.  The individuals brought their suit claiming standing as taxpayers on the basis that the Secretary has spent some taxpayer money on gathering and disseminating the data required under the statute.

In its April 1 ruling, the Court held that the statute was in violation of the Equal Protection Clause of the California Constitution.  The Court differentiated between the “group terms” that the statute aimed to impact, as compared to the “right of individuals to equal treatment” protected by the California Constitution. Specifically, the Court reasoned that “[b]efore the Legislature may require that members of one group be given certain board seats, it must first try to create neutral conditions under which qualified individuals from any group may succeed.”  The Court did not make clear in its order what “neutral conditions” may entail, or if such conditions are different from the current, unregulated status quo.

Part of the Secretary’s argument was that those individuals from underrepresented groups were not similarly situated to anyone else.  The Court again held that the rights under the Equal Protection Clause were based on individual, rather than group rights.  The Secretary also argued that the State had a compelling state interest in remediation of past discrimination and benefit to companies from more diverse boards.  The Court did not consider these as sufficient, holding that it was not enough for the State to broadly offer an intent to address general discrimination, but must identify a specific arena in which discrimination has occurred and that “generic interest in healthy business” does not constitute compelling state interest.

What’s Next?

Although no notice of appeal has been filed as of yet, the Court’s entry of the order on the motion renders the case set for appeal.  The Secretary of State has sixty days from the entry of the order to file a notice of appeal.  There is no certainty, but this litigation may continue. In the meantime, California corporations should keep a close eye on this litigation, as the rules regarding board composition remain in flux.