Last month, May 13, Los Angeles County Superior Court Judge Maureen Duffy-Lewis ruled that SB 826, which requires California public corporations with a principal executive office in California to meet the requirements in gender diversity for board seats, violates the Equal Protection Clause of the California Constitution.
The decision follows another recent Los Angeles County case, where Superior Court Judge Terry A. Green found that AB 979’s bill to promote community board members underrepresented also violates the California Constitution. We have already reported on this decision and also provide some details about this decision below.
These AB 979 and SB 826 challenges were brought by the same plaintiffs, Robin Crest, Earl De Vries and Judy De Vries. In both cases, the plaintiffs were represented by Judicial Watch, a conservative activist group. Both cases were presented as “taxpayer lawsuits” and brought to restrain California Secretary of State Alex Padilla from spending taxpayer funds and resources to enforce or implement a law that violates the California Constitution. As discussed in more detail below, successful challenges to SB 826 and AB 979 may be an interpretation of future challenges to other California or federal statutes and provide guidance to companies regarding the composition requirements of their boards of directors and similar diversity initiatives.
The challenge of AB 979
Just over a month before Judge Duffy-Lewis’ SB 826 ruling, AB 979 was successfully challenged in Crest vs. Padilla (Case No. 20ST-CV-37513) (Crest vs. Padilla II). Los Angeles County Superior Court Judge Terry A. Green issued a decision on AB 979, granting plaintiff’s motion for summary judgment and finding that AB 979 violated the Equal Protection Clause of the California Constitution. Justice Green noted that while remedying discrimination may be a compelling interest, compelling evidence was needed that the action of the legislature was necessary and narrowly tailored. The court found that AB 979 was not narrowly tailored to serve the compelling interests offered because the legislature had made no attempt to examine the demographics of the “qualified talent pool” from which members of the council could be selected.
The challenges of SB 826
On September 30, 2018, Senate Bill 826 was signed into law by then-Governor Jerry Brown. SB 826 required at least one female director on California boards by December 31, 2019 and required that, by the end of 2021, three female directors be required, if the company had six or more directors in total. The legislative text of SB 826 outlines the bill’s purpose: to stimulate the California economy, improve opportunities for women in the workplace, and protect California taxpayers, shareholders and retirees.
In Crest vs. Padilla (Case No. 19STCV27561) (Crest vs. Padilla I)), Judicial Watch challenged SB 826’s gender quota on board composition requirements. Judge Maureen Duffy Lewis ruled that California could not prove that “the use of gender-based classification was necessary to stimulate the California economy, improve opportunities for women in the workplace, and protect taxpayers.” “. Justice Duffy-Lewis found that the real goal of the California legislature was gender balance, not redress for discrimination, and that was improper.
SB 826 also faces similar challenges on equal protection grounds in a federal case pending in the District Court for the Eastern District of California (Sacramento) called Alliance for Fair Recruitment of Directors c. Weber. The court in Alliance for Fair Recruitment of Directors was scheduled to hear oral argument on the plaintiff’s motion for summary judgment on June 7, 2022, so a decision by Judge Mendez is expected to be released shortly. The Federal Court is not bound to follow the jurisprudence of the Superior Court.
Recent SEC Efforts to Diversify Boards of Directors
The Securities and Exchange Commission (SEC) recently approved Nasdaq (Nasdaq) Stock Exchange Listing Rules, which require Nasdaq-listed companies to meet diversity requirements and disclose diversity data regarding the composition of the boards of directors. Under the Nasdaq rule, listed companies must have or disclose why they don’t have at least two directors from underrepresented communities. Despite the rulings on SB 826 and AB 979, Nasdaq-listed California employers will still need to consider Nasdaq’s diversity rules for board composition. Nasdaq listing rules are currently facing a challenge in the Fifth Federal Circuit, where, in Alliance for Fair Board Recruitment c. DRYthe Court will review the SEC’s approval of these rules and determine whether they violate the Equal Protection Clause of the US Constitution.
Briefly, the unreported decisions of the Los Angeles County Trial Court in both Crest vs. Padilla the decisions, unless successfully challenged in higher courts, preclude the application of AB 979 and SB 826. However, there is no appeal or other published decisions on this issue. In addition, federal courts will hear challenges to SB 826 and Nasdaq’s listing rules on similar equal protection grounds. Nasdaq-listed California companies should pay close attention to these decisions and any appeals from the Crete decisions to determine the diversity composition of their Board of Directors.
As the courts issue additional rulings on these issues, companies can expect greater clarity regarding their diversity and reporting requirements. Therefore, at this time, California employers should continue to promote diversity in leadership, but should await further guidance from the Court of Appeals and Federal Court review before making any changes to the composition of their board of directors based expressly on AB 979 or SB 826. As such, CDF will continue to monitor potential appeal challenges to AB 979 and SB 826, as well as other federal decisions affecting the evolution of board diversity mandates, laws and rules for California employers.