California Courts Have Found Two Statutes Requiring Diversity in the Makeup of Public Company Boards of Directors Unconstitutional
In April, a Los Angeles Superior Court held that Assembly Bill (AB) 979 which required publicly-held corporations headquartered in California to diversify by adding “underrepresented communities” to their board of directors, was unconstitutional. On May 13, 2022, a second Los Angeles Superior Court found Senate Bill (SB) 826, which required gender diversity on the boards of directors of publicly-held corporations, was also unconstitutional.
In the most recent case, Robin Crest, et al. v. Alex Padilla, California taxpayers asked the Court to enjoin the State of California from spending taxpayer funds or using taxpayer-financed resources to enforce SB 826.
After a bench trial, Judge Duffy-Lewis issued a 23-page verdict identifying the constitutional flaws of SB 826. The Court found that the plaintiffs demonstrated that SB 826 was presumptively unconstitutional because it affected two or more similarly situated groups, in this case, men and women, in an unequal manner. Once the Court concluded the statute was presumptively unconstitutional the burden shifted to the State to prove the statute was narrowly tailored and necessary to fulfill a compelling state interest. The Court found the State failed to meet its burden.
The State argued that the SB 826 fulfilled several compelling state interests by: (1) eliminating and remedying discrimination in the director selection process; and (2) increasing gender diversity on boards of publicly held corporations to benefit the public and the state economy, and to benefit and protect California taxpayers, public employees, and retirees. The Court disagreed.
The Court concluded that the State Legislature’s goal in passing SB 826 was to achieve gender equity or parity and not to boost the State economy or improve opportunities for California taxpayers, public employees, or retirees. Accordingly, the Court concluded that the Legislature lacked a compelling state interest for passing the statute.
Further, the Court found that the State failed to prove that SB 826’s use of gender-based classifications was necessary to boost the State’s economy or improve opportunities for women in the workplace or protect California taxpayers, public employees, pensions, or retirees.
Finally, the Court found the State did not prove SB 826’s use of gender-based classifications was limited in scope or duration to that which was necessary to remedy specific, unlawful discrimination against women or to restore victims of specific, purposeful, or intentional unlawful discrimination to the position the victims would have held in the absence of discrimination. Accordingly, the Court found the statute was not narrowly tailored.
The Court ruled SB 826 violated the Equal Protection Clause of the California Constitution and as such enjoined enforcement of the statute.
The ruling means that the State is precluded from enforcing SB 826 at this time. It is unclear whether the State will appeal the Superior Court’s ruling. However, if it does so, the injunction against the State using taxpayer funds may remain in place until a further ruling.