There have been a number of challenges to California’s board diversity legislation, SB 826, the board gender diversity statute, and AB 979, the board diversity statute regarding “underrepresented communities.” In two cases, Crest v. Padilla I and II, filed in state court, the plaintiffs notched wins and the court issued injunctions against implementation and enforcement of these two statutes. Both of these cases are currently on appeal, and the injunctions remain in place. But there were also cases filed in federal court, and, in one of those cases, Alliance for Fair Board Recruitment v. Weber, the U.S. District Court for the Eastern District of California has just granted the Plaintiff’s motion for summary judgment, concluding that AB 979 is unconstitutional on its face. The federal court decision could have reverberations in other states and potentially influence the ongoing state court appeals (as could an earlier decision on SB 826 by the Court going the other way. See the third SideBar below.)
The first Crest v. Padilla was filed in 2019 by three California taxpayers seeking to prevent implementation and enforcement of SB 826, the board gender diversity law. Framed as a “taxpayer suit,” the litigation sought a judgment declaring the expenditure of taxpayer funds to enforce or implement SB 826 to be illegal and an injunction preventing the California Secretary of State from expending taxpayer funds for those purposes, alleging that the law’s mandate was an unconstitutional gender-based quota and violated the Equal Protection Provisions of the California Constitution. After a bench trial, the court agreed with the plaintiffs and enjoined implementation and enforcement of the statute. (See this PubCo post.) That verdict followed summary judgment in favor of the same plaintiffs in the second Crest v. Padilla challenging AB 979. (See this PubCo post.) The court in that case concluded that the statute violated the equal protection clause of the California Constitution on its face because, in the court’s view, it treated similarly situated individuals differently based on suspect racial and other categories that were not justified by a compelling interest, nor was the statute narrowly tailored to address the interests identified. According to the court, the plaintiffs were entitled to a “judgment declaring as much and an injunction preventing the expenditure of taxpayer funds on implementation of the measure.” These cases are on appeal, and, in both cases, the injunctions against implementation and enforcement of these two statutes are in place. (See this PubCo post and this PubCo post.)
The original complaint. The instant case was originally filed in July 2021 in a California federal district court against the California Secretary of State, Dr. Shirley Weber, seeking declaratory relief that California’s board diversity statutes (SB 826 and AB 979) violated the Equal Protection Clause of the Fourteenth Amendment and the internal affairs doctrine, and an injunction to prevent Weber from enforcing those statutes. The Plaintiff, the Alliance for Fair Board Recruitment, was described as “a Texas non-profit membership association,” with members that include “persons who are seeking employment as corporate directors as well as shareholders of publicly traded companies headquartered in California and therefore subject to SB 826 and AB 979.”
AB 979, patterned after SB 826, required that, no later than the close of 2021, each “publicly held corporation” have a minimum of one director from an underrepresented community. A director from an “underrepresented community” means a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual or transgender. No later than the close of 2022, a corporation with more than four but fewer than nine directors was required to have a minimum of two directors from underrepresented communities, and a corporation with nine or more directors needed to have a minimum of three directors from underrepresented communities. (See this PubCo post.)
In its complaint, the Plaintiff maintained that “states may not require discrimination on the basis of race without making a convincing showing at the outset that the discrimination is narrowly tailored to advance a compelling state interest. And they may not compel discrimination on the basis of sex without demonstrating that the discrimination is substantially related to achieving an important governmental interest.” AB 979, the complaint asserted, required all publicly traded corporations headquartered in California to discriminate based on race in selecting their board members. The complaint alleged that the law is “unconstitutional and patronizing social engineering,” relying on and perpetuating “invidious racial categories.” The Plaintiff argued that the law did not “claim to remedy any particular past discrimination.” Rather, the Plaintiff said, California viewed the mandate as “justified on the pretext that discrimination will be lucrative for California’s corporations and shareholders and thus for the state. That is unconstitutional. If the Fourteenth Amendment and our foundational civil rights laws stand for anything, it is that private moneymaking is no justification for race or sex discrimination.” The Fourteenth Amendment prohibition against discrimination based on race or ethnicity, the Plaintiff maintained, is prohibited “in all but the narrowest circumstances. Laws that discriminate based on race are subject to strict scrutiny, meaning they must be narrowly tailored to serve a compelling government interest.” But, the complaint contended, the law failed both prongs of the strict scrutiny test: there was no compelling state interest—the law neither remedied past discrimination nor fostered the educational benefits of diversity in a college setting—nor was it narrowly tailored.
The Plaintiff also contended that the statute violated the prohibition in 42 U.S.C. § 1981 against discrimination on the basis of race in the making and enforcing of contracts by hindering those who do not identify as members of the favored class from securing contracts for board positions at corporations headquartered in California. (See this PubCo post.)
Motion for summary judgment. In June 2022, the Plaintiff moved for summary judgment with regard to AB 979 on the grounds that there was no genuine issue as to any material fact and that Plaintiff was entitled to judgment as a matter of law because AB 979 “imposed race-based classifications in manner that cannot satisfy the requirements of strict scrutiny, in violation of the Fourteenth Amendment of the U.S. Constitution (Count II) and 42 U.S.C. § 1981 (Count III).”
What happened to Plaintiff’s challenge in the original complaint to SB 826? At a hearing in January, the Court dismissed (without issuing an opinion) the Plaintiff’s facial challenge to the constitutionality of SB 826, as well as a claim that the statutes violated the internal affairs doctrine, but allowed the facial challenge to AB 979 to go forward.
Why was the Plaintiff’s challenge to SB 826 dismissed, while the challenge to AB 979 survived? In the transcript of the proceedings of the motion to dismiss, the Court gave us the answer: on a motion denying injunctive relief in another case, Meland v. Weber, the Court had already found that, as to SB 826, “the likelihood of success is…that it’s not unconstitutional.” In essence, the Court observed, “gender seems to be treated much differently than race, to put it as simply as possible.”
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In the Meland order, the Court held that Meland failed to demonstrate a likelihood of success on the merits: as a sex-based classification, SB 826 was subject to intermediate scrutiny, and the Secretary had shown an “abundance of evidence” of discrimination to support its conclusion that remedial action was warranted there. In addition, the Court concluded that it would not serve the public interest to “override the legislature’s determination and enjoin a law that the evidence shows is clearly working.”
According to the Court, to successfully bring a facial challenge to a legislative act required the challenger to establish that the statute would not be valid under any set of circumstances. The Court dismissed the count related to SB 826, concluding that the Plaintiff had “not plausibly alleged that all applications of SB 826 are unconstitutional and violative of the Equal Protection Clause of the Fourteenth Amendment, nor does the case law that was cited in support of plaintiff’s position support its argument that all applications are unconstitutional.” The Plaintiff could, however, amend to go forward on as-applied basis if desired.
In its motion for summary judgment, the Plaintiff asserted that AB 979 was a “paradigmatic violation of the Fourteenth Amendment’s equal protection clause,” that worked by “requiring set-asides,” making it “a race-based law, and it is in every aspect, at least in the Supreme Court’s view, a quota.” This kind of “‘race-based action’ can be countenanced only if it ‘is necessary to further a compelling interest’ and ‘satisfies the “narrow tailoring” test.’… AB 979 falls far short on both prongs.” The Secretary opposed the motion, contending that the law was not a quota because it established only a “flexible floor” for diversity and that it satisfied strict scrutiny. Alternatively, the Secretary requested that, if any provisions were held to be unconstitutional, they be severed from the rest of the statute.
The Court’s decision. The Court granted the Plaintiff’s motion, concluding that “the Plaintiff’s facial challenge to AB 979 must be affirmed.” Although the Secretary had conceded “that AB 979 constitutes a racial classification,” she argued that it was permissible because it was designed to remedy past discrimination, did not create “preferred racial and ethnic classes because no individual is insulated from competition with others and each candidate must still go through an individualized consideration process,” and expressly permitted boards to expand to accommodate more candidates so that no director’s seat was necessarily jeopardized.
In its order, the Court rejected the Secretary’s “semantic argument that [AB 979] only sets a ‘flexible floor’ for diversity.” Instead, the Court found that the statute’s racial classifications were indeed a “race-based quota,” as defined by SCOTUS, as it required a “certain fixed number of board positions to be reserved exclusively for certain minority groups.” Moreover, the Court highlighted that SCOTUS “has rejected racial and ethnic quotas and has declared them ‘facially invalid.’” Accordingly, as there was no genuine issue of material fact, the Court held that AB 979 was unconstitutional on its face, granting summary judgment to the Plaintiff as a matter of law. The Court did not even reach the issue of strict scrutiny “because the facial challenge to AB 979 is dispositive.” Because SCOTUS had stated that a violation of the Equal Protection Clause of the Fourteenth Amendment also constitutes a violation of §1981, the Court also granted summary judgment in favor of the Plaintiff on that count as well.
The Court also rejected the Secretary’s request to sever the unconstitutional provisions. Applying California law, the Court found that “removing AB 979’s racial and ethnic classifications would adversely affect the coherence of the remaining provision regarding those who identify as gay, lesbian, bisexual, or transgender because the statute’s language is almost exclusively cast in racial and ethnic terms and figures.” In addition, the Court looked to the language of the statute, the Secretary’s brief arguing that the main purpose of the statute was to remedy racial and ethnic discrimination, and the absence of a severability clause as indications that “the legislature would not have adopted the remainder of AB 979 had it foreseen its partial invalidation.”
It’s worth noting that the Alliance for Fair Board Recruitment has also petitioned the Fifth Circuit Court of Appeals for review of the SEC’s final order (see this PubCo post) approving the Nasdaq board diversity rule (see this PubCo post). The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. In their briefs, petitioners argued, among other things, that the Nasdaq listing rules imposed a quota that violates the constitutional right to equal protection by encouraging discrimination against potential board members and compels disclosure of controversial information in violation of the First Amendment. The rule “issued by Nasdaq and approved by SEC constitute[s] state action that is subject to constitutional restraints.” In addition, they contended that the “SEC lacked statutory authority to issue the order, which seeks to regulate demographics through the guise of ‘financial disclosures.’” During oral argument before a three-judge panel of the Fifth Circuit, the arguments came down principally to a couple of key issues: whether the adoption of the Nasdaq rule involved state action and whether the SEC exceeded its authority in approving the rule. In this article, MarketWatch concluded that the appeals court judges “sounded skeptical that the court should overturn the policy.” (See this PubCo post.)