Court Strikes Down California’s Board Diversity Mandate

Employment Law


California’s first-of-its-kind law mandating diversity on boards of directors was declared unconstitutional by a superior court in April.

In 2020, Governor Gavin Newsome signed Assembly Bill 979 into law, requiring publicly held corporations headquartered in California to include a minimum of one “person from an underrepresented community” on their boards by December 31, 2021. Larger boards were given an extra year to comply.

For boards with more than four but fewer than nine members, the corporation was instructed to include a minimum of two directors from underrepresented communities; boards with nine or more directors needed a minimum of three.

The law defined “person from an underrepresented community” as someone who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who self-identifies as gay, lesbian, bisexual or transgender.

AB 979—which built upon Senate Bill 826, a 2018 law that requires companies to have a minimum number of women on their boards of directors—included penalties beginning at a fine of $100,000 for the first violation and increasing to $300,000 for subsequent violations.

A trio of taxpayers filed suit, seeking to have the law struck down.

Ruling on cross motions for summary judgment, Superior Court Judge Terry A. Green sided with the plaintiffs, holding that AB 979 violates the Equal Protection Clause of the California Constitution, as it “treats similarly situated individuals – qualified potential corporate board members – differently based on their membership (or lack thereof) in certain listed racial, sexual orientation, and gender identity groups.”

While the court acknowledged the legislature’s laudable goal to increase diversity, the law itself failed to pass constitutional muster because the state failed to identify a compelling interest to justify classification by protected categories or to narrowly tailor the statute to meet the interest offered by the state.

“[W]hile remediation of discrimination can be a compelling interest, the state must define a specific arena in which the discrimination has occurred, such as a school district or a specific industry within a particular local jurisdiction,” Green wrote.

“Corporate boards are not such an arena – they cover all industries and all parts of the country. The legislature did not even attempt to limit its investigation or its findings to California corporations, though jurisdictional restrictions ensured that only California corporations would be covered by the law. And even supposing that corporate boards were a sufficiently specific arena, neither the legislature nor the secretary has produced the combination of (a) valid statistical comparisons and (b) anecdotal testimony which could serve as ‘convincing evidence’ of discrimination in that arena.”

The legislature made no attempt to conduct a demographic survey of the qualified talent pool of potential board members, the court said, nor did it attempt to obtain disclosure from California corporations regarding the current demographics of their boards.

“Only in very particular cases should discrimination be remedied by more discrimination,” the court added. “And that should only happen after obvious alternative measures have been tried. Sometimes the direct approach should be the last resort, not the first.”

Because the law “treats similarly[]situated individuals differently based on race, sexual orientation, and gender identity, because that use of suspect categories is not justified by any compelling interest, and because the statute is not narrowly tailored to serve the interests offered, [it] violates the Equal Protection Clause of the California Constitution,” Green concluded, entering an injunction preventing the expenditure of taxpayer funds on implementation of the statute.

To read the order in Crest, et al. v. Padilla, click here.

Why it matters: The court recognized that the legislature’s efforts were meant to solve a problem but that the efforts failed to do so in a constitutionally acceptable fashion. “The difficulty is that the legislature is thinking in group terms,” Green wrote. “But the California Constitution protects the right of individuals to equal treatment. Before 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. That attempt was not made in this case.” Whether the court’s decision will have an impact on the effort in other jurisdictions to enact laws diversifying corporate boards—several other states have followed California’s lead and considered similar measures—remains to be seen.

manatt-black

ATTORNEY ADVERTISING

pursuant to New York DR 2-101(f)

© 2022 Manatt, Phelps & Phillips, LLP.

All rights reserved