In 2020, California passed Assembly Bill 979, which required California-headquartered public companies to appoint a minimum number of individuals from underrepresented communities to their boards. This bill followed on the heels of a 2018 Senate Bill that required publicly listed corporations headquartered in California to have two or three female board members, depending on the size of the board.
Following a recent trial-court decision out of the Eastern District of California as well as two earlier state court decisions, both board requirements have been found to violate equal protection. That creates significant compliance uncertainty for corporations while these decisions wind through the appellate courts. At the same time, the benchmarks set out in both bills reflect an interest that many institutional investors have publicly prioritized. Furthermore, certain publicly listed companies are required to disclose the diversity metrics of their boards. As a result, even though these bills are currently enjoined, their diversity frameworks will likely continue to be important considerations for boards as they seek to respond to the real expectations of their constituents in a merits-based and non-discriminatory way.
Trial Courts Find California’s Board Diversity Statutes to be Unconstitutional
In 2020, California passed Assembly Bill 979, which required California-headquartered public companies to appoint a minimum number of individuals (dependent on the size of the corporation) from underrepresented communities to their boards. This law has been challenged, and the U.S. District Court for the Eastern District of California (the “District Court”) became the latest court to rule it unconstitutional.
California Assembly Bill 979
CAB 979 defines “underrepresented communities” as individuals who identify 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.” One to three persons from underrepresented groups must be members of a corporation’s board (again, based on the corporation’s size). Fines for noncompliance are $100,000 for an initial violation and $300,000 for subsequent violations.
Alliance for Fair Board Recruitment v. Weber
The Alliance for Fair Board Recruitment (the “Alliance”) challenged the constitutionality of CAB 979 in a lawsuit in the District Court. On May 15, 2023, the District Court, in Alliance for Fair Board Recruitment v. Weber, ruled that CAB 979 violates the Equal Protection Clause of the U.S. Constitution’s Fourteenth Amendment, as well as 42 U.S.C. §1981.
The Alliance argued that CAB 979’s imposition of board requirements based on select racial and ethnic classifications constitutes an impermissible race-based quota in violation of the Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution and federal statute 42 U.S.C. §1981, which prohibits racial discrimination on the basis of race in the making and enforcing of contracts.
The District Court granted Alliance’s motion for summary judgment, ruling that CAB 979’s racial and ethnic quotas are “facially invalid” based on relevant U.S. Supreme Court precedent, including its ruling in the affirmative action case Grutter v. Bollinger.
The District Court is not the only court to consider the constitutionality of California’s board diversity requirements. In two cases, Crest v. Padilla I and II, filed in California state courts, the courts ruled in favor of the plaintiffs and entered injunctions against the implementation and enforcement of CAB 979 and California Senate Bill 826, which requires gender diversity on boards. The courts found that the statutes violated the equal protection provisions of the California Constitution.
Crest v. Padilla I and II were both appealed and the appeals remain pending. Alliance for Fair Board Recruitment v. Weber was also recently appealed.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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