California Gender Board Diversity Law Is Unconstitutional, Judge Rules

California Gender Board Diversity Law Is Unconstitutional, Judge Rules

 

A California court recently struck down Senate Bill No. 826 (“SB 826”), a landmark gender diversity law requiring the representation of women on the boards of publicly held corporations in California.  The Court found the State of California failed to offer a compelling interest for the law, rendering the law unconstitutional under the Equal Protection Clause of the California Constitution.[i]

 

Background

On January 1, 2019, SB 826 took effect. It required each publicly held domestic or non-U.S. corporation with its principal executive office located within the State of California to have a minimum number of female directors serving on its board of directors, including at least one by the end of 2019.  By the end of the of 2021, corporations headquartered in California were required to have a higher number of female directors depending on the total number of directors.

 

Judicial Watch Challenges SB 826

In 2019, Judicial Watch, a conservative legal advocacy group, filed a lawsuit in the Superior Court of the State of California for the County of Los Angeles, challenging SB 826 on behalf of California taxpayers Robin Crest, Earl De Vries, and Judy De Vries.  Judicial Watch argued SB 826 established a “quota system for female representation on corporate boards” and therefore violated California’s constitutional equal protection clause by making distinctions based on gender without a compelling state interest and without being “necessary” and “narrowly tailored” to serve that interest. Judicial Watch also argued SB 826 violated the prohibition in the California Constitution against “discrimination based on sex in public employment, education or contracting.”[ii] The lawsuit sought to enjoin the California Secretary of State from using taxpayer-financed resources to enforce SB 826.[iii]

The State of California defended SB 826, arguing it had a compelling interest in eliminating and remedying discrimination in the director selection process. The State also contended the measure benefited the public and state economy and protected California taxpayers, public employees, and retirees.[iv]

 

The Court Strikes Back

The lawsuit over SB 826 proceeded to trial in Los Angeles Superior Court in December 2021, and in May 2022, Judge Maureen Duffy-Lewis entered the Court’s ruling, holding SB 826 “violates the Equal Protection Clause of the California Constitution and is thus enjoined.”[v]

The Court stated the studies cited in SB 826 failed to show a connection between women on corporate boards and corporate governance.[vi]  The Court also stated the statutory goal was to achieve “gender equity or parity” – “not to boost California’s economy, not to improve opportunities for women in the workplace, nor not to protect California’s taxpayers, public employees, pensions and retirees.”[vii]  The Court noted under California law, “there is no compelling governmental interest in remedying societal discrimination … [or] generalized, non-specific allegations of discrimination”, “[t]he State must have a strong basis in evidence to conclude that remedial action is necessary before it embarks on a program to remedy discrimination, and the discrimination cannot merely be conceded.”[viii]

 

Precedent Was Set When AB 979 Was Previously Struck Down

It is important to note the ruling on SB 826 follows an April 2022 ruling of another Los Angeles Superior Court judge regarding AB 979, which required boards of directors for publicly held companies headquartered in California to include a certain number of directors from underrepresented communities.  The lawsuit was decided on summary judgment with the court finding AB 979 unconstitutional.[ix]

 

Takeaway

The California Secretary of State may appeal the Court’s order on SB 826 which will prolong the determination of the final outcome.  Notwithstanding the courts striking down SB 826 and AB 979, California companies continue to have various reasons for pursuing diversity on their boards and in other leadership positions.  Diversity is a high priority for many investors, stakeholders, employees, and customers.  Diversifying their boards thus makes good business sense.

Despite the removal of the legal obligation, organizations can encourage diversity on their boards and other leadership positions by identifying and finding solutions for the barriers that have created diversity imbalance, hiring outside evaluators to develop committees and policies aimed at considering diversity, executive recruiters to identify diverse talent, and striving for numerical targets while hiring qualified applicants.

 

 

 


[i] Crest v. Padilla, No. 19-STCV-27561 (LA Super. Ct., May 13, 2022) at 1.

[ii] Id.

[iii] Complaint at 1, Crest v. Padilla, No. 19-STCV-27561 (LA Super. Ct., May 13, 2022).

[iv] Id. at 7-8

[v] Id. at 23

[vi] Id. at 12

[vii] Id at 9

[viii] Id. at 8.

[ix] Crest v. Padilla, No. 20-STCV-37513 (LA Super. Ct., Apr. 1, 2022).

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