Blog: The First Legal Challenge to California’s Gender Diversity Law Goes to Court | Cooley LLP
You may remember that the first legal challenge to California’s gender diversity law, Crest vs. Alex Padilla, was a 2019 lawsuit filed in a California state court by three California taxpayers seeking to prevent the implementation and enforcement of the law. Presented as a “taxpayer lawsuit,” the litigation sought to bar Alex Padilla, then California Secretary of State (now US Senator), from spending taxpayer funds and taxpayer-funded resources to enforce or enforce. enforces the law, SB 826, alleging that the mandate of the law is an unconstitutional quota based on gender and violates the California constitution. The court in this case has just dismissed each party’s motion for summary judgment after concluding that there were matters of material fact that could be adjudicated. The case will now go to trial, which is currently set for October 25. Stay tuned.
Even supporters of the California law recognized the possibility of “equal protection” claims and other legal challenges – when Gov. Jerry Brown enacted the bill, he acknowledged that “serious legal concerns” had been raised. . (See this post from PubCo.) And many expected a flood of legal challenges to thwart efforts to implement the bill. Nonetheless, California companies appear to have accepted the requirements of the legal mandate – perhaps also feeling pressure from large asset managers such as BlackRock and State Street – and have not filed a complaint.
SB 826 requires public companies (defined as companies listed on major US stock exchanges) with principal executive offices located in California, no matter where they are incorporated, include a specified number of women on their boards. Each public company was to have at least one woman on its board by the end of 2019. This minimum increases to two by December 31, 2021 – not too far – if the company has five directors, and to three women. directors if the company has six or more directors. The law also requires the California Secretary of State’s office to post reports on the status of compliance with the law on its website. Under the law, the secretary can impose fines for violations, ranging from $ 100,000 to $ 300,000 per violation. To date, the Secretary has neither proposed nor adopted any regulations regarding fines or imposed fines for violations.
In the litigation, the plaintiffs claim “taxpayer” status under the “California Taxpayer Common Law Doctrine and Section 526a of the Code of Civil Procedure, which grants California taxpayers the right to sue representatives of the government to prevent illegal spending of taxpayer funds and taxpayer-funded resources. ”They argue that in so-called“ taxpayer procedures ”it is“ irrelevant whether the amount of the expenditure is small or whether the ban illegal spending saves tax funds. ”In addition, they argue, the Assembly Appropriations Committee indicated that SB 826 would require“ ongoing General Fund costs of approximately $ 500,000 each year for that the Secretary of State develop regulations, investigate claims and enforce violations of the provisions of the law and unknown additional costs to produce e annual report required.
In the complaint, the complainants argue that the law’s requirement for the representation of women on boards of directors “employs express gender classifications. As a result, SB 826 is immediately suspect and presumed invalid “under the equal protection provisions of the California Constitution and subject to” scrutiny “by the California courts. The complaint seeks the entry of a judgment declaring illegal any expenditure of taxpayer funds to implement or enforce SB 826 and the issuance of an injunction permanently prohibiting the secretary from spending taxpayer funds to enforce or enforce. implement the provisions of the legislation.
There are of course several other ongoing legal challenges against SB 826, as well as its related legislation, AB 979, which requires boards of directors of public companies, including foreign companies headquartered in California , to include a specified number of directors from “under-represented communities”. The same three plaintiffs in this case also filed a similar lawsuit challenging AB 979 on essentially the same basis. As Crest vs. Padilla I, the case is touted as a “taxpayer lawsuit” and seeks to direct the California Secretary of State to spend taxpayer funds and taxpayer-funded resources to administer or enforce the law, alleging that the mandate of the law is an unconstitutional quota and violates the California constitution. (See this post from PubCo.)
In Creighton Meland v. Alex Padilla, California Secretary of State, filed in Federal District Court for the Eastern District of California, a shareholder of a Delaware corporation that is incorporated and headquartered in California filed a lawsuit seeking a declaratory judgment that the law was unconstitutional under the equal protection provisions of the 14th Amendment and permanent injunction preventing the implementation and enforcement of the law. The applicant claims that the law is a classification based on sex which violates the equal protection provisions of the 14e Amendment by imposing a quota based on sex directly on shareholders and seeking to force shareholders to perpetuate discrimination based on sex. Specifically, the complaint argues that the law “discriminates on the face on the basis of sex” and “does not serve any important government interest” because “[s]ex-based balancing is not a significant government interest that can support a classification based on gender under the equal protection clause. In April 2020, a federal judge dismissed this legal challenge for lack of standing. In June 2021, a panel of three judges from the 9e Circuit reversed that decision, allowing the case, now called Meland vs. Weber, Go forward. The tribunal held that, because the complainant “plausibly alleged that SB 826 compelled or encouraged him to discriminate on the basis of sex, he sufficiently alleged that he had standing to challenge the constitutionality of SB 826 ”. A district court hearing is currently scheduled in this case for Oct. 19 on the plaintiff’s motion for a preliminary injunction. (See this post from PubCo and this post from PubCo)
In another case, Alliance for Fair Board Recruitment v. Weber, the plaintiff sought a declaratory judgment that the two California board of directors diversity laws violate the equal protection clause of 14e Amendment and doctrine of internal affairs. The case has been filed in California Federal District Court against California Secretary of State Dr. Shirley Weber and seeks to bar Weber from enforcing those laws. The plaintiff is described as “a Texas nonprofit membership association,” with members including “individuals seeking employment as corporate directors as well as shareholders of publicly traded companies headquartered in in California and therefore subject to SB 826 and AB 979 standards ”. According to the complaint, these laws require all publicly traded companies headquartered in California to discriminate on the basis of gender and race when selecting members of their board of directors. The complaint alleges that “[t]These laws are unconstitutional and patronizing social engineering. The legal regime they institute builds on and perpetuates outrageous racial categories and gender stereotypes that the US legal system has rightly rejected. Further, the Complainant argues that the two laws “violate the sovereign rights of other states to regulate corporate governance for entities incorporated under their laws. SB 826 and AB 979 apply to all companies headquartered in California, even if the company in question is incorporated under the laws of another state. This policy is illegal because California does not have jurisdiction to regulate the internal affairs of entities incorporated under the laws of other states. (See this post from PubCoNotably, that same group has filed a slim Exchange Act petition with the Fifth Circuit Court of Appeals for a review of the SEC’s final order approving the board’s diversity rule. of the Nasdaq. (See this post from PubCo.)