Last month, on May 13, Los Angeles County Superior Court Judge Maureen Duffy-Lewis ruled that SB 826, which requires publicly held California corporations with a principal executive office in California to follow gender diversity requirements for board of directors seats, violates the Equal Protection Clause of the California Constitution.  

This ruling follows another recent Los Angeles County case, where Superior Court Judge Terry A. Green’s found AB 979’s bill to promote board of directors members from underrepresented communities also violates the California Constitution.  We previously reported on that ruling and provide some details on that ruling below as well.  

These challenges to AB 979 and SB 826 were brought by the same plaintiffs, Robin Crest, Earl De Vries, and Judy De Vries.  In both cases, the plaintiffs were represented by Judicial Watch, a conservative activist group.  Both cases were framed as “taxpayer suits” and brought to enjoin the California Secretary of State, Alex Padilla, from expending taxpayer funds and resources to enforce or implement a law that violates the California Constitution.  As discussed in more detail below, the successful challenges to SB 826 and AB 979 may be interpretive of future challenges to other California or federal legislation and provide guidance to companies regarding their boards of directors’ composition requirements and similar diversity initiatives. 

The Challenge to AB 979

Just over a month before Judge Duffy-Lewis’ SB 826 ruling, AB 979 was successfully challenged in Crest v. Padilla (Case No. 20ST-CV-37513) (Crest v. Padilla II).  Los Angeles County Superior Court Judge Terry A. Green issued a ruling on AB 979, granting the plaintiff’s motion for summary judgment and finding that AB 979 violated the Equal Protection Clause of the California Constitution.  Judge Green noted that while remedying discrimination can be a compelling interest, there needed to be convincing evidence that the Legislature’s action was necessary and narrowly tailored.  The court found that AB 979 was not narrowly tailored to serve the compelling interests offered because the Legislature made no attempts to look at the demographics of the “qualified talent pool” from which board members could be selected. 

The Challenges to SB 826 

On September 30, 2018, Senate Bill 826 was signed into law by then Governor Jerry Brown.  SB 826 required at least one female director on California corporate boards by December 31, 2019, and required that, by the end of 2021, three female directors are required, if the company had six or more directors in total.  SB 826’s legislative text describes the purpose behind the bill: to boost the California economy, improve opportunities for women in the workplace, and protect California taxpayers, shareholders, and retirees.

In Crest v. Padilla (Case No. 19STCV27561) (Crest v. Padilla I)), Judicial Watch challenged SB 826’s gender quota to boards of director composition requirements.  Judge Maureen Duffy Lewis found that California could not prove the “use of gender-based classification was necessary to boost California’s economy, improve opportunities for women in the workplace, and protect taxpayers.”  Judge Duffy-Lewis found that the California Legislature’s actual purpose was gender-balancing, not remedying discrimination, and that this was improper.  

SB 826 also faces similar challenges on equal protection grounds in a pending federal case in the District Court for the Eastern District of California (Sacramento) called Alliance for Fair Board Recruitment v. Weber.  The court in Alliance for Fair Board Recruitment was scheduled to hear oral arguments on the plaintiff’s motion for summary judgment on June 7, 2022, so a ruling from Judge Mendez should be published soon.  The federal court is not bound to follow the superior court precedent.  

SEC’s Recent Efforts to Diversify Corporate Boards

The Securities and Exchange Commission (SEC) recently approved the Nasdaq Stock Market (Nasdaq) Listing Rules, which require Nasdaq-listed companies to follow diversity requirements and disclose diversity data regarding the composition of boards of directors.  Under Nasdaq’s rule, listed companies must either have or disclose why they do not have at least two directors from underrepresented communities.  Despite the rulings regarding SB 826 and AB 979, California employers listed on the Nasdaq will still need to consider the Nasdaq diversity rules for board composition.  Nasdaq’s Listing Rules currently face a challenge in the federal Fifth Circuit, where, in Alliance for Fair Board Recruitment v. SEC, the Court will review the SEC’s approval of these rules and determine whether they violate the Equal Protection Clause of the U.S. Constitution.  

What’s Next?

In short, the Los Angeles County trial court’s unpublished rulings in both Crest v. Padilla decisions, unless successfully challenged in the higher courts, preclude the enforcement of AB 979 and SB 826.  However, there are no appellate or other published decisions on this issue.  Furthermore, federal courts will hear challenges to SB 826 and Nasdaq’s Listing Rules on similar Equal Protection grounds.  California Nasdaq-listed companies will need to pay close attention to these decisions and any appeals of the Crest decisions to determine their board of directors’ diversity composition. 

As courts issue additional rulings on these matters, companies can look forward to greater clarity regarding their diversity and reporting requirements.  Therefore, at this time, California employers should continue to promote diversity in leadership, but should wait for further guidance from the appellate and federal court’s review before making changes to their board of directors’ composition based expressly on AB 979 or SB 826.  As such, CDF will continue to monitor potential appellate challenges to AB 979 and SB 826, as well as other federal decisions affecting the developments to board diversity mandates, laws and rules for California employers.