You remember California’s climate legislation signed into law just last year—Senate Bill 253, the Climate Corporate Data Accountability Act, and Senate Bill 261, Greenhouse gases: climate-related financial risk? (See this PubCo post.) The U.S. and California Chambers of Commerce, the American Farm Bureau Federation and others have just filed a new complaint against the California Air Resources Board challenging these two California laws. The lawsuit seeks declaratory relief that the two laws are void because they violate the First Amendment, are precluded by federal law, and are invalid under the Constitution’s limitations on extraterritorial regulation, particularly under the dormant Commerce Clause.  The litigation also seeks injunctive relief to prevent CARB from taking any action to enforce these two laws.  These California laws have the potential to affect thousands of companies, including companies domiciled in other states, and many will be alert to see if these laws survive this legal action unscathed. To some extent, the litigation will also function as a dress rehearsal for the litigation that’s likely to surface when the SEC finally adopts its long-awaited climate disclosure rules. What does this litigation augur for the SEC’s anticipated climate disclosure rules?  While the dormant Commerce Clause is unlikely to play much of a role in a future challenge to the SEC’s expected climate disclosure regulations, the First Amendment claim is certainly one that we have seen used successfully in the past and are likely to see again. For example, it was raised in connection with challenges to Rule 14a-8 and to the stock repurchase rules, as well as at a recent House Financial Services subcommittee hearing on oversight of the SEC’s proposed climate disclosure, where the contention that the proposal’s compelled speech would violate the First Amendment was a topic of discussion. (See this PubCo post.) Now, we’ll see how well it plays in federal court in California.

In this press release, Tom Quaadman, executive director of the Chamber’s Center for Capital Markets Competitiveness, remarked that business and government need to work together to address climate change,

“and that requires policies that are practical, flexible, predictable, and durable. California’s corporate disclosure laws are the opposite of that and violate the First Amendment by forcing businesses to engage in subjective speech. With many public companies already disclosing material climate risks, businesses are well ahead of government regulators. California’s laws usurp the role of federal regulators, opening the door for other states to take an opposite approach to disclosure, leaving businesses and their investors caught in the middle of a political scrap between states. The resulting fragmentation will undermine the competitiveness of American capital markets, ushering in an era of duplicative and conflicting state-imposed requirements.”

What’s even worse, he said, is that “these laws demand that both public and private businesses with even minimal operations in the state calculate their greenhouse gas emissions from their whole supply chain, no matter where those emissions take place, and subjectively measure and report their worldwide climate-related financial risks and proposed mitigation strategies to California. The costs and compliance issues of this law will be felt by businesses of all sizes, but especially small, Main Street businesses.”

As a reminder, SB 253 would mandate disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities (public or private) with total annual revenues in excess of a billion dollars that “do business in California,” however that ends up being defined.  SB 253 has been estimated to apply to about 5,300 companies. SB 261would require subject companies to prepare reports disclosing their climate-related financial risk, in accordance with TCFD framework, and describing their measures adopted to reduce and adapt to that risk.  With a lower reporting threshold of total annual revenues in excess of $500 million, SB 261 has been estimated to apply to over 10,000 companies. (For more information about this legislation, see this PubCo post.)

In the complaint, the plaintiffs maintain that they are in favor of policies that would reduce GHG emissions “as much and as quickly as reasonably possible, consistent with the pace of innovation and the feasibility of implementing large-scale technical change,” and that they support the disclosure of material information, including climate-related information, as necessary to protect investors, but those policies “must be informed by the best science, a careful analysis of available alternatives, and attention to legal rights and requirements.” In addition, “a patchwork of inconsistent state-by-state regulatory regimes, under which multiple states attempt to regulate emissions nationally through conflicting means” don’t help either business or consumers.  

These laws, they profess, will impose massive costs on businesses, with the burden of compliance falling disproportionately on small and medium businesses. They argue that both laws apply to any company exceeding a certain revenue threshold that does any business in California and that estimating GHG emissions is “enormously burdensome”; reporting Scope 3 emissions alone, they contend, will cost many companies more than $1 million per year and, in many instances, may be inaccurate. According to the complaint, the “burden of estimating Scope 3 emissions flows up and down the supply chain.  Small businesses nationwide will incur significant costs monitoring and reporting emissions to suppliers and customers swept within the law’s reach.  For example, scores of family farm members of AFBF will need to report emissions to business partners that do business with entities covered by S.B. 253.” Plaintiffs also cite the reservations California’s Governor expressed at the time of his signing of these bills regarding financial impact. (See this PubCo post.)

In summary, the plaintiffs charge that the two California laws “unconstitutionally compel speech in violation of the First Amendment” by “impermissibly compel[ling] thousands of businesses to make costly, burdensome, and politically fraught statements about ‘their operations, not just in California, but around the world,’… in order to stigmatize those companies and shape their behavior.” Plaintiffs cite legislative analysis indicating that public availability of these compelled statements “‘might encourage them to take meaningful steps to reduce [greenhouse-gas] emissions.’” In addition, they charge that these two laws “seek to regulate an area that is outside California’s jurisdiction and subject to exclusive federal control by virtue of the Clean Air Act and the federalism principles embodied in our federal Constitution.  These laws stand in conflict with existing federal law and the Constitution’s delegation to Congress of the power to regulate interstate commerce.” 

First Amendment claims. Plaintiffs assert that both S.B. 253 and 261 violate the First Amendment right to refrain from speaking “by compelling companies to engage in costly speech on ‘climate change,’ an issue the Supreme Court has acknowledged is ‘controversial.’” S.B. 253 and 261, they maintain, “compel companies to publicly express a speculative, noncommercial, controversial, and politically-charged message that they otherwise would not express, and in the case of S.B. 261, expressly requires companies to communicate that message on their own websites.”  They argue that these laws are subject to the highest level of scrutiny—strict scrutiny—because both laws “compel a business to speak noncommercially on controversial political matters.” They’re controversial, plaintiffs contend, because “the laws require companies to speak about the effects of, and proper response to, climate change, anything but uncontroversial topics. Nor is the speech factual, but rather is “subject to reasonable debate,” and “is far from the recitation of a pure, rote ‘fact.’ Even the estimation of emissions is a matter of opinion.”  

To support the contention that the speech at issue here is “non-commercial,” plaintiffs argue that “[n]ot all speech made by a business is ‘commercial speech.’… Rather, commercial speech is ‘usually defined as speech that does no more than propose a commercial transaction.’” As a result, they contend, the laws are subject to strict scrutiny and “the burden is on the State to prove that the laws ‘are narrowly tailored to serve compelling state interests.’” Both laws fail that test, they argue:  they do “not further any legitimate government interest of the State of California, let alone a compelling one.” In addition, the legislation is not “narrowly tailored” and “makes no meaningful effort to restrict its scope to information that is needed to achieve any legitimate governmental purpose.”

In case the “non-commercial” argument is too tough a sell, plaintiffs argue that, even under a lower level of scrutiny, “the laws are nonetheless unconstitutional.  Under any form of scrutiny, required disclosures cannot be ‘unjustified’ or ‘unduly burdensome.’”  To justify the compelled speech, they argue, “the State must show that ‘the harm’ it seeks ‘to remedy’ is ‘more than ‘purely hypothetical,’… and that the required disclosures ‘will in fact alleviate [that harm] to a material degree.” But the State has not justified the legislation by connecting the required disclosures “to any concrete, direct, and immediate interests, instead relying on vague, generalized statements.”

And the public statements required by the two laws are also vague and speculative, they assert, requiring companies to “estimate[e] their future risk from climate change.”  Indeed, the key term in S.B. 261—“climate-related financial risk”—is not defined “with enough specificity to enable companies to comply.” And SB 253 requires companies to report Scope 3 emissions; calculating Scope 3 emissions is either “a subjective undertaking, requiring myriad judgment calls about how to identify and quantify another entity’s emissions,” or it will force companies “to demand information from their non-covered partners in the supply chain.” Plaintiffs conclude that  the “compelled reports of Scope 3 emissions are not purely factual but rather are full of subjectivity and guesswork,” which can subject companies to “enormous penalties and public opprobrium should they happen to guess incorrectly.”

Supremacy Clause and the Clean Air Act.  Plaintiffs further contend that, because the two California laws “operate as de facto regulations of greenhouse-gas emissions nationwide, they are precluded by the Clean Air Act,” which empowers the “federal government to implement programs to regulate pollution, including greenhouse gases,” and therefore, under the Supremacy Clause, “displaces state regulation of interstate greenhouse-gas emissions.”   The Supremacy Clause would preempt any conflicting state regulation, and that’s particularly true, they assert, “where the scheme of federal regulation is so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it.” The Clean Air Act, they maintain, is just such an “intricate regulatory regime.” Because of the Clean Air Act and principles of federalism, “California lacks the authority to regulate greenhouse-gas emissions outside of its own borders.  Yet that is precisely what this legislation intentionally accomplishes, using a legal mechanism (requiring extensive disclosure of information about out-of-state emissions) that is itself precluded by the Clean Air Act and the Constitution, as part of a calculated program for mobilizing public pressure.  Accordingly, this legislation violates the federal Constitution’s Supremacy Clause.”

Extraterritorial impact—the dormant Commerce Clause.  Plaintiffs also argue that the two laws do “not limit reporting requirements to emissions produced in California or to companies’ expected climate change financial risks in California—rather, both laws require companies to make sweeping reports about their emissions and risks everywhere they operate, whether in California, in other states, or even abroad.  States may not regulate out-of-state emissions by requiring disclosure of data about such emissions in this manner.”  Although the laws do not directly require companies to reduce their out-of-state emissions, plaintiffs contend that the disclosure requirements “are aimed at stigmatizing companies for the purpose of pressuring them to lower their emissions nation- and even world-wide.” 

These laws, plaintiffs contend, intrude on congressional authority to regulate interstate commerce and “place upon interstate commerce a burden that far outweighs any benefits to the State of California.” Not only do the laws “require companies to spend significant time and money” in “making public statements regarding climate change,” they “also subject companies, including those in the supply chain that have no intention of doing business in California, to significant political and economic pressure to conform their conduct to the policy preferences of the State of California.” Nor do plaintiffs find any significant benefits to California from these two laws: the “State does not (and cannot reasonably) maintain that the laws will have a meaningful impact on climate change, a global phenomenon.  Nor does the State explain, let alone demonstrate, how the compelled speech would benefit anyone.  The State does not identify any risk of fraud or danger associated with any particular transaction and does not (and cannot) establish that the compelled speech (which applies to private as well as public companies) will be material to investors.” In addition, they maintain, the laws are “overbroad,” applying to companies that exceed certain revenue thresholds, even if their business “is de minimis and is unlikely to have any impact in the State…. Because the laws so heavily intrude on Congress’s authority to regulate interstate and foreign commerce, and because the benefits to California are so limited, the laws are invalid under the Constitution’s limitations on extraterritorial regulation, including the Dormant Commerce Clause.” 

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