Hearing on board gender diversity statute—will the court issue a preliminary injunction?

Cooley LLP

Cooley LLP

On October 19, a federal district court judge held a hearing on a motion for a preliminary injunction in Meland v. Weber, a case challenging SB 826, California’s board gender diversity statute, on the basis that it is unconstitutional under the equal protection provisions of the 14th Amendment. The judge had previously dismissed the case on the basis of lack of standing, but was reversed by the 9th Circuit.  What did the hearing reveal?

Case history. In Meland v. Padilla, a shareholder of a publicly traded company that is incorporated in Delaware and headquartered in California filed a complaint seeking a declaratory judgment that SB 826 was unconstitutional under the equal protection provisions of the 14th Amendment and a permanent injunction preventing implementation and enforcement of the statute. The plaintiff claims that the statute is a sex-based classification that violates the equal protection provisions of the 14th Amendment by imposing a sex-based quota directly on shareholders and by seeking to force shareholders to perpetuate sex-based discrimination. More specifically, the complaint contends that the statute “facially discriminates on the basis of sex” and “serves no important government interest” because “[s]ex-based balancing is not an important government interest that can sustain a sex-based classification under the Equal Protection Clause.”

In April 2020, a federal district court dismissed that legal challenge on the basis of lack of standing, finding that none of the provisions of SB 826 affected the plaintiff’s 14th amendment rights to an extent sufficient to establish standing under Article III. While the plaintiff had argued that he had standing because the statute was compelling him, as a shareholder, to vote in a way that perpetuated sex-based discrimination, the district court concluded that SB 826 “places a requirement and a possible penalty on publicly held corporations, but Plaintiff is not a publicly held corporation. He is a shareholder. And that is a distinction with a difference.” In addition, the district court reasoned, the plaintiff is not being forced to vote for any particular director: “notwithstanding SB 826, Plaintiff, as a shareholder, can vote in shareholder elections as he pleases. If, at future shareholder meetings, Plaintiff prefers a male board member nominee, there is nothing in SB 826 preventing him from casting a vote in favor of that nominee.” The plaintiff, the district court also concluded, was not affected in any “personal or individual way.”

In June 2021, a three-judge panel of the 9th circuit reversed that decision, allowing the case, now called Meland v. Weber, to go forward.  The court held that, because the plaintiff “plausibly alleged that SB 826 requires or encourages him to discriminate on the basis of sex, he has adequately alleged that he has standing to challenge SB 826’s constitutionality.” The panel observed, “we have long held that ‘[a] person required by the government to discriminate by ethnicity or sex against others has standing to challenge the validity of the requirement, even though the government does not discriminate against him.’” Accordingly, the court concluded, if the plaintiff has plausibly alleged that SB 826 “requires or encourages” him to discriminate on the basis of sex, “then he has suffered a concrete personal injury sufficient to confer Article III standing.” (For a more detailed rundown of the history of this case, see this PubCo post and this PubCo post.) 

Shortly after the 9th Circuit decision, Meland moved for a preliminary injunction to prevent the California Secretary of State from enforcing the statute while the case is pending. On October 19, there was a hearing in the district court  on the plaintiff’s motion.

At the hearing. Reuters is reporting that, during the hearing, the federal district court judge indicated that he is unlikely to grant the preliminary injunction. According to the article, while the judge made clear that he is still considering “Meland’s argument that the 2018 law is unconstitutional because it pressures shareholders to vote for women directors,” he said “that Meland has not shown the lawsuit is likely to succeed, meaning he will likely not block the California Secretary of State from enforcing the statute while the case is pending.” In addition, the judge asked why it was “in the public interest to allow an out-of-state shareholder who holds 65 shares in an 18-million-share company to stop a law that no corporation objects to, that no corporation is challenging, and is working?” counsel for Meland reportedly responded that “while the law may have increased representation, it has led to the patronization of female board candidates.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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