On April 1, 2022, a Los Angeles County judge ruled that AB 979, which requires publicly held corporations with a principal executive office in California to have at least one member of the Board of Directors from an “underrepresented community,” violated the Equal Protection Clause of the California Constitution. Under AB 979, which was codified as California Corporations Code 301.4, a director from an underrepresented community included a person who self-identified as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, gay, lesbian, bisexual, or transgender. Covered companies that did not have at least one underrepresented community Board member by the end of 2021 faced large fines.
In a lawsuit challenging the law, the plaintiffs argued, among other things, that AB 979 violated equal protection because it required a quota based on race, ethnicity, sexual preference, or transgender status. The State of California defended the law, arguing that it was necessary to reverse a culture of discrimination on Boards of Directors.
The ruling, issued by Judge Terry A. Green, granted the plaintiffs’ motion for summary judgment, finding a violation of the Equal Protection Clause of the California Constitution. In its ruling, the court recognized that while having a heterogenous Board may be a valid goal, the Equal Protection Clause protected the rights of individuals, not groups.
The court stated that because the law employs a “suspect classification” – race for example - it was subject to strict scrutiny. Thus, California must prove that the law was necessary to further a compelling state interest, and it addresses that compelling interest through the least restrictive means available. The court noted that while remedying discrimination can be a compelling interest, there needed to be “convincing evidence” that the Legislature’s action was necessary. The court found that “convincing evidence” could be found in a combination of statistical and anecdotal evidence. However, the statistical evidence must show a “disparity between the demographic make-up of the qualified talent pool and those who hold positions in the targeted arena.” In this case, while there was evidence of the demographics of the Board members of California companies, the court held that there was no evidence that there had been any effort to look at the demographics of the “qualified talent pool” from which Board members could be selected. As a result, summary judgment was warranted.
The court’s ruling, unless successfully challenged, may impact another law regarding Boards of Directors in California. There are other cases pending challenging AB 979. In addition, Senate Bill 826, which requires at least one female director on California corporate boards by December 31, 2019, is being challenged on similar grounds. In addition, the basis of this ruling could be used to attack other diversity laws and programs.
Stay tuned for updates on this blog.
