In Crest v. Padilla, No. 19STCV27561, 2022 WL 1565613 (Cal. Super. May 13, 2022), the Superior Court of California for the County of Los Angeles (Duffy-Lewis, J.) issued a decision following a bench trial finding that Senate Bill 826 (“SB 826”), California’s law requiring gender diversity on boards of directors, violates the Equal Protection Clause of the California Constitution. The ruling comes after a decision in a different case issued in April of this year, which found that Assembly Bill 979 (“AB 979”), which required publicly held corporations with principal executive offices in California to include “underrepresented communities” on their boards of directors, also violates the Equal Protection Clause of the California Constitution (blog article here).
After California Governor Jerry Brown signed SB 826 into law on September 30, 2018, California became the first state to require publicly traded companies to include women on their boards of directors. The law, which carried monetary penalties for violations, required publicly held corporations with principal executive offices located in California to have at least one female director on the board by the close of the 2019 calendar year, and required some boards, based on corporation size, to have additional female directors by the end of the 2021 calendar year (at least one female director if the number of directors is four or fewer; at least two female directors if the number of directors is five, and at least three female directors if the number of directors is six or more). The law carried additional requirements for posting reports on the status of compliance to the California SOS website.
On August 6, 2019, Judicial Watch sued the California Secretary of State (“SOS”) on behalf of three California taxpayers, presenting two challenges to SB 826 under California Code of Civil Procedure Section 526a, which allows a taxpayer to enjoin an actual or threatened expenditure of taxpayer funds by a state official where the expenditure is illegal.
After a multi-month bench trial, the Court found that the plaintiffs successfully carried their burden of showing that men and women are similarly situated for purposes of SB 826’s gender-based quota, and thus that SB 826 is presumptively unconstitutional. The SOS did not meet its burden to prove that SB 826 satisfies the strict scrutiny test for a suspect classification.
The Court found that the SOS failed to prove a compelling state interest, rejecting the SOS’s claim that SB 826 is a remedial scheme to redress specific past discrimination in the director selection process, or that the goal of SB 826 was to boost California’s economy, improve opportunities for women in the workplace, or protect California’s taxpayers, public employees, pensions and retirees. The Court similarly rejected the SOS’s position that SB 826 was necessary to protect these broad economic and societal interests. In the Court’s view, the evidence presented by the SOS failed to show a causal connection between women on corporate boards and increased profitability and improved corporate governance. Finally, the Court held that SB 826 was not narrowly tailored and the SOS failed to show that the Legislature considered gender-neutral alternatives to remedy specific unlawful discrimination against women in the board selection process or that gender-neutral alternatives were not available, and did not show that SB 826’s use of gender-based classification was limited in scope and duration to the extent necessary to remedy specific, unlawful discrimination against women in board selection. Moreover, the Court reasoned, the SOS did not prove that use of gender based classification was actually remedial, noting that the SOS could not identify any past specific instance of women being discrimination against by a specific corporation in the board selection process.
Both SB 826 and AB 979 are now ripe for appeal. The constitutionality of California’s efforts to legislate board diversity remains uncertain. Nevertheless, regardless of the ultimate fate of these laws, it is probable that private businesses will continue to expand their diversity efforts to better reflect California’s highly-diverse population.