As discussed in our previous blog, on April 1, 2022, Los Angeles Superior Court Judge, Terry Green, granted summary judgment in favor of individuals represented by D.C.-based nonprofit Judicial Watch, declaring Assembly Bill 979 (“AB 979”) to be unconstitutional and granting an “injunction preventing the expenditure of taxpayer funds on the implementation of the measure.”

AB 979 required publicly held corporations with a principal executive office in California to have at least one member from an “underrepresented community” on their board of directors by December 31, 2021.  A director from an underrepresented community included “an individual who self-identifie[d] as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifie[d] as gay, lesbian, bisexual, or transgender.  Companies in violation of AB 979 faced fines of $100,000 for first violations and $300,000 for repeated violations.

In its lawsuit challenging the law, Judicial Watch claimed AB 979 violated the Equal Protection Clause of the California Constitution by using taxpayer funds to enforce a quota based on race, ethnicity, sexual preference, and transgender status.  California disagreed, arguing that AB 979 was necessary to reverse a culture of discrimination, and pointing out that no companies had been fined and no tax dollars had been used to enforce the measure.

Judge Green has since issued an order agreeing with Judicial Watch that AB 979 violates the Equal Protection Clause of the California Constitution on its face because:

1. AB 979 “treats similarly-situated individuals – qualified potential corporate board members – differently based on their membership (or lack thereof) in certain listed racial, sexual orientation, and gender identity groups. It requires that a certain specific number of board seats be reserved for members of the groups on the list – and necessarily excludes members of other groups from those seats.”
2. The use of suspect categories is not justified by any compelling interest. “The broader public benefits produced by well-run businesses do not fit that bill. On the other hand, while remediation of discrimination can be a compelling interest, the state must define a specific arena in which the discrimination has occurred…[c]orporate boards are not such an arena… The Legislature did not even attempt to limit its investigation or its findings to California corporations, though jurisdictional restrictions ensured that only California corporations would be covered by the law.  And even supposing that corporate boards were a sufficiently specific arena, neither the Legislature nor the Secretary [of State] has produced the combination of (a) valid statistical comparisons and (b) anecdotal testimony which could serve as “convincing evidence” of discrimination in that arena.”
3. The statute is not narrowly tailored to serve the compelling interests offered. “The Legislature made no attempt to conduct a demographic survey of the qualified talent pool of potential board members…[and]…made no attempt to obtain disclosure from California corporations regarding the current demographics of their boards….The Legislature and the Secretary [of State] blame a “secretive, insular” selection process for the problem with current board compositions. Yet there has been no attempt to improve that process, nor has any good explanation been offered for that lack of effort.”

This decision may impact another lawsuit Judicial Watch filed against the State challenging a 2018 law (Senate Bill 826) requiring a minimum of one female director on corporate boards. This decision may also impact the Securities and Exchange Commission approval of a rule proposed by Nasdaq, set to go in effect this year, that will require companies listed on its exchange to have “at least one director who self-identifies as a female,” and to have “at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+,” or explain why they do not.

The current California Secretary of State, Dr. Shirley Weber, has yet to comment on whether or not she will appeal this decision.  Nevertheless, proponents of AB 979 are hopeful that the law has already created expectations of increased diversity on corporate boards moving forward.

We will continue to monitor this decision and provide any relevant updates.