Federal Court Invalidates California’s Board Diversity Statute

Just over a year after the Los Angeles County Superior Court in Robin Crest, et al. v. Alex Padilla (Case No. 20ST-CV-37513) held that Corporations Code §301.4 (requiring a certain number of persons from underrepresented communities to be elected to the boards of directors of publicly held companies) violated the Equal Protection Clause of the California Constitution [see: Sidebar Issue 138 | April 2022], the Federal District Court of the Eastern District of California has held that the statute also violates the Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution.

Corporations Code §301.4 (also known as AB 979) was intended to address corporate discrimination against underrepresented communities (defined in the statute as those who identified as “Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native . . . gay, lesbian, bisexual, or transgender”). In Alliance for Fair Board Recruitment v. Shirley N. Weber, in her official capacity as Secretary of State of the State of California (Case No. 2:21-cv-01951-JAM-AC, the Plaintiff (a non-profit membership organization composed of individuals who do not identify in any of AB 979’s underrepresented groups) challenged that AB 979 constituted an unconstitutional racial quota in violation of the federal Equal Protection Clause and the Civil Right Act (42 U.S.C. §1981). While the State argued that the statute did not prefer any racial or ethnic class as no person was insulated from competition and AB 979 expressly permitted corporate boards to expand to accommodate as many candidates as they wish so no director candidate who did not identify in any of the underrepresented communities would be forced to lose their board position, the Federal Court affirmed the Plaintiff’s challenge. The Federal Court reasoned that the Supreme Court has rejected racial and ethnic quotas and declared them as “facially invalid” and has defined a quota as “a program in which a certain fixed number or proportion of opportunities are ‘reserved exclusively for certain minority groups.’” Accordingly, AB 979’s requirement of a certain fixed number of board positions to be reserved for certain minority groups constitutes a racial quota in violation of the Equal Protection Clause and, as the Supreme Court has previously held that a violation of the Equal Protection Clause is a violation of the Civil Rights Act, AB 979 is also in violation of the Civil Rights Act.

As with the prior State Court rulings, the State of California is likely to appeal this decision. So, a final decision on the validity of AB 979 (as well as a separate ruling invalidating Senate Bill 826, a gender diversity statute for corporate boards [see: Sidebar Issue 140 | June 2022] may take some time. That said, and regardless of the outcome of those appeals, publicly held companies continue to face pressure to diversify their boards of directors from other directions, including a Nasdaq board diversity rule as well as shareholders, institutional investors, investment banks and other organizations that have also sought to expand board diversity.