Judge Strikes Down California’s Board Diversity Statute

On April 1, 2022, Los Angeles County Superior Court Judge Terry A. Green entered summary judgment in favor of the plaintiff in Crest v. Padilla, 20 STCV 37513, who challenged the constitutionality of California Corporations Code section 301.4. That statute (also known as AB 979) mandated that California-based public companies add to their boards of directors at least one to three directors (depending upon the size of the board) from underrepresented communities. The statute defined a qualifying person as “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.”

The lawsuit was brought by Judicial Watch, a nonprofit conservative advocacy group, asserting that the Secretary of State spent taxpayer money to implement and enforce AB 979, and that such an expenditure was illegal as it imposed an improper duty on companies to have a certain number of directors from certain demographic groups. The plaintiff further argued that the State could not identify a compelling governmental interest requiring the use of such classifications in compliance with the Equal Protection Clause of the California Constitution.

The Court concluded that Corporations Code section 301.4 violates the Equal Protection Clause of the California Constitution on its face as the statute 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 (which list itself necessarily excludes members of other groups that may be underrepresented on company boards). The Court further note that Section 301.4 was not narrowly tailored to meet the compelling interest cited by the Secretary of State in that the Legislature made no attempt to conduct a demographic survey of the qualified talent pool of potential board members nor to obtain disclosure from

California corporations regarding the current demographics of their boards.

The questions regarding mandated public company board representation are far from over in California. It is possible that the State will appeal the ruling and ask the California Court of Appeals to reinstate Corporations Code Section 301.4. Further, a challenge to Corporations Code Section 301.3 (mandating a minimum number of female directors on boards of directors of California-based public companies) is currently pending. Given the general appellate process, as well as the prospect of appeals to the California Supreme Court, a resolution of these issues may be years in the making.