July 18, 2022

Judge Rules That Gender Quotas for Corporate Board Members Violate the California Constitution

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As we reported in our blog discussing an LASC judge striking down a law that required California companies to have racially diverse boards (AB 979): Judge Rules That Race and LGBT Quotas for Corporate Board Members Violate the California Constitution, another LASC judge was presiding over a trial in which the plaintiff was challenging a different law that required California companies to have a certain number of women on their boards. The judge in the second matter, the Los Angeles Superior Court Judge Maureen Duffy-Lewis has handed down her ruling striking down that law as well. California Secretary of State Shirley Weber announced that she has directed an appeal, but a formal appeal has not yet been filed.

The History of SB 826

In 2018, Women on Boards (SB 826) was signed into law following a seven-year campaign by organizations including 50/50 Women on Boards™ to increase the number of female board members at California-based companies. SB 826 required that, by Dec. 31, 2019, all publicly held domestic or foreign corporations whose principal executive offices are located in California have at least one female director on their boards by filling an open seat or by adding a seat. Specifically, boards of four or fewer directors were required to have at least one female director; boards of five directors were required to have at least two women; and boards of six or more directors were required to have at least three women.

Litigation of SB 826

Similarly, to AB 979, SB 826 faced opposition from Judicial Watch, a conservative activist group. Judicial Watch sued the secretary of state on behalf of California taxpayers to enjoin enforcement (i.e., prohibit by judicial order) of SB 826, and on May 13, 2022, LASC judge, Judge Duffy-Lewis, held in the group's favor. Robin Crest, et al. v. Alex Padilla (No.19-STCV-27561).

Judge Duffy-Lewis found that Judicial Watch had satisfied their burden of proof—that Judicial Watch needed to and did prove that the law was "presumptively unconstitutional" and "men and women are similarly situated for purposes of SB 826's gender-based quota." The burden then shifted to the state to prove that there was "(1) a compelling state interest, (2) that SB 826 is necessary and (3) that SB 826 is narrowly tailored."

After considering the evidence, in the court's view, neither the defendant nor the legislature had identified actual "discrimination to be remedied." The court held that there was no compelling state interest because "nothing in the text of S.B. 826 quantifies the expected boost to California's economy, the improvement in work opportunities for women, or the protection of California taxpayers, public employees, and retirees." The court also held that California failed to prove that the law's gender-based classification was necessary "to boost California's economy, improve opportunities for women in the workplace, and protect California taxpayers, public employees, pensions, and retirees." Judge Duffy-Lewis found that the law was not narrowly tailored because California failed to consider "gender-neutral alternatives" or even "amending existing anti-discrimination laws or enacting a new anti-discrimination law focusing on the board selection process."

Shortly after the decision striking down SB 826 was released, Secretary of State Shirley Weber announced that she would appeal the decision. Weber noted that the outcome "ignores critical and substantial evidence of discrimination against women in the director selection process and fails to acknowledge the realities that women face when attempting to access corporate boards."

Practical Implications

While an appeal is pending, SB 826 (along with AB 979) cannot be enforced; however, companies remain interested in increasing the diversity of their boards for a number of reasons. One reason is that to be included as a Nasdaq-listed company, companies must have at least two "diverse directors"—one must be female-identifying while the other must self-identify as part of the LGBTQ+ community or as an "underrepresented minority." Furthermore, large institutional investors may expect their companies to have diverse boards and in some cases have adopted voting guidelines that allow votes against board members where there is insufficient diversity.

Keep an Eye Out

Per the California Rules of Court, appeals must be filed within 60 days of decision. A formal appeal has not yet been filed, but should it remain as such or should the appeal fail, we may see legislators return to the drawing board to craft more narrowly-tailored legislation.

* Special thanks to Summer Associate Sajni Patel for her valuable contribution to this GT blog post.

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

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