Friday, May 19, 2023

Court strikes down California board diversity bill as unconstitutional

By Anne Sherry, J.D.

A district court in California overturned a state law that required public companies to achieve board diversity goals for persons from underrepresented communities. The court found that despite the state’s attempt to cast the diversity requirement as flexible, it was a racial quota that was facially invalid under Supreme Court precedent. Furthermore, the court could not sever the racial and ethnic classification provisions from the law without rendering the rest of it incoherent (Alliance for Fair Board Recruitment v. Weber, May 15, 2023, Mendez, J.).

Background. In 2020, California Governor Gavin Newsom signed into law AB 979, which expanded the state’s board diversity requirements, previously focused on women, to a larger group of individuals who self-identify as members of racial and ethnic minorities or as LGBT. By the end of 2022, public companies headquartered in California were to have one to three directors from underrepresented communities (depending on board size). The statute defined "director from an underrepresented community" to include "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 Alliance for Fair Board Recruitment filed its legal challenge to AB 979 and SB 826 in July 2021. The group, which incorporated in February 2021, lists Edward Blum as its president but keeps its members’ identities confidential. According to the original complaint, Alliance members "include persons who are seeking employment as corporate directors as well as shareholders of publicly traded companies headquartered in California." One of these members was a corporate director before he was "ousted because he is not a woman and does not self-identify as an underrepresented minority," according to the plaintiff.

Facially unconstitutional. In its opposition to the Alliance’s motion for summary judgment, the state argued that AB 979 satisfies strict scrutiny or, in the alternative, should have its unconstitutional provisions severed from the rest of the bill. While the state conceded that the law constitutes a racial classification, it argued that this was permissible because it was aimed at remedying past discrimination. Furthermore, the bill does not create preferred racial and ethnic classes because individuals must still go compete with others and go through an individualized consideration process. Because boards are expressly permitted to expand, no candidate would be forced to lose their board position.

The court did not even reach the strict scrutiny argument, though, because it found that the law is unconstitutional on its face. Under Grutter v. Bollinger (U.S. 2003), a quota is “a program in which a certain fixed number or proportion of opportunities are reserved exclusively for certain minority groups.” The district court found that the California law is a racial quota under this definition because it “requires a certain fixed number of board positions to be reserved exclusively for certain minority groups.”

No severance. The court also agreed with the Alliance that severance of the unconstitutional provisions would be inappropriate. California law allows for severance if it will not affect the wording or coherence of the rest of the statute, which is complete in itself, and the legislature would have adopted the rest of the statute if it had foreseen the partial invalidation. Here, the statute’s language “is almost exclusively cast in racial and ethnic terms and figures,” so that removing the racial and ethnic classifications would affect the coherence of the remaining provision regarding those identifying as gay, lesbian, bisexual, or transgender. Furthermore, the language of the statute, the state’s argument that the main purpose of the statute was to remedy racial and ethnic discrimination, and the lack of a severability clause within the statute indicated that the legislature would not have adopted the remainder of AB 979 alone.

The case is No. 21-cv-01951.