While the need for increased diversity in corporate boardrooms should be a foregone conclusion, laws that aim to remedy this issue continue to face legal challenges.
On April 1, 2022, Los Angeles Superior Court ("LASC") issued a ruling that effectively invalidated Assembly Bill 979 ("AB 979"). As a refresher, AB 979 required publicly held corporations in California to have at least one director from an underrepresented community on the board of directors by the end of 2021. AB 979 further required these corporations with five to eight (5-8) directors to have a minimum of two (2) directors from underrepresented communities, and corporations with nine (9) or more directors to have a minimum of three (3) directors from underrepresented communities. Importantly, AB 979 defined "director from an underrepresented community" as an individual who self-identified 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.
Since being passed, AB 979 has faced, and continues to face, many legal challenges, including this equal protection challenge that was the basis of the court's most recent ruling. Specifically, Judicial Watch, an advocacy group acting on behalf of a group of California taxpayers, filed a lawsuit against the State of California, seeking to stop the State from using taxpayer dollars to enforce this law. Judicial Watch argued that, absent a "compelling interest," the law imposed quotas based on race and ethnicity, and therefore, violated the Equal Protection Clause of the California Constitution.
In its ruling, LASC focused on (1) whether the state demonstrated a "compelling interest" that justified using these classifications; and (2) whether the statute was "narrowly tailored to suit that interest." The state offered "remedying discrimination in board selection" as a "compelling interest," but the court rejected this reasoning, stating that this was too general of an interest because it "covers the entire nation and all industries" instead of "identify[ing] a specific arena," and maintaining that regulated companies could range from technology, pharmaceutical, and agriculture businesses, each with different pools of qualified candidates.
When describing the issue of discrimination in board room leadership, the state used the general population as a comparison group, and listed "healthy business" as a justification for the law. The court rejected both offerings, finding that the state failed to offer "convincing evidence" of discrimination that would justify enacting this law.
The court noted that a combination of statistical and anecdotal evidence specific to the group in question can be used as "convincing evidence" of discrimination instead of the generalized evidence of discrimination offered by the state, and the court continued by saying the state's offerings improperly used the general population as the comparison group even though that population is "manifestly not the qualified talent pool for corporate board seats." The court further reasoned that an interest in "healthy business" was "not sufficiently specific or immediate to permit the use of suspect classifications."
While this ruling does not limit California's (New York's, Washington's, or Illinois's) ability to bring similar legislation in the future, and it is likely to be appealed, it does highlight one of many challenges facing progressive, diversity-centric legislation.
This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.