A California federal district court has found as unconstitutional on its face California Assembly Bill No. 979 (AB 979), which requires publicly held corporations in California to have a certain number of directors from underrepresented racial, ethnic, and LGBTQ backgrounds.

This case has been widely watched because as we blogged, in own our polling, when we asked about what ESG initiatives are most important to their own company, while 72% responded GHG emissions that was followed by 59% who replied advancing gender and racially diverse talent (.. no other ESG initiative polled over 50%). So, this subject is top of mind for many business leaders, even as they consider matters of business reputation in a hyper polarized society where in the last month both the left and right criticized Anheuser-Bush and Target which each lost Billions in market value.

This granting of a motion for summary judgment filed by the Alliance for Fair Board Recruitment against Shirley N. Weber, the Secretary of State of California was not surprising in that it is consistent with an earlier state court ruling that found the same law violative of Equal Protection constitutional standards, as we blogged about in California Racial, Ethnic and LGBT Quotas for Company Boards Ruled Unconstitutional.

Specifically, the law describes underrepresented groups as those who identify as “Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native . . . gay, lesbian, bisexual, or transgender.” Cal. Corp. Code § 301.4(e). The minimum number of directors required by AB 979 depends on the size of the corporation’s board, ranging from a minimum of one to three. Cal. Corp. Code § 301.4(b). Corporations that fail to comply with the statute are subject to a $100,000 fine for an initial violation and $300,000 for any subsequent violation. Cal. Corp. Code § 301.4(d).

The plaintiff here alleged that AB 979 violates the Equal Protection Clause of the U.S. Constitution and 42 U.S.C. § 1981.

The court granted the plaintiff’s preliminary motion without oral argument finding that AB 979 constitutes a racial quota and imposes a fixed number of board positions exclusively for certain minority groups, thereby clearly violating Supreme Court precedent. The court affirmed the plaintiff’s challenge to the law, finding it unconstitutional on its face.

Additionally, the court held that a violation of the Equal Protection Clause also constitutes a violation of 42 U.S.C. § 1981, the federal law (.. enacted after the Civil War) creating a federal cause of action for discrimination.

Also significantly, the defendant requested that in lieu of striking down the whole law, the court sever AB 979 by excluding the groups whose inclusion violates the Equal Protection Clause. However, the court denied this request, stating that severing the statute would adversely affect its coherence and the remaining provision regarding individuals who identify as gay, lesbian, bisexual, or transgender.

Again, the Federal Court declared AB 979 unconstitutional on its face and affirmed the violation of 42 U.S.C. § 1981.

At first blush, some have suggested this decision is a blow to the G in ESG. And yes, many companies describe advancing gender and racially diverse talent as key to their business, for ESG purposes and otherwise, but the real problem here may be better characterized as legislator malpractice in failing to properly enact a law in response to discrimination.

Concomitantly, the plaintiff here is also the plaintiff in a pending federal court challenge to the SEC’s approval of Nasdaq’s board diversity rule. That rule requires Nasdaq listed companies to have at least one female director and at least one minority or LGBTQ director on their boards or to explain why they do not have such representation.  A decision on that appeal in the Fifth Circuit is expected soon.

Make no mistake, business reputations are in play in these matters in our hyper polarized society. The front lines of the culture wars are moving, just think Anheuser-Bush and Target that in the last month have lost Billions in market value.

We are confident ESG will flourish as companies address inequality, including unequal access, systemic racism, gender discrimination, and lack of inclusion in their efforts to repair the world (.. but maybe not so much in their front facing consumer advertising or other public statements?), not only driven by where they perceive they can gain an advantage in the marketplace but to do the right thing.

For those attending the Maryland Bar Legal Summit in Ocean City, Maryland, Nancy Hudes and I will be presenting a fun and fast paced “Maryland is the First State to Regulate Carbon” on Thursday, June 8 at 1:30 pm. Register at https://msba.org/product/2023-msba-legal-summit/

Excited to be speaking at NAIOP DC MD Seat At The Table With Stuart Kaplow to talk about “what is really going on today in the commercial real estate market” in matters of ESG and specifically GHG emissions, on June 22nd at 11:30 am. You can register at   https://www.naiopdcmd.org/events/EventDetails.aspx?id=1753993

Webinar “You Need to Amend Your Lease Today in Advance of New GHG Laws” 30 talking points in 30 minutes, Tues, June 20 at 9 am ET presented by Stuart Kaplow and Hudes Nancy of ESG Legal Solutions, LLC. Webinar is complimentary, but you must register https://us02web.zoom.us/webinar/register/WN_Plp5-6nTQpKwMUcCuA7Pzg