California Court Rules Assembly Bill 979 Unconstitutional

2024-09-24 11:37:03

On April 1, 2022, the Los Angeles County Superior Court in California ruled in Robin Crest, et al. v. Alex Padilla ("Crest Case") that Assembly Bill 979 (signed into law on September 30, 2020) violates the Equal Protection Clause of the California Constitution. Assembly Bill 979 required that, by the end of 2021, publicly held corporations formed in or based in California must have a specified number of directors from underrepresented communities on their boards. Underrepresented communities were defined as individuals who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, or as gay, lesbian, bisexual, or transgender.

In the Crest Case, the plaintiffs sought to prohibit California from spending taxpayer funds to enforce Assembly Bill 979 and to declare the bill unconstitutional. In ruling the bill unconstitutional, the court first determined that the bill used race as a suspect classification and then applied the following scrutiny: (1) whether California had a compelling governmental interest in using race as a suspect classification, and (2) whether the statute was narrowly tailored to achieve that compelling governmental interest.

California presented two compelling governmental interests: (1) remedying discrimination in director selection and (2) creating better corporate outcomes through diverse board composition. The court rejected both arguments. Regarding the first interest, the court found the claim of remedying discrimination too broad, as the bill applied to companies across all industries without providing convincing evidence of a history of discrimination in director selection across all sectors. Regarding the second interest, the court ruled that the goal of creating better corporate outcomes was neither specific nor urgent enough to qualify as a compelling governmental interest.

Additionally, the court held that even if California had a compelling governmental interest in using suspect classifications, Assembly Bill 979 was not narrowly tailored to achieve that interest. The court reasoned that the bill was not the least restrictive means available, as the government had not attempted more neutral measures that did not rely on suspect classifications.

California has not yet appealed the court's ruling. As a result, companies are currently not required to comply with the board diversity mandates of Assembly Bill 979. However, companies should continue to monitor potential future actions by California.