On May 13, 2022, Los Angeles Superior Court Judge Maureen Duffy-Lewis issued a bench trial verdict in a widely-watched case—Crest et al. v. Padilla, C.A. No. 19STCV27561 Cal. Super. Ct. (Crest I). The case challenged California’s statute mandating that a minimum number of females serve on boards of publicly-held corporations with principal executive offices in California. The verdict determined that Senate Bill 826—codified in section 301.3 of the Corporations Code—violates the equal protection clause of California’s Constitution and enjoined enforcement of the law. The state’s loss at trial follows a Los Angeles Superior Court judge’s decision in April 2022 striking down California’s board diversity statute, AB 979, that is codified in section 301.4 of the Corporations Code (see Crest et al. v. Padilla, C.A. No. 20STCV37513 Cal. Super. Ct. (Crest II)).
Crest I arose after former Governor Jerry Brown signed SB 826 in September 2018. The new law required publicly held corporations—those with outstanding shares listed on a major United States stock exchange—that have their principal executive offices in California, to have at least one female director on their board by December 31, 2019. No later than December 31, 2021, such corporations would have to have at least two female directors if the number of their directors was five and at least three female directors if the number of their directors was six or more.
Each corporation covered by the statute is required to disclose on the Corporate Disclosure Statement (Form SI-PT) filed with the Secretary of State whether its principal executive office is in California, and the number of female directors on the corporation’s board of directors. The failure to timely file board member information with the Secretary of State could result in a fine of $100,000 and additional fines for repeated violations. Evidence at the Crest I trial showed that the state has yet to issue any fines.
The plaintiffs in Crest I challenged SB 826 on the basis that it violates two equal protection provisions of the California Constitution. The court’s verdict focused on the equal protection clause in Article I, Section 7 of the California Constitution and thus declined to determine whether SB 826 violates Article I, Section 31 (prohibiting discrimination based on sex in public employment, education or contracting).
After determining that the taxpayer plaintiffs had standing, Judge Duffy-Lewis determined that SB 826, on its face, violates the equal protection clause because it treats “similarly situated groups” in an unequal manner, thus shifting the burden of proof to the defendant to prove that SB 826 satisfies strict scrutiny. In order to do so, defendant must show “(1) a compelling state interest, (2) that SB 826 is necessary and (3) that SB 826 is narrowly tailored.”
In response to defendant’s argument that the law serves three compelling state interests (eliminating and remedying discrimination in the director selection process; increasing gender diversity on boards of publicly held corporations to benefit the public and economy; and increasing gender diversity to benefit and protect taxpayers, public employees and retirees), Judge Duffy-Lewis determined “that there is no compelling governmental interest in remedying societal discrimination” or in “remedying generalized, non-specific allegations of discrimination.” Evidence presented at trial supported that SB 826’s goal was to “achieve gender equity or parity,” not to “boost California’s economy, not to improve opportunities for women in the workplace nor to protect California’s taxpayers, public employees, pensions and retirees.” As a result, a “compelling state interest” is lacking.
Furthermore, defendant failed to prove that SB 826’s use of gender-based quotas was necessary to boost California’s economy, improve opportunities for women in the workplace and protect California’s taxpayers, public employees, pensions and retirees. In particular, Judge Duffy-Lewis noted that the studies cited by defendant failed to “sufficiently show a causal connection between women on corporate boards” and improved corporate governance or performance, nor did they prove that gender diversity on boards would serve the aforementioned compelling state interests. Defendant also failed to present specific evidence of “actual, unlawful discrimination against any specific woman by any specific corporation subject to SB 826”—claims of “societal and structural discrimination and general social phenomena of ‘like stereotyping,’ ‘affinity bias,’ ‘like picking like,’ and ‘gender matching’” were insufficient because they were not unique to any particular publicly-held corporation headquartered in California.
Lastly, the verdict concluded that defendant failed to show that SB 826 was narrowly tailored to its purpose, indicating the legislature could have done so by considering gender-neutral alternatives or that defendant could have shown that such alternatives were not available.
Notwithstanding the outcome of Crest I and Crest II, public companies based in California still need to be aware that various regulatory and governmental bodies and other constituencies, including Nasdaq, the SEC, proxy advisory firms, shareholders, customers, employees and even the general public, have actual or pending requirements for, or may factor in whether there is, diversity in the composition of boards of directors of public companies.
This e-Bulletin was prepared by Shannon Treviño, Clinical Professor of Law at Loyola Marymount University’s Loyola Law School. Ms. Treviño is a member and Vice-Chair, Publications of the Corporations Committee of the Business Law Section of the California Lawyers Association. William Ross, of counsel to Hirschfeld Kraemer LLP, member and past co-chair of the Committee, provided input on this e-Bulletin.