Opining that civil rights pertain to individuals, not groups, a judge strikes down the state’s racial and gender-identity requirements for corporate boards.
Opining that civil rights pertain to individuals, not groups, a judge strikes down the state’s racial and gender-identity requirements for corporate boards.
A California state judge has granted the plaintiffs summary judgment in Crest v. Padilla (Crest II), finding the state’s mandate that California-headquartered public companies select their directors based on race or LGBTQ+ status violates the equal-protection clause of the California constitution “on its face.”
Crest II was filed in October 2020 by Judicial Watch on behalf of three California taxpayers to prevent the state from enforcing Corporations Code Section 301.4 (previously, AB 979), which requires that California-headquartered public companies include at least one director from an “underrepresented community,” and by the end of 2022, up to three such directors, depending on the size of the board. The statute defines a “director from an underrepresented community” to be 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.”
In a detailed, carefully reasoned 24-page order, Judge Terry A. Green observed that when he asked the state why these groups were protected and other minorities, including religious minorities, were not, the state responded: “In effect, the included groups were included simply because they asked to be. Excluded groups were excluded because they didn’t show up [i.e., ask].”
Section 301.4 is now enjoined pending any potential appeals. Because the trial court ruled by summary judgment, if there is an appeal, the appeals court probably will review the constitutional issues de novo, though it likely would accord weight to Judge Green’s analysis. The state has until June to file a notice preserving its right to appeal.
No other state has enacted similar legislation, though numerous states and NASDAQ have adopted rules requiring public companies to disclose the ethnic, gender, and gender identities of their board members and explain any failure to achieve specified diversification requirements.
In his decision, Judge Green signaled that he might have been more amenable to similar disclosure requirements as a less coercive means of achieving the legislature’s objectives. He observed that the legislature had refused to consider disclosure or other alternatives before imposing strict numerical requirements.
Citing California precedent, Judge Green determined that because Section 301.4 makes distinctions based on race, ethnicity, and gender identification, the statute is subject to strict scrutiny, meaning the law may be upheld only if it is necessary for furtherance of a compelling state interest and addresses that interest through the least restrictive means available.
However, because the plaintiffs did not allege damages, aside from funding the law’s administration as taxpayers (a permissive standing rule not available in federal lawsuits), Judge Green imposed on the plaintiffs the additional burden of proving that Section 301.4 “inevitably poses a present total and fatal conflict” with the California constitution’s equal-protection clause. After reviewing the “ever more complex” scenarios posited by the state to avoid that conclusion, the judge concluded the state’s efforts were “in vain.”
Judge Green found that Section 301.4 treats similarly situated individuals — qualified potential corporate-board members — differently based on whether they are in the favored racial and gender-identity groups. He rejected arguments that members of those groups are innately different simply because they are members of those groups. He also emphasized repeatedly that the California constitution protects the rights of individuals, not the groups of which they might be members.
Based on the legislature’s rationale for AB 979, an article I wrote for National Review last year asked whether profits now can be used as a justification for discrimination. Judge Green answered that question with a resounding “No.” He rejected the state’s assertion that business profitability and success qualify as a “compelling interest” and also concluded that the generalized goal of remediating discrimination does not qualify. He chided the state for relying on national data about Fortune 100, Fortune 500, and Russell 3000 companies, rather than studies of California corporations by specific industry.
Judge Green further observed that mere statistical imbalances as compared with the population at large would be insufficient. Rather, the state would have to look to the qualified pool of applicants and show improper conduct that led to qualified individuals from specific minority groups being excluded. He suggested that if there is a flaw in the process by which board members are selected, the state might seek to improve that process, rather than require specific outcomes.
Judge Green concluded:
Because Section 301.4 treats similarly-situated individuals differently based on race, sexual orientation, and gender identity, because that use of suspect categories is not justified by any compelling interest, and because the statute is not narrowly tailored to serve the interests offered, Section 301.4 violates the Equal Protection Clause of the California Constitution.
Section 301.4 built on SB 826, which requires that publicly held California corporations include up to three directors who “self-identify” as women. Judicial Watch recently completed a trial in Crest I, a previously filed lawsuit seeking to enjoin that statute. A decision is expected shortly. If the Crest decisions conflict, the potential for appeals is greater.
According to studies cited by the Wall Street Journal, at the time AB 979 passed, a majority of California corporations already met the first-year requirements for diversity. Since then, the share of directors from minority groups favored by Section 301.4 rose from 13.9 percent in 2019 to 22.6 percent in 2021, and the share of companies with at least one underrepresented director jumped from 57 percent to 90 percent.
Conversely, since passing SB 826, California has seen a low compliance rate as public companies have either gone private or left the state. According to reports issued by the California secretary of state, during 2020, of 647 companies to which SB 826 applied, only 311 reported compliance, and at least 50 companies avoided compliance by leaving the state or going private. During 2021, of 716 companies subject to SB 826 or Section 301.4, 186 reported compliance with SB 826, 301 reported compliance with Section 301.4, and 70 companies left California or went private.*
Judge Green’s careful analysis may bring an end to racial and gender-identity engineering on California boards for the foreseeable future. But he also provided a road map to the legislature on how it might achieve a different outcome. As a state-court decision, Crest II’s precedential value elsewhere is uncertain, though many courts look to Delaware, New York, and California on matters of corporate governance. Racial-discrimination claims made under federal law generally have the same burden as in California, but claims regarding gender identification might fare differently under evolving federal standards.
Whether minority board members contribute perspectives that others do not, and whether those opinions are germane to the issues that boards consider, is an open question. The answer likely differs based on the business and the background of the board members. Research regarding whether board diversity or even management diversity affects corporate performance is inconclusive. Yet, without considering any peer-reviewed studies, the California legislature simply assumed that people of different backgrounds contribute in different ways. Ironically, in other settings, those on the left usually insist the opposite is true.
Presumably expecting condemnation from progressives, Judge Green added an epilogue to his decision that speaks beautifully to the essential purpose of our judiciary and individual rights, while not very subtly taking on Ibram X. Kendi’s call to remedy past racism with discrimination against whites:
A member of the public . . . might wonder at this result. . . . If the Legislature has identified a social problem, how can the court stand in the way of the obvious and direct approach to solving it? There are two complementary answers to the question.
The first comes from the differing functions accorded to the different branches. It is the function of the judicial branch to resolve disputes. Courts serve that function, in part, by maintaining the continuity of rules even against the will of a majority. Residents of all stripes can feel more at home and at peace with one another if they know the rules are stable, even when they don’t like those rules.
The second is that fundamental values, whether personal or social, must be guarded. Equal treatment and opportunity, of and for all individuals regardless of how they look or identify, is one of this state’s basic commitments. Sometimes and in some places the citizens of this state will not live up to that ideal. But the thing that caused the problem is not always the right tool to fix the problem. Only in very particular cases should discrimination be remedied by more discrimination. And that should only happen after obvious alternative measures have been tried. Sometimes the direct approach should be the last resort, not the first.
Judge Green’s words are perfect. Any other final words would mean less.
*Disclosure: My principal business is a private California-based company that is not subject to these laws. However, I create, grow, and take companies public. I am a co-founder of a group of affiliated companies that commenced operations last year. We had intended to base the companies in California, but, because of these laws, moved them to Nevada. Ironically, most of the boards comply with these laws, but that is based on doing what is right for the companies at this time. We do not want to cede control of our boards to the state.