The California Secretary of State has announced that she has directed counsel to file an appeal of the May 13 verdict of the Los Angeles Superior Court in Crest v. Padilla, which ruled unconstitutional SB 826, California’s board gender diversity statute. Crest v. Padilla was filed in 2019 by three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a “taxpayer suit,” the litigation sought a judgment declaring the expenditure of taxpayer funds to enforce or implement SB 826 to be illegal and an injunction preventing the California Secretary of State from expending taxpayer funds for those purposes, alleging that the law’s mandate was an unconstitutional gender-based quota and violated the Equal Protection Provisions of the California Constitution. After a bench trial, the Court agreed with the plaintiffs and enjoined implementation and enforcement of the statute. (See this PubCo post.) This verdict follows summary judgment in favor of the same plaintiffs in their case against AB 979, California’s board diversity statute regarding “underrepresented communities,” which was patterned after the board gender diversity statute. (See this PubCo post.)
SB 826 required that, by December 31, 2021, all public companies listed on a major exchange and headquartered in California, no matter where they were incorporated, include at least two women on their boards if the corporation had five directors, and three women directors if the corporation had six or more directors. A minimum of one woman director was required if the board had four or fewer directors. The statute also required that the office of the California Secretary of State post on its website reports on the status of compliance with the law. Under the statute, the Secretary could impose fines for violations, ranging from $100,000 to $300,000 per violation. No fines for violations or regulations regarding fines had been proposed or adopted.
In the litigation, the plaintiffs claimed standing as “taxpayers,” under “California’s common law taxpayer standing doctrine and Code of Civil Procedure Section 526a, which grants California taxpayers the right to sue government officials to prevent unlawful expenditures of taxpayer funds and taxpayer-financed resources.” The plaintiffs contended that the law’s requirement for female representation on corporate boards employed “express gender classifications. As a result, SB 826 was immediately suspect and presumptively invalid” under the equal protection provisions of the California Constitution and subject to “strict scrutiny” in the California courts, requiring the state to have a compelling governmental interest and the classifications to be narrowly constructed to serve that interest, according to the plaintiffs. The complaint requested entry of a judgment declaring any expenditures of taxpayer funds to implement or enforce SB 826 to be illegal and issuance of an injunction permanently prohibiting the Secretary from expending taxpayer funds to enforce or implement the provisions of the legislation.
In the decision, the Court found that the statute used a suspect gender classification, shifting the burden to the defendant to prove that the statute survived “strict scrutiny.” To meet the test, the defendant had to “show (1) a compelling state interest, (2) that S.B. 826 is necessary and (3) that S.B. 826 is narrowly tailored.” After examining the evidence, the Court determined that the State did not satisfy that burden. The Court concluded that there was “no compelling governmental interest in remedying generalized, non-specific allegations of discrimination,” and that the State “was unable to present specific evidence of actual, unlawful discrimination against any specific woman by any specific corporation subject to S.B. 826.” In sum, the Court determined that there was “no Compelling Governmental Interest in remedying discrimination in the board selection process because neither the Legislature nor Defendant could identify any specific, purposeful, intentional and unlawful discrimination to be remedied.” The Court was likewise not persuaded that SB 826 was necessary. According to the Court, the State did not establish that the “the use of a gender-based classification was necessary to boost California’s economy, improve opportunities for women in the workplace, and protect California taxpayers.” Finally, the Court determined that the State “did not carry the burden to show that the legislation was narrowly tailored.” In the Court’s view, the defendant failed to show that “the Legislature considered gender-neutral alternatives, that the statute was limited in scope and duration to that which is necessary to remedy specific, unlawful discrimination against women in the selection of board members.”
In her statement, Shirley Weber, the California Secretary of State, expressed her disappointment with the Court’s ruling: the Legislature’s intent in passing SB 826 in 2018, she said, was
“to remedy longstanding discrimination against women in the corporate board selection process and, in doing so, promote equitable and diverse gender representation on every corporate board….For nearly 30 years before SB 826’s passage, our State has tried alternative measures to remedy gender discrimination on corporate boards and increase the number of female directors, but the needle barely moved. SB 826 was passed not to remove men from the boardroom, but simply to make room for highly qualified women who have been excluded from the corporate board selection process for decades.”
What’s more, this discrimination at the corporate board level is not only harmful to women, she said, it also “has a negative effect on our State’s economy and its citizens. Companies with more women on their boards have been shown to have better financial results….”
Prior to the passage of SB 826 in 2018, women held only 15.5% of director seats on boards of publicly held corporations headquartered in California, according to the press release. But, the Secretary contends, SB 826 has had a positive effect: “SB 826 has already been successful in addressing in-group bias in the board selection process, and the evidence presented showed that in 2019, the number of women added to the boards of California publicly held corporations almost tripled the number of women who had been added to such boards in 2017. We should not abandon a policy aimed at remedying persistent discrimination just as it begins to work.”
The decision of the Court, she said “ignores critical and substantial evidence of discrimination against women in the director selection process and fails to acknowledge the realities that women face when attempting to access corporate boards. I am deeply disappointed in the court’s decision to allow the State to revert to policies that allow systemic gender discrimination to create an impenetrable wall which excludes women from the State’s most influential boardrooms.” Although the Court’s ruling was “disheartening, I remain committed to this policy and to the fight for justice on California’s publicly held boards, so I have directed counsel to file an appeal.”