Given the impending change in Administration in D.C.—and all that portends for regulation—the States may, in many ways, take on much larger significance. Case in point: California’s climate disclosure laws and the ongoing litigation challenges there. In January, the U.S. and California Chambers of Commerce, the American Farm Bureau Federation and others filed a complaint (and in February, an amended complaint) against two executives of the California Air Resources Board and the California Attorney General challenging these two California laws. The lawsuit seeks declaratory relief that the two laws are void because they violate the First Amendment, are precluded under the Supremacy Clause by the Clean Air Act, and are invalid under the Constitution’s limitations on extraterritorial regulation, particularly under the dormant Commerce Clause. The litigation also seeks injunctive relief to prevent CARB from taking any action to enforce these two laws. (See this PubCo post.) California then filed a motion to dismiss the amended complaint for lack of subject matter jurisdiction and failure to state a claim. Interestingly, however, the motion did not seek dismissal of Plaintiffs’ First Amendment claim (except as to the Attorney General, whom the motion seeks to exclude altogether on the basis of sovereign immunity), even though California asserted that Plaintiffs’ First Amendment challenge was “legally flawed.” The Plaintiffs then moved for summary judgment on the First Amendment claim, and California moved to deny that motion or to defer it, enabling the parties to conduct discovery. In this Order, issued on election day, the Federal District Court for the Central District of California denied Plaintiffs’ motion to dismiss and granted California’s motion to deny or defer the motion for summary judgment.
You may recall that Senate Bill 253, the Climate Corporate Data Accountability Act, will mandate disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities (public or private) with total annual revenues in excess of a billion dollars that “do business in California.” SB 253 has been estimated to apply to about 5,300 companies. The companion bill, SB 261, Greenhouse gases: climate-related financial risk, with a lower reporting threshold of total annual revenues in excess of $500 million, will require subject companies to prepare reports disclosing their climate-related financial risk, in accordance with TCFD framework, and describing their measures adopted to reduce and adapt to that risk. SB 261 has been estimated to apply to over 10,000 companies. SB 219, signed into law this year, tweaks some of the requirements of those bills. (See this PubCo post and this PubCo post.)
After determining that the First Amendment was applicable because the climate disclosure laws did compel speech, the Court considered whether the climate disclosure laws violated the First Amendment. Citing precedent, the Court stated that in “a First Amendment facial challenge,” the courts must first “‘assess the state laws’ scope,’” and second, “‘decide which of the laws’ applications violate the First Amendment, and . . . measure them against the rest.’” While some content-based regulations are subject to strict scrutiny, a lesser standard typically applies to laws regulating commercial speech. To determine if the speech was commercial, the Court said, it must consider three factors outlined by SCOTUS in a 1983 case, Bolger v. Youngs Drug Products Corporation: whether “(1) ‘the speech is an advertisement,’ (2) ‘the speech refers to a particular product,’ and (3) ‘the speaker has an economic motivation.’” (In other briefing, California had contended that “the disclosures required under SB 253 and SB 261 closely resemble speech that falls into a ‘long … tradition’ of reduced constitutional concern: corporate risk disclosure.” In addition, California had contended “the information disclosed pertains to the commercial operations of the company,” and that the disclosures “have a commercial purpose that goes far beyond a ‘potential consumer’s decision of whether to use [a product].’” Rather, California argued, the disclosures “provide ‘information needed by investors, lenders, and insurance underwriters to appropriately assess and price climate-related risks,’…’and allow businesses to better ‘manag[e] GHG risks and identify[] reduction opportunities.’”) Generally, under Central Hudson, commercial speech is subject to intermediate scrutiny, but under Zauderer, compelled “commercial speech that is ‘purely factual and uncontroversial,’… is subject to rational basis review”; “the government may compel truthful disclosure in commercial speech as long as the compelled disclosure is ‘reasonably related’ to a substantial governmental interest.” (For a discussion of First Amendment standards applicable to compelled commercial disclosure, see this PubCo post and this PubCo post.)
Plaintiffs contended that SB 253 and SB 261 are subject to strict scrutiny because they “do not regulate commercial speech and the regulated speech is not purely factual and uncontroversial.” California disagreed and urged denial of the motion for summary judgment or alternatively, that the Court defer the motion, allowing time for discovery. California identified three issues that required discovery: “(1) SBs 253’s and 261’s financial and administrative burden, (2) controversial nature of the speech SBs 253 and 261 regulate, and (3) ‘existence of out-of-state entities that are covered by SB[s] 253 and 261, but only engage in a single transaction within California.’” Plaintiffs argued that the discovery was not material to its facial challenge.
The Court found that the case did not “present ‘only pure questions of law.’” First, the Court needed to determine which businesses the law covered—the laws expressly stated that they apply to all companies that meet specified revenue thresholds that do “business in California.” Further, the Court must “‘decide which of the laws’ applications violate the First Amendment,’ and ‘measure the constitutional against the unconstitutional applications.”’ These are fact-driven inquiries, the Court maintained, and the present record was inadequate to enable the Court to make these determinations. For example, the Court said that it needed more information to determine if the speech that the laws regulated was indeed commercial speech or whether strict scrutiny should apply. To that end, the Court indicated, it needed “a record on whether SBs 253 and 261 regulate a substantial number of companies that do not make potentially misleading environmental claims. For example, if ninety-nine percent of the regulated companies have made advertisements relevant to SBs 253’s and 261’s required disclosures, that may support a finding that SBs 253 and 261 are appropriately tailored to the State’s aims under at least rational basis review. This becomes less likely if, for example, a handful of the regulated companies make such advertisements.” Similarly, further data was required to assess claims that the laws were over-inclusive.
Ultimately, the Court found that there were “genuine disputes of material fact that preclude it from granting summary judgment at this stage.” Accordingly, while the Court did not “rule on whether the State is entitled to specific discovery,” the Court ruled only “that further development of the facts are needed for it to evaluate Plaintiffs’ Motion for Summary Judgment,” granting California’s motion to defer or deny Plaintiffs’ motion for summary judgment.
