Last week, the Los Angeles Superior Court ruled that California’s landmark law requiring women on corporate boards is unconstitutional.
The case is styled Crest et al. v. Padilla (“Crest”) and struck down Senate Bill 826 (“SB 826”), also known as the “Women on Boards” law. The conservative legal group Judicial Watch challenged the law, claiming it was illegal to use taxpayer funds to enforce a law that violates the equal protection clause of the California Constitution by mandating a gender-based quota.
Governor Jerry Brown signed SB 826 in 2018. SB 826 mandates that publicly held corporations headquartered in California (even if incorporated elsewhere) must have a minimum number of female directors on their Boards of Directors. For example, the law required any public company with at least six directors to have at least three female directors on its Board. Although SB 826 provides that violations may result in fines up to $300,000, California has not fined any companies under the law.
In Crest, the Court found that SB 826 violates the Equal Protection Clause in California’s state constitution by treating groups of people differently based on sex.
In reality, this law was on shaky ground from the start. The California state constitution requires that laws that differentiate based on sex must survive “strict scrutiny” review, meaning that SB 826 must serve a compelling government interest and be “narrowly tailored” to that interest. This means that the state must show that there is no way to achieve its stated goals without differentiating based on suspect classifications.
The state defended the law as constitutional, saying it was necessary to reverse a culture of discrimination that favored men and was put in place only after other measures failed. The state also said the law did not create a quota because boards could add seats for female directors without stripping men of their positions.
The Court did not find the state’s justifications for the law persuasive, including the state’s reliance on studies showing that more women on corporate boards improve corporate performance and boost the state economy. The Court noted alternative steps the state could take to improve the state’s economy without discriminating based on sex, and thus SB 826 could not be narrowly tailored for that purpose.
The decision comes just over a month after another Los Angeles judge found that a California law mandating that corporations diversify their boards with members from certain racial, ethnic, or LGBT groups was unconstitutional.
The corporate diversity legislation was a sequel to the law requiring women on corporate boards. The judge in the previous case ruled in favor of Judicial Watch and the same plaintiffs without holding a trial.
This decision may also impact judicial review of a Nasdaq rule, approved by the Securities and Exchange Commission, that will require companies listed on Nasdaq’s exchange to have at least one female director and at least one director “who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities” or as LGBTQ+, or explain why they do not. The Nasdaq rule is currently facing a legal challenge in the Fifth Circuit filed by the Alliance for Fair Board Recruitment.
Even though the Los Angeles Superior Court struck down SB 826, the fight is not over. This decision came from a lower-level court, and earlier this week, California announced that it would appeal the decision. We will continue to provide applicable updates as they are announced.