Los Angeles County Judge Strikes Down California Law Requiring Board Diversity As Unconstitutional

By Jose Cruz Roa 

SACRAMENTO, CA – Assembly Bill 979 (AB 979) had gone into effect in 2020 after being signed into law by California’s Governor Gavin Newsom. However, recently, Terry A. Green, a judge of the Superior Court of Los Angeles County, ruled that the law was unconstitutional. 

AB 979 set quotas for public companies that were located in California requiring their boards to have members from underrepresented communities. This included people of several races and ethnic groups such as African American, Latino, Asian, Black, etc. The law also applied to those who identified as gay, lesbian, bisexual, or transgender. 

Companies that did not comply could face fines. For first violations, it would be 100,000 dollars and 300,000 dollars for repeated violations. 

According to the Associated Press, no companies as of now have been fined and the state said no tax dollars had been spent to enforce this law. 

A similar law, SB826, was introduced in 2018 where companies were required to have at least one woman on the corporate board — failure to do so would also result in fines. 

With the establishment of SB 826, the California Partners Project, a nonprofit focused on gender equity co-founded by Governor Newsom’s wife, Jennifer Siebel Newsom, saw a doubling of female board members.

In a statement, California Partners Project called Judge Green’s decision “disappointing but not determinative.” The group pointed to studies showing business outcomes were better “when all of our rich talent is represented in positions of leadership” and noted that investors motivated by these outcomes would continue to pressure companies to have diverse boards.

In previous years, it was reported by the Latino Corporate Directors Association that more than one-third of California’s boardrooms were all white. The establishment of AB 979, would make companies hire a more diverse board which would lead to an increase in equity in hiring. 

“The bill would add desperately needed perspective to boardrooms that remain overwhelmingly white,” stated Esther Aguilera, CEO of the Latino Corporate Directors Association.

“More diverse boards and voices lead to better-informed decisions and decision-making and also produce better results for the company,” Aguilera said.

Although the law would have called for more diversity within company boardrooms, many were critical of it, declaring it unconstitutional and also viewing it as a violation of the equal protection clause of California’s constitution because it forced diversity quotas. Furthermore, some opponents of the law argued that forcing diversity quotas would not necessarily lead to changes in how these companies’ boards run their operations. 

On April 1st, Judge Green had granted summary judgment to Judicial Watch, a conservative legal nonprofit. On the behalf of three residents, the nonprofit sued the State of California, alleging that the state’s expenditure of taxpayer funds to enforce the law was unconstitutional. 

Tom Fitton, president of Judicial Watch, decried the law as part of “one of the most blatant and significant attacks in the modern era on constitutional prohibitions against discrimination.”

“If demographically homogeneous boards are a problem, then heterogenous boards are the immediate and obvious solution,” he wrote. “But that doesn’t mean the Legislature can skip directly to mandating heterogenous boards.” He also described the law as “a bit arbitrary” on which groups it aimed to help in an earlier hearing, according to Law360.

It has not been made clear if the State of California will appeal Judge Green’s ruling regarding AB 979.

“The decision was not a complete surprise, and California’s gender diversity law may face a similar fate,” said David A. Bell, the co-chairman of corporate governance at the law firm Fenwick & West. “Under constitutional principles, the courts have generally been hostile to quotas,” Mr. Bell said.

Mr. Bell does not expect an appeal to occur and does not expect a change in pressure for companies that are already being pushed to diversify their top ranks. 

Categories: