California Court Blocks Board Diversity Law

A Los Angeles court recently struck down a law that requires publicly traded corporations headquartered in California to have board members from underrepresented communities. But the ruling likely won't be the last word on the issue, because California officials may file an appeal and are currently defending several lawsuits challenging the state's board diversity laws.

Law Deemed Unconstitutional 

AB 979 required covered California corporations to have one director from an underrepresented community by the close of the 2021 calendar year. Additional requirements apply by the end of 2022, depending on the size of the board.

The bill defines a director from an underrepresented community as "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."

The law was modeled after SB 826, which requires boards of California-based publicly held companies to have a certain number of female directors.

Corporations that don't comply with these laws could face steep penalties, ranging from $100,000 to $300,000 for each violation.

In Crest v. Padilla, Judge Terry Green of the Los Angeles County Superior Court granted summary judgment to Judicial Watch, a foundation that files lawsuits to challenge alleged misconduct by government officials. Judicial Watch claimed the law violated the state constitution.

"Equal treatment and opportunity, of and for all individuals regardless of how they look or identify, is one of this state's basic commitments," Green said in an April 1 order. "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."

What Does the Ruling Mean for Employers?

"If this ruling stands, publicly traded corporations headquartered in California will not be legally mandated to appoint board members based on their race or ethnicity," explained Christopher Olmsted, an attorney with Ogletree Deakins in San Diego.

The defendant in this case, California's secretary of state, could appeal the decision. If the state appeals, Olmsted noted, an appellate court or the California Supreme Court could reverse the trial court's ruling. He said publicly traded companies headquartered in California should continue to monitor the progress of this litigation.

Notably, the state is defending multiple lawsuits challenging AB 979 and SB 826.

But employers shouldn't halt their diversity, equity and inclusion programs. "The ruling does not diminish or call into question the benefits of diversity in the workplace, which served as the basis for the legislation," said Michael Thomas, an attorney with Jackson Lewis in Los Angeles. "Instead, the ruling is a reminder that employers must tread carefully when taking efforts to diversify the workplace or board."

Michelle Phillips, an attorney with Jackson Lewis in White Plains, N.Y., said the ruling highlights the importance of ultimately selecting the best qualified board candidates and employees to avoid so-called reverse discrimination claims.

"Having said that, if boards and employers don't start to take their role in attracting and retaining qualified diverse candidates seriously, there will be a limit to the impact of these recruitment efforts," she noted. "It's important for boards and employers to do a better job of creating opportunities for diverse talent."

Phillips said leaders should proactively assist and encourage individuals from diverse talent pools in finding a seat at the table and should use their allyship to mentor and develop this talent. 

She expects that the decision in Crest will be appealed and that new legislation will continue to promote opportunities for women, people of color, LGBTQ+ people and other underrepresented groups regarding representation on boards, in leadership roles and in other areas of influence.