Last summer, when California adopted a new law requiring corporations based in the state to add board members from “underrepresented communities,” it modeled the statute on the board gender diversity statute the state had enacted two years before. The constitutionality of the board gender diversity law itself had been challenged in a federal court lawsuit, but the court hearing the suit had dismissed it based on the named plaintiff’s lack of standing. However, in a June 21, 2021 opinion (here), the Ninth Circuit reversed the district court, finding that the claimant had sufficient standing to pursue the claim. The appellate court’s action has implications both for the board gender diversity statute and the more recently adopted board racial diversity statute, which has also been challenged in court.
The California Legislature enacted Senate Bill 826 in 2018. SB 826 required all corporations headquartered in California to have a minimum number of females on their boards of directors. Corporations that do not comply are subject to monetary penalties. OSI Systems is a Delaware Corporation based in California and is subject to SB 826. OSI Systems’ directors are elected by a vote of the corporation’s shareholders.
Creighton Meland, Jr. is an OSI Systems shareholder. In November 2019, Meland sued California’s Secretary of State alleging that SB 826 discriminates on the basis of sex in violation of the Equal Protection Clause of the Fourteenth Amendment and “seeks to force shareholders to perpetuate sex-based discrimination.”
At its December 2019 shareholder meeting, OSI shareholders elected a female to fill a vacant board seat. California then filed a motion to dismiss Meland’s complaint for lack of Article III standing. The district court granted the state’s motion, on the grounds that Meland had not suffered an “injury-in-fact” because the statute imposed requirements and potential penalties on corporations, not shareholders. The district court also found that Meland was free to vote for a male board candidate. Finally, the district court found that, even if Meland had established an injury, Meland’s injury was not actual or imminent, because OSI was in compliance with SB 826. Meland appealed the district court’s dismissal.
The June 21, 2021 Opinion
In a June 21, 2021 opinion written by Judge Sandra Segal Ikuta for a unanimous three-judge panel, the Ninth Circuit reversed the district court’s dismissal of Meland’s claims.
In ruling in Meland’s favor, the appellate court said that Meland had plausibly alleged that SB 826 requires or encourages him to discriminate based on sex. In reaching this conclusion, the appellate court first noted that “corporate shareholders are an object of SB 826.” For the statute to achieve its goal of “gender parity,” it must compel shareholders to act. Accordingly, the court said, “the California Legislature necessarily intended for SB 826 to require (or at least encourage) shareholders to vote in a manner that would achieve that goal.”
While the district court had found that Meland was free to vote for male board candidates, the statute, the appellate court said, “necessarily requires or encourages individual shareholders to vote for female board members,” as the “failure to vote for a female” would “contribute to the risk of putting the corporation in violation of state law and exposing it to sanctions.” At a minimum, SB 826 “would encourage a reasonable shareholder to vote in a way that would support corporate compliance with legal requirements.”
The Court therefore concluded that Meland had adequately alleged an injury in fact, the only Article III standing element at issue, and thus had Article III standing to challenge SB 826. The appellate court also concluded that Meland’s injury was distinct from any injury to the corporation, and thus he could bring his own Fourteenth Amendment challenge, meaning that Meland had prudential standing as well. Finally, Meland’s injury was ongoing and neither speculative or hypothetical, and the district court coud grant meaningful relief. Accordingly, the case is therefore ripe and not moot.
The appellate court’s ruling that Meland has standing means only that the lawsuit now goes back to the district court for further proceedings. The appellate court’s ruling does not mean Meland’s claims are meritorious, or that the statute is unconstitutional. Whether or not Meland’s claims will prevail remains to be seen, as does the overall question of whether the statute will survive the constitutional challenge. But while the ultimate merits of Meland’s claim remain to be determined, the appellate court’s ruling is nonetheless significant – both with respect to the board gender diversity statute and with respect to California’s more recently enacted board racial diversity statute.
The fundamental issue that Meland’s lawsuit raises – and that the separate lawsuits challenging the newly enacted board racial diversity statute – is whether state legislatures may, consistent with the requirements of the U.S. constitution, enact laws requiring the boards of private corporations doing business in the states, to have boards of directors composed on members reflecting specific gender and racial diversity goals. If the California statutes are upheld, other states may enact similar laws. If the California laws are struck down, state legislatures will be constrained from seeking to impose board diversity requirements by statute.
The appellate court’s determination here that Meland has standing to maintain his challenge to SB 826 not only means that California’s board gender diversity statute must face constitutional scrutiny, but it strongly suggests that the claimants in the separate lawsuits challenging the more recently enacted board diversity statute may have standing as well – meaning that the board racial diversity statute may face constitutional scrutiny as well.
The California board diversity statutes are of course not the only current board diversity initiatives underway. For example, as discussed here, Nasdaq has proposed board diversity listing requirements requiring Nasdaq listed companies to implement diverse board membership. Nasdaq’s proposal to the SEC remains pending. In addition, there have been a number of lawsuits filed against the boards of companies whose boards allegedly lack racial diversity alleging that the boards’ failure to implement diverse board membership violates the board members’ fiduciary duties. While these lawsuits have not proven to be particularly successful at least so far, the litigation and the threat of litigation represent yet other factors compelling companies to implement greater board diversity.
These other initiatives, and changing social attitudes in general, may cause many companies to take steps to adopt greater board diversity, even without the added impact of legal compulsion in the form of state statutory requirements. Nevertheless, the California board diversity statutes are a significant part of the legal environment within which companies and their boards must consider the diversity represented amongst their boards’ membership. At a minimum, if the statutes are struck down as unconstitutional, the legal compulsion toward diverse board membership will be diminished.
Again, it remains to be seen whether or not the statutes will withstand constitutional scrutiny. But at a minimum the appellate court’s conclusion that the plaintiff has standing to challenge the statutes means that the constitutional challenge will now go forward in federal court. It will be interesting to watch and see what happens next as the plaintiff’s challenge goes forward.
A complete review of the picture surrounding the legal challenges to SB 826 also requires a discussion of the separate state court challenge to the California board gender diversity statute. As discussed here, in addition to the Meland’s federal court lawsuit challenging the statute, a different plaintiff has also filed a separate state court lawsuit challenging the statute. The state court case is framed as a “taxpayer lawsuit” based on taxpayer standing, seeking to enjoin the California Secretary of State from expending taxpayer funds to enforce the statute. As far as I have been able to tell, the California state court lawsuit remains pending. In other words, the California board gender diversity statute is facing multiple challenges, not just the federal court constitutional challenge.