Some of you may have heard: there was a Presidential election in the United States last Tuesday, as a result of which there will be a change in administration next January. This upcoming change almost certainly means a categorical shift in the regulatory environment in Washington, including in particular at the SEC. Many of the SEC’s regulatory initiatives under the Biden administration may be rolled back. In particular, the new administration likely will pull the plug on the SEC’s pending climate change disclosure guidelines. These likely developments at the federal level may mean that, as Cydney Posner noted in a November 7, 2024, post on the Cooley law firm’s PubCo blog (here), State level actions “may, in many ways, take on much larger significance.”
For that reason, it is worth taking a closer look at the ruling last week in the federal court lawsuit in which various business groups led by the U.S. Chamber of Commerce are challenging the California statutes requiring companies “doing business” in the state to make certain climate change-related disclosures. As discussed below, the Court has denied the plaintiffs’ pre-discovery motion for summary judgment on First Amendment grounds. The court’s interesting ruling may provide some indication of the future direction of the litigation, as well as on the likelihood that the California statutes will eventually compel companies to make the mandated disclosures. A copy of the Central District of California’s November 5, 2024, order can be found here.
Background
As discussed here, in September 2023, the California legislature adopted, and in October 2023, California Governor Gavin Newsome signed into law, two far-reaching statutes setting climate change disclosure guidelines for companies “doing business” in California with revenues above specified levels.
State Bill 253, the Climate Corporate Data Accountability Act, requires the state’s California Air Resources Board (CARB) to develop guidelines requiring companies with annual revenues over $1 billion and doing business in California to report annually on their Scope 1, Scope 2, and Scope 3 emissions, subject to numerous requirements in the statue (including a requirement that reporting companies obtain third-party assurances as to the quality and accuracy of the reported emissions). The state estimates that this statute will apply to 5,300 U.S. businesses.
State Bill 261, Greenhouse gases: climate-related financial risk, which applies to any entity with revenues over $500 million that does business in California, requires applicable entities to biennially disclosed two categories of climate-related risk information; specifically, the reporting entity’s climate-relate financial risk; and the measures the company has taken to reduce the climate-related financial risk. The state estimates that this statute will apply to over 10,000 companies.
A subsequent California statute, State Bill 219, provided a number of adjustments to the two prior statutes’ requirements, as discussed here.
In January 2024, a group of business concerns led by the U.S. Chamber of Commerce filed a lawsuit in the Central District of California against the CARB, certain of its executives, and the state’s attorney general, challenging the constitutionality of the California climate change-related disclosure statutes. In the lawsuit, the plaintiffs seek a judicial declaration that the California statutes violate the First Amendment; the Supremacy Clause (based on preemption under federal law); and the Constitution’s limits on extraterritorial regulation, particularly under the dormant Commerce Clause. A copy of the plaintiffs’ amended complaint can be found here.
The plaintiffs moved for summary judgment, seeking a ruling that the statutes are facially invalid under the First Amendment. The defendants moved to deny the motion or to defer it, enabling summary judgment.
The Court’s Opinion
On election day, November 5, 2024, Central District of California Judge Otis D. Wright II entered an order denying the plaintiffs’ motion for summary judgment. The court did find, as a threshold matter, that the First Amendment did apply to the statutes, stating that “there can be no dispute that the primary effect – and purpose – of SBs 253 and 261 is to compel speech.”
The court then noted that a facial challenge to a statute under the First Amendment is “hard to win.” The issue the Court had to decide in considering the challenge is what standard of review the Court was to apply in assessing the statutes’ constitutionality. While the statutes unquestionably are content-based, “not all content-based regulations are subject to strict scrutiny.” Statutes regulating Commercial speech, for example, is subject to a lesser level of First Amendment scrutiny, and statutes regulating “purely factual and uncontroversial” commercial speech is subject to a rational basis review, an even lesser level of constitutional scrutiny.
The court said that it would require a factual record in order to determine what level of constitutional scrutiny to apply to the statues. For example, the court said, it needs to determine which businesses the law covered, given the revenue thresholds and the “doing business in California” requirements. Further, the Court said, it must determine which of the laws’ applications violate the First Amendment and “measure the constitutional against the unconstitutional applications.” These, the court said, are “fact-driven inquiries,” and the present pre-discovery record was inadequate to enable the Court to make these determinations. There are, the Court said, “genuine disputes of material fact that preclude it from granting summary judgment at this stage.”
Discussion
At a minimum, the Court’s denial of the plaintiffs’ summary judgment means that this litigation involving the questioned constitutionality of the California statues will go on. At some point, the plaintiffs are likely to renew their summary judgment motion, to seek rulings not only on the First Amendment issues, but also on the Supremacy Clause and Dormant Commerce Clause issues as well. The likelihood is that it will take many months if not years for this litigation to play out.
While this litigation will clearly continue to go forward, it is important to note that, as observed in a November 7, 2024, memo from the Vinson & Elkins law firm about the California court’s ruling (here), “a handful of other states, including Illinois, Minnesota, New York, and Washington are considering their own climate-related disclosure legislation that would mirror key aspects of the California Climate Laws.”
Perhaps just as significantly, the European Union’s Corporate Sustainability Reporting Directive “continues to march forward.” As discussed here, the EU directive, and the ensuing European Sustainability Reporting Standards, require EU and non-EU companies with specified levels of EU activity to file annual sustainability reports with their financial statements. The standards are in effect for the 2024 reporting period, meaning the first reports under the standards will appear in 2025.
In other words, while it seems likely that in the new administration the SEC’s climate change disclosure guidelines will be withdrawn or otherwise de-commissioned, that is not the end of the story on regulatory requirements for climate change disclosure. Indeed, even if the court challenge to the California statutes succeeds and the statutes are struck down as unconstitutional, that will still not be the end of the story surrounding compulsory climate change disclosure.
These climate change disclosure issues matter to reporting companies because of the potential burdens the disclosure requirements could involve. By the same token these regulatory requirements are at least potentially important to investors, to permit climate-focused investors to make informed investment decisions. For readers of this blog, these developments regarding climate change disclosure guidelines because once requirements are established, companies’ compliance with guidelines not only become a potential source of regulatory enforcement, but also become a potential source of D&O claims activity. The extent to which these various climate change disclosure requirements are enacted and survive judicial scrutiny could have a significant impact on the future potential liabilities of companies and their executives with respect to climate change related issues.