Hearing on Board Gender Diversity Statute

On October 19, a federal district court judge held a hearing on a motion for a preliminary injunction in Meland v. Weber, a case challenging SB 826, California’s board gender diversity statute, on the basis that it is unconstitutional under the equal protection provisions of the 14th Amendment. The judge had previously dismissed the case on the basis of lack of standing, but was reversed by the 9^th Circuit. What did the hearing reveal?

Even proponents of the California law recognized the possibility of “equal protection” claims and other legal challenges—when then-Governor Jerry Brown signed the bill into law, he acknowledged that “serious legal concerns” had been raised. (See this PubCo post.) And many expected a flood of legal challenges to frustrate efforts to implement the bill. Nevertheless, California’s businesses appear to have accepted the requirements of the legal mandate—perhaps also feeling the pressure from large asset managers such as BlackRock and State Street—and have not filed suit.

Case history. In Meland v. Padilla, a shareholder of a publicly traded company that is incorporated in Delaware and headquartered in California filed a complaint seeking a declaratory judgment that SB 826 was unconstitutional under the equal protection provisions of the 14th Amendment and a permanent injunction preventing implementation and enforcement of the statute. The plaintiff claims that the statute is a sex-based classification that violates the equal protection provisions of the 14^th Amendment by imposing a sex-based quota directly on shareholders and by seeking to force shareholders to perpetuate sex-based discrimination. More specifically, the complaint contends that the statute “facially discriminates on the basis of sex” and “serves no important government interest” because “[s]ex-based balancing is not an important government interest that can sustain a sex-based classification under the Equal Protection Clause.”

In April 2020, a federal district court dismissed that legal challenge on the basis of lack of standing, finding that none of the provisions of SB 826 affected the plaintiff’s 14^th amendment rights to an extent sufficient to establish standing under Article III. While the plaintiff had argued that he had standing because the statute was compelling him, as a shareholder, to vote in a way that perpetuated sex-based discrimination, the district court concluded that SB 826 “places a requirement and a possible penalty on publicly held corporations, but Plaintiff is not a publicly held corporation. He is a shareholder. And that is a distinction with a difference.” In addition, the district court reasoned, the plaintiff is not being forced to vote for any particular director: “notwithstanding SB 826, Plaintiff, as a shareholder, can vote in shareholder elections as he pleases. If, at future shareholder meetings, Plaintiff prefers a male board member nominee, there is nothing in SB 826 preventing him from casting a vote in favor of that nominee.” The plaintiff, the district court also concluded, was not affected in any “personal or individual way.”

In June 2021, a three-judge panel of the 9^th circuit reversed that decision, allowing the case, now called Meland v. Weber, to go forward. The court held that, because the plaintiff “plausibly alleged that SB 826 requires or encourages him to discriminate on the basis of sex, he has adequately alleged that he has standing to challenge SB 826’s constitutionality.” The panel observed, “we have long held that ‘[a] person required by the government to discriminate by ethnicity or sex against others has standing to challenge the validity of the requirement, even though the government does not discriminate against him.’” Accordingly, the court concluded, if the plaintiff has plausibly alleged that SB 826 “requires or encourages” him to discriminate on the basis of sex, “then he has suffered a concrete personal injury sufficient to confer Article III standing.” (For a more detailed rundown of the history of this case, see this PubCo post and this PubCo post.)

Shortly after the 9^th Circuit decision, Meland moved for a preliminary injunction to prevent the California Secretary of State from enforcing the statute while the case is pending. On October 19, there was a hearing in the district court on the plaintiff’s motion.

At the hearing. During the hearing, the federal district court judge indicated that he was unlikely to grant the preliminary injunction.

According to the transcript, the court made clear that “to secure a preliminary injunction, the plaintiff has to show that he is, one, likely to succeed on the merits, that he’s likely to suffer irreparable harm in the absence of a preliminary injunction, that the balance of equities tips in his favor, and that an injunction is in the public interest.” From a procedural standpoint, the State attempted to take another stab at the argument that the plaintiff had no standing, but the judge questioned whether, in light of the 9^th circuit opinion, the State would “really want to double-down on this standing argument.”

Getting to the merits, the judge cited two 9^th circuit cases on gender preferences that survived a facial challenge. In one of the cases, the court found that the defendant had a “legitimate and important interest,” and that the means chosen to remedy the “many disadvantages that confront women business owners” were “substantially related to the objective.” In addition, the “utilization goals under both the set-aside and preference methods are legitimate means of furthering the objective and are not unduly onerous.” In that case, the judge said, the court “properly granted summary judgment” to the defendant. The court highlighted that strict scrutiny was not applied: “It’s only intermediate scrutiny,” that is, the state needed to show only “that some degree of discrimination has occurred in a particular field before a gender-specific remedy may be instituted.”

The hearing then turned to the issue of the pattern of gender discrimination. Counsel for the plaintiff pointed to data showing that about 40% of new directors were women, and argued that the state “has to show discrimination in the relevant industry” and tailor its remedy more narrowly to particular industries affected. But the court pointed out that plaintiff’s data was post-adoption of SB 826 and only about new directors. The State pointed to an MIT study of over 5,000 corporate board members between October 2015 and June 2016, which found that 44% of publicly held companies “considered no women as candidates for nonexecutive board seats.” The same study also found a “diversity feedback loop,” where boards with more women tended “to consider both the larger pool of candidates and a higher proportion of women candidates when filling vacancies. Where 61 percent of boards without women fail to consider a single woman candidate in most recent board vacancies.” Plaintiff’s counsel contended that there are other non-discriminatory reasons for that data. However, the State pointed to evidence showing that women experience bias at work and maintained that “gender-neutral policies would not have solved the problem given these biases that had been documented.”

There was also a discussion about whether SB 826 imposes a “quota,” with the judge reasoning that it’s not a quota because you can always add board seats—i.e., that the law doesn’t require that men be replaced on boards with women nor does it prohibit more men from joining the board. Plaintiff’s counsel argued that it was a quota under Bakke because those seats are set aside for women in perpetuity. But, the State argued, there’s no fixed percentage involved and the potential women directors aren’t walled off in a separate competition. Rather, the fact that the law specifies numbers depending on board size is intended to ensure a “critical mass” of women are elected to boards and to avoid “token” board appointments.

The parties also discussed whether SB 826 was “premised on a stereotype” and whether there’s evidence to support the business case for SB 826. The State argued that nothing in SB 826 requires that women directors have a particular leadership style or advocate for particular policies. In addition, the State referred to a body of research over 20 years that supports the positive impact on corporate performance of gender diversity. Counsel for the plaintiff responded that their research showed mixed results for business case. The parties also discussed whether the absence of a sunset date was problematic.

The judge then asked for a discussion of whether a preliminary injunction would be in the public interest, noting that there is a strong argument that, based on evidence, the law has been working. “So why is it in the public interest,” the court asked, “to allow an out-of-state shareholder who holds 65 shares in an 18-million share company, [to] stop a law that no corporation objects to, that no corporation is challenging and is working?” Plaintiff’s counsel responded that “it’s always in the public interest to enjoin an unconstitutional law,” and that “increasing representation for its own sake is not a legitimate interest.” According to counsel for the plaintiff, “increased representation is not necessarily remed[ying] discrimination, and is therefore perpetuating the very stereotypes that equal protection laws are meant to protect against.”

Finally, the judge asked whether, as this is a question of state law, he should delay a decision in this case until the case on SB 826 that is being tried in L. A. Superior Court is completed. (Presumably he’s referring to Crest v. Alex Padilla, which is now scheduled to begin trial on December 1. See this PubCo post.) While that seemed to be fine with the State, plaintiff’s counsel objected.

Recognizing that “no matter what happens, this is going to go up on appeal,” the judge took the case under submission with the intention of reviewing more documents and cases and ultimately issuing a written decision.

“However,” he said, that “always drove me crazy as a lawyer, because you want to leave court with at least having some indication of which way the judge is leaning. I think it’s only fair that I give you that indication with respect to the issues in this case. And, again, this is not my final decision. It’s tentative, but these are some of the thoughts that I have based on everything I’ve read and the arguments today.

“In terms of the standing issue, I think that’s going to be very difficult for the defendants to succeed on, and I don’t really see a way around the Ninth Circuit decision that remanded the case back to me. I know the defendants think otherwise, but I just think that’s a really difficult issue for the defendant.

“In terms of whether the plaintiff has demonstrated a likelihood of success on the merits so that he is entitled to a preliminary injunction, I think part of the problem with this motion at this time is it’s a preliminary injunction. This case, at some point, if it continues, will—will result in a full hearing and a request that the law be permanently enjoined.

“But I think that the plaintiff hasn’t demonstrated enough of a likelihood of success on the merits on his claim that this law is unconstitutional to warrant a preliminary injunction, to stop the law now. It goes to my question obviously loaded and somewhat biased about the balance of equities in the public interest of stopping this law now, particularly when it appears to be working so well and is accomplishing the primary goal of remedying discrimination.

“So in terms of a likelihood of success on the merits, I am leaning towards finding that the defendants are more likely to succeed on the merits, and that the law should be upheld.

“In terms of irreparable harm, again, I think that at this stage, by not issuing a preliminary injunction, that the harm would be irreparable to the plaintiff. If there is any harm to him, it really can and could be remedied through a permanent injunction, rather than a preliminary injunction.”

The judge then said that he “would address the quota argument and the lack of what appears to be a sunset provision, but again I don’t think those issues preclude the law continuing in its current state. Those are my preliminary thoughts. Again, I will review all of those, rethink those, and then issue an opinion.”

Initially the judge said that he was not certain that he could get an order out before December 31st, but then said that he would get an opinion out before the trial in the L.A. County Superior Court, which is now scheduled for December 1. So stay tuned.