California Appeals Court reinstates injunctions against California Board diversity laws

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David WeissWill Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; Duty and Diversity (discussed on the Forum here) by Chris Brummer, and Leo E. Strine. 

You may recall that, earlier this year, two Los Angeles Superior Courts struck down as unconstitutional two California laws mandating that boards of public companies achieve specified levels of board diversity and enjoined implementation and enforcement of the legislation. Those injunctions, however, were temporarily lifted as the state appealed. Now, the appeals court has vacated those temporary stays. What does it mean for the diversity legislation?

The first Crest v. Padilla was filed in 2019 by three California taxpayers seeking to prevent implementation and enforcement of SB 826, the board gender diversity law. Framed as a “taxpayer suit,” the litigation sought a judgment declaring the expenditure of taxpayer funds to enforce or implement SB 826 to be illegal and an injunction preventing the California Secretary of State from expending taxpayer funds for those purposes, alleging that the law’s mandate was an unconstitutional gender-based quota and violated the Equal Protection Provisions of the California Constitution. After a bench trial, the court agreed with the plaintiffs and enjoined implementation and enforcement of the statute. (See this PubCo post.) That verdict followed summary judgment in favor of the same plaintiffs in the second Crest v. Padilla challenging AB 979, California’s board diversity statute regarding “underrepresented communities,” which was patterned after the board gender diversity statute. The court in that case concluded that the statute violated the equal protection clause of the California Constitution on its face because, in the court’s view, it treated similarly situated individuals differently based on suspect racial and other categories that were not justified by a compelling interest, nor was the statute narrowly tailored to address the interests identified. According to the court, the plaintiffs were entitled to a “judgment declaring as much and an injunction preventing the expenditure of taxpayer funds on implementation of the measure.” (See this PubCo post.)

Those cases are being appealed by the State, and, in both cases, the California Secretary of State petitioned for a writ of supersedeas seeking stays, pending appeal, of the enforcement of the permanent injunctions imposed by the lower courts. (See this PubCo post.) In the meantime, the appeals court had temporarily lifted the permanent injunctions, to the extent those injunctions required the State to modify its procedures for or enjoin collecting and reporting data otherwise required under the applicable statutes, pending further order of the appeals court. (See the SideBar in this PubCo post.)

At the end of last week, the California appeals court denied the State’s petitions for writ of supersedeas in these cases and vacated the temporary stays—meaning that the injunctions against implementation and enforcement of these two statutes are back in place. Do these Orders suggest that the appeals are unlikely to succeed on the merits? Some reading the tea leaves would contend that they do. Former California state senator, Hannah-Beth Jackson, author of SB 826, the board gender diversity legislation, told me that, although the court’s Order was a summary denial, providing no guidance as to its reasoning, she believes the Order was based largely on the issue of standing argued in the writ and not on the larger, more substantive issues that will be addressed in the appeal, which she believes will be winning arguments. Time will tell.

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