Investors should sue California over its corporate gender quotas right now

Investors should sue California over its corporate gender quotas right now

At Reason, the prominent and prolific law professor Ilya Somin questions the constitutionality of California’s new law requiring corporations to have gender quotas for their boards of directors. He appears to be right that it is unconstitutional sex discrimination.

But who will actually sue over it? Companies are acutely image-conscious, and don’t want to look sexist to feminists who support the law. And it’s not as if a company’s board of directors actually manages the company on a day-to-day basis; many directors don’t do that much. So companies will wait for some other company to challenge it and thereby take the political heat. That timidity means that it could take a long, long time before a company challenges it. But can’t someone else sue over it now? As I explain below, investors — and perhaps taxpayers as well — can bring such a challenge in state court, if skittish corporations won’t do it themselves.

As Professor Somin notes,

California recently passed Senate Bill 826, a law requiring all publicly held corporations based in the state to have a minimum number of women on their boards. A corporation with four or fewer directors must have at least one woman on its board. If the board has five members, at least two women must be on it. If it has six or more, there must be at least three women. In his official signing statement, California Governor Jerry Brown praised the law, but also noted that “serious legal concerns have been raised” and that “these potential flaws may… prove fatal to its ultimate implementation.” Governor Brown is right to worry. The law is clearly unconstitutional under current Supreme Court precedent. If it survives the nearly inevitable legal challenges, it is also likely to cause more harm than good….California state courts have ruled that the state constitution applies “strict scrutiny” to gender classifications, an even tougher standard than federal intermediate scrutiny required by the federal Supreme Court’s interpretation of the Equal Protection Clause. If strict scrutiny applies, Bill 826 is even more likely to be struck down.

Others have also questioned its constitutionality. Corporate law scholar Steve Bainbridge argues that it violates the Dormant Commerce Clause in many of its applications, such as to Delaware-chartered companies. Former SEC Commissioner Joseph Grundfest, who teaches at Stanford, outlines a variety of possible legal challenges to Bill 826 and argues that it actually is a counterproductive approach to promoting board diversity. Hans Bader has argued that it violates the equal-protection clauses of the federal and state constitutions, at CNS News and in the Wall Street Journal. Some studies finds that gender quotas harm company profitability, as discussed in a Washington Times story discussing Norway’s experience with gender quotas.

This gender-quota requirement does seem to be unconstitutional under the state and federal constitutions, based on appeals court rulings striking down sex-based affirmative action even when it is less rigidly-quota-oriented and more narrowly tailored to particular industries. (See, e.g., Connerly v. State Personnel Board, 112 Cal.Rptr.2d 5 (Cal. App. 2001); Lamprecht v. Federal Communications Commission, 958 F.2d 382 (D.C. Cir. 1992); Builders Association of Chicago v. County of Cook, 256 F.3d 642 (7th Cir. 2000); Michigan Road Builders v. Milliken, 834 F.2d 583, 595 (6th Cir. 1987), aff’d, 489 U.S. 1061 (1989)).

Governor Brown admitted in his signing statement that the law raises “serious legal concerns” that may be “fatal,” and that he was signing it to send a “message” in response to events in “Washington, DC,” rather than properly concerning himself with California. This shows that the law rests on impermissible motives for affirmative action, and does not reflect the California-specific legal findings of discrimination necessary to justify a gender-based classification in that state. (See United States v. Virginia, 515 U.S. 518, 533 (1996); Shaw v. Hunt, 517 U.S. 899, 908 n.4, 910 (1996); Western States Paving Co. v. Washington, 407 F.3d 983, 995-1001 (9th Cir. 2005)).

Even when the state is picking people for its own boards — rather than meddling in the private sector — it is not supposed to mandate gender quotas or gender-balance requirements. That violates the Constitution’s equal-protection clause — as a court ruled in Back v. Carter, 933 F. Supp. 738 (N.D. Ind. 1996).

But who will sue over this law? Companies bend over backwards to seem in favor of “diversity.” Many Fortune 500 companies joined in amicus briefs in favor of affirmative action when affirmative action was challenged at the University of Texas and the University of Michigan.

As a commenter on Twitter put it in response to Professor Somin’s prediction that the California law will be challenged in court, “I’ve been trying to sort out the idea … in your phrase ‘nearly inevitable legal challenges.’ It seems unlikely to me that a publicly traded company would sue to keep women off its board. How does this get into court? Or am I just mistaken about incentives?”

Professor Somin responded, “At least a few firms probably will sue so they don’t have to follow the quota law. In addition, rejected male applicants for board positions could potentially sue to challenge the law.”

Somin is right that both firms and rejected applicants can sue. (See Lutheran Church v. FCC, 141 F.3d 344 (D.C. Cir. 1998)).

But the universe of potential plaintiffs is much bigger. Hans Bader says that stockholders in companies could also have standing to sue, under the theory that the California law “impairs their ability to buy shares in California companies with merit-selected boards.” He points to a case in which the Chamber of Commerce was found to have standing to sue in federal court over a requirement that investment companies’ boards of directors be comprised mostly of non-insiders — they had to have a board consisting of at least 75% independent directors, and an independent board chairman. The Chamber was held to have standing because the challenged regulation made it harder for it “to invest in shares of funds” that “do not meet those conditions” about company boards. Chamber of Commerce v. SEC, 412 F.3d 133 (D.C. Cir. 2005).

In California state court, it is even easier to sue. And it may even be that members of the general public can sue to block enforcement of the unconstitutional gender-quota law — regardless of whether they would lack legal standing to sue in federal court. That’s what happened in Connerly v. State Personnel Board, 112 Cal.Rptr.2d 5 (Cal. App. 2001). In that court ruling, gender-based and race-based affirmative action programs were struck down in response to a lawsuit even after the governor’s office dropped out of the case, leaving only a taxpayer, Ward Connerly, to challenge the programs. He was able to successfully appeal the trial court’s ruling upholding the challenged programs, and have the appeals court strike them down.

The appeals court ruled that Ward Connerly, a black businessman who opposed affirmative action, had taxpayer standing to challenge the race-based affirmative action programs, regardless of whether they injured him in particular, and regardless of the fact that he would have lacked Article III standing to sue in federal court. Connerly is philosophically opposed to such programs, but was not personally harmed by them; indeed, his own business apparently had benefited from racial set-asides in the past. But this lack of injury from affirmative action programs did not keep him from seeking a writ of mandate against them.

As the appeals court explained, in California state court, “Citizen suits may be brought without the necessity of showing a legal or special interest in the result where the issue is one of public right and the object is to procure the enforcement of a public duty…Statutorily enacted affirmative action programs are matters of intense public concern…Hence, a claim that such a program violates principles of equal protection and Proposition 209 is precisely the type of claim to which citizen and taxpayer standing rules apply.”  The court rejected the argument that courts should wait to address the constitutional challenge until “application of the challenged statutory schemes will produce” actual harm to white or male employees and thus “produce potential plaintiffs with personal beneficial interests” harmed by the programs.

It may be that similarly expansive notions of taxpayer standing can be used to challenge implementation of California’s gender-quota requirement for corporate boards. Moreover, the fact that the California law will take a while to change the composition of boards of directors does not prevent people from having standing to challenge it right now. See Bras v. California Public Utility Commission, 59 F.3d 869 (9th Cir. 1995).

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Jerome Woehrle

Jerome Woehrle

Jerome Woehrle is a retired attorney and author, who writes about politics.


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