Corporations Headquartered in California Need a Minimum Number of Females on Their Boards of Directors

The United States Court of Appeals for the Ninth Circuit recently opined on California Senate Bill 826 (SB 826), which requires all corporations headquartered in California to have a minimum number of females on their boards of directors.

California Senate Bill 826 (SB 826) provides that corporations that don’t comply with the law may be subject to monetary penalties. The shareholders of OSI Systems, Inc., a corporation covered by SB 826, elect members of the board of directors. One shareholder of OSI, Creighton Meland, brought an action challenging the constitutionality of SB 826 on the ground that it requires shareholders to discriminate on the basis of sex when exercising their voting rights, in violation of the Fourteenth Amendment.

The Details of SB 826

The California Legislature enacted SB 826 in 2018. The legislative findings state that “[i]f measures are not taken to proactively increase the numbers of women serving on corporate boards, studies have shown that it will take decades, as many as 40 or 50 years, to achieve gender parity among directors.” To address this, the state legislature required that public corporations with principal executive offices located in California appoint a certain number of female directors to their boards.

By the end of 2019, SB 826 says that a covered corporation must have “a minimum of one female director on its board.” By the end of 2021, any covered corporation with six or more directors must have at least three female directors; a covered corporation with five directors must have at least two female directors; and any covered corporation with four or fewer directors must have at least one female director. The law has reporting requirements which include requiring the Secretary of State to publish reports showing which corporations are in compliance with the law.

SB 826 authorizes the Secretary of State to impose fines for violations ranging from $100,000 to $300,000 per violation. Each director seat required to be held by a female that’s not held by a female is a violation.

The Details of the Lawsuit

In Meland v. Weber (9th Cir. June 21, 2021) a shareholder of OSI Systems, Inc. (OSI), Creighton Meland, Jr., brought an action in November 2019 against the California 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.”

The complaint alleged that because the corporation had seven male board members, SB 826 required it to add a female board member by the end of 2019 and two additional female board members by the end of 2021. The complaint also alleged that Meland intended to vote on board-member nominees in the December 2019 annual shareholder meeting and at subsequent meetings. The plaintiff sought declaratory relief, injunctive relief, and attorneys’ fees and costs.

OSI shareholders, including Meland, are responsible for selecting the corporation’s directors by voting for directors at the company’s annual meetings. OSI’s nominating committee, as well as individual shareholders or groups of shareholders, may recommend candidates or submit names of candidates for election to OSI’s board of directors. But to become a member of OSI’s board, a candidate must get a plurality of shareholder votes.

At the December 2019 annual shareholder meeting, OSI shareholders elected a woman to fill a vacant board-member seat. The state then moved to dismiss Meland’s complaint for lack of Article III standing. The district court granted the state’s motion, finding that he hadn’t suffered an injury in fact, because SB 826 imposed requirements and potential penalties on corporations, not shareholders. Further, the district court held that SB 826 didn’t prevent Meland from voting for a male director. And the district court concluded that, even assuming Meland had established an individualized injury, his injury wasn’t actual or imminent because OSI was in compliance with SB 826. Meland appealed.

The Circuit Court Decision Focuses on Whether the Plaintiff Suffered an Injury in Fact

Circuit Judge Sandra Segal Ikuta wrote for a panel that included Circuit Judges M. Margaret McKeown and Daniel A. Bress and stated that the key question before the Court was whether Meland adequately alleged that he has Article III standing to challenge the constitutionality of SB 826. To have standing, Judge Ikuta wrote, the party invoking federal jurisdiction must allege “a case or controversy within the meaning of Art. III of the Constitution.” Here, Meland has the burden of establishing the three “irreducible” elements of Article III standing. The “first and foremost of standing’s three elements,” and the only element at issue here, is that the plaintiff has suffered “an injury in fact.”

Quoting the U.S. Supreme Court, the Ninth Circuit explained that an injury in fact is “an invasion of a legally protected interest which is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical.” For an injury to be actual or imminent, the “threatened injury must be certainly impending.”  An allegation of possible future injury is insufficient. Again the U.S. Supreme Court said that to confer standing under Article III, an injury in fact must “affect the plaintiff in a personal and individual way that’s beyond “the psychological consequence presumably produced by observation of conduct with which one disagrees.” Judge Ikuta said that while this means that an “abstract, generalized grievance” is insufficient to confer standing,  a person may suffer a concrete, personalized injury stemming from non-economic harm.

Consistent with these standing principles, the Ninth Circuit said it has 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.”

The Ninth Circuit has subsequently relied on the determination in Monterey Mech. Co. v. Wilson(9th Cir. 1997) that a person required or encouraged to discriminate on the basis of a protected class, “even if the beneficiaries [of the discrimination] are members of groups whose fortunes we would like to advance,” has suffered a direct personal injury sufficient to confer standing. As a result, if Meland’s allegations that SB 826 “requires or encourages” him to discriminate on the basis of sex are plausible, the Court said he’s suffered a concrete personal injury sufficient to confer Article III standing.

The State of California argued that Meland’s allegations weren’t plausible, primarily because corporations, not their shareholders, are the objects of SB 826. California points out that on its face, SB 826 imposes requirements on specified corporations, not on shareholders. Therefore, California argues, Meland has not suffered a concrete, personal injury. The Ninth Circuit disagreed because shareholders are one of the objects of SB 826 and therefore have standing to challenge it. In determining whether a plaintiff is the object of a government enactment, courts consider the purpose of the government enactment and its practical effect. In this instance, corporate shareholders are an object of SB 826 because, as a general rule, shareholders are responsible for electing directors at their annual meetings, and the California Legislature intended for SB 826 to require (or at least encourage) shareholders to vote in a manner that would achieve this goal.

The Ninth Circuit concluded that, as a shareholder of OSI, Meland is subject to the coercive effect of SB 826. To keep OSI in compliance with California law and avoid potential monetary sanctions, Meland has alleged that he is required or encouraged to make discriminatory decisions in voting for board members. As Meland points out in his complaint, if SB 826 is declared unconstitutional and the state is enjoined from enforcing it, then he “would no longer have to worry that he might subject OSI to fines unless he considers sex when selecting a board member.” The Court found that alleging this kind of injury is all that is needed for Article III standing.

The Ninth Circuit held that because Meland plausibly alleged that SB 826 requires or encourages him to discriminate based on sex, he adequately alleged an injury in fact. Since this was the only Article III standing element at issue, he thus has Article III standing to challenge SB 826. The district court’s decision was reversed. Meland v. Weber, No. 20-15762, 2021 U.S. App. LEXIS 18378, at *1 (9th Cir. June 21, 2021).

Although the Ninth Circuit did not address the merits of Meland’s argument, the finding that he has standing to sue which permits the case to proceed has broad implications for California’s attempt to address what is viewed as gender discrimination impeding female progress in the corporate arena.

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