9th circuit considers California’s board diversity law

A panel of federal appeals judges on Wednesday appeared ready to allow a shareholder to challenge California's corporate board diversity law.

SB 826, signed into law in 2018, requires California-based corporations to have at least one female director, and by the end of 2021 that number will increase in proportion to the size of the board. Companies that are not in compliance can be fined up to $300,000..

Creighton Meland Jr., a shareholder of OSI Systems Inc., claims that law effectively coerces him into voting for certain directors. He is represented by Pacific Legal Foundation. Trial Judge John A. Mendez of the Eastern District of California threw out Meland's lawsuit for lack of standing. But at least two of the three judges who heard his appeal seemed to sympathize with his argument.

Judge Sandra Ikuta, an appointee of President George W. Bush, and regarded as one of the court's leading conservative thinkers, appeared the most open to Meland's challenge.

"So a shareholder, of course, technically, has an ownership interest in the corporation. That's what a shareholder means. And we do have cases saying that if there's a financial imposition on the corporation, ... that the shareholder has standing to challenge a financial imposition on the corporation," Ikuta said.

"The corporation is not being encouraged to discriminate on the basis of gender. So that particular injury is not an injury to the corporation, that injury is only to the shareholders," she continued. "I'm not understanding why the injury is only to the corporation at all. There is no injury to the corporation at least at present that I'm aware of. Can you explain that?"

Ikuta wrote a dissent that was believed to have influenced the U.S. Supreme Court in its landmark decision that a class of women could not sue Walmart. Wal-Mart v. Dukes, 564 U.S. 338 (2011)

Lara Haddad argued the appeal for the Secretary of State. She told the judges that Meland could not show that he would suffer an injury separate from any injury to OSI System. Shareholders are not required to do anything and any penalty would fall on the corporations. Any fines are speculative and do not meet the requirements for standing, she said. Any harm to Meland and his shares in the company would depend on whether OSI System falls out of compliance with the law and that those fines would somehow have to harm Meland's shares, Haddad said.'Judge Daniel A. Bress, an appointee of President Donald Trump, agreed any harm appears to hinge on whether the Secretary of State will issue a fine, "but from the perspective of the shareholder, they don't know whether that grace will be given or not." 'Judge M. Margaret McKeown, an appointee of President Clinton, was the most skeptical that Meland has standing to sue.'"He hasn't actually alleged in his complaint allegations of this nature in terms of he's changing his vote and that sort of thing," McKeown said. "So, we have got the corporation over here, and then you have got him, but I don't see how he is subject to a quota vote. That's the link I'm missing."

Anastasia P. Boden, senior attorney at the Pacific Legal Foundation, argued on behalf of Meland.'"[W]e brought this case because our client wants to vote for board members based on merit, not based on a person's race or sex," Boden said in an email after the argument. "By putting equal numbers above equal treatment, the quota perpetuates the very thing the Fourteenth Amendment was meant to get rid of: treating people based on the characteristics they were born into rather than treating them as individuals."

"The court focused on the penalty, which is assessed on corporations, rather than the sex-based mandate, which is imposed on shareholders," Boden said. "We're appealing because the requirement that shareholders make decisions on the basis of the sex is an injury to the shareholders independent of any injury to the corporation, and that means shareholders (like our client) should be able to challenge it."

But Bodin argued that since shareholders are responsible for doing the electing, "and just because the state has chosen to punish a third party for any infractions, does not mean that the law is not regulating shareholders."