A state law enacted in May 2020 required California-based corporations to appoint between one and three minority board members, depending on the size of their board of directors.

David Paul Morris/Bloomberg

In the latest legal blow to efforts to mandate diversity in corporate boardrooms, a federal judge struck down a California law that required banks and other companies to appoint a minimum number of board members from underrepresented communities.

The three-year law, which applied to California-based corporations, imposed an unconstitutional racial quota, an Eastern District of California judge ruled this week.

The law mandated “reserving a certain fixed number of board seats for certain minority groups” in violation of the US Constitution’s Equal Protection Clause, US District Judge John Mendez wrote.

The decision reverses a law intended to address corporate discrimination against underrepresented communities, including Black, Hispanic, Asian, Pacific Islander, and Native American groups, as well as people who identify as LGBTQ+.

Enacted in May 2020, the law required California-based corporations to appoint between one and three minority board members, depending on the size of the company’s board of directors. Fines for non-compliance ranged from $100,000 to $300,000.

The law was challenged in court by the Alliance for Fair Board Recruitment, a nonprofit group that engages in corporate board recruiting practices “without regard to race, ethnicity, gender, or sexual identity,” according to its website.

Attempts to “semantically formulate” the law as “flexible” failed to overcome the court’s decision that the law established a racial quota, Mendez wrote in the ruling.

The California Secretary of State’s office and attorneys representing the Alliance for Fair Board Recruitment did not respond to requests for comment Friday.

The 2020 law has been the subject of multiple court challenges. Last year, a state court judge ruled that the law violated the Equal Protection Clause of the California Constitution. Mendez initially granted a stay in the federal lawsuit pending an appeal of the state court decision, but later lifted the stay.

California courts have also blocked a 2018 State Law that would have required state-based companies to add more women to their boards.

State onboard diversity laws have also been enacted in Illinois, Maryland and New York. and a the federal court of appeals is reviewing the Securities and Exchange Commission’s approval of corporate board diversity rules devised by the Nasdaq stock exchange.

Lance Christensen, vice president for education policy and government affairs at the California Policy Center, a free-market group, said the courts are recognizing that the California legislature is “overstepping its bounds on issues that are specific to corporate governance.”

“Whenever the state intervenes to control, restrict, or redirect a company’s purpose, mindset, and mission, [it] can have a negative impact on the California economy,” Christensen said in an interview.

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