California has long sought to lead the nation through what its legislators see as progressive regulations that curb corporate misbehavior. But pending challenges to two new laws show the limits of the state’s power, particularly when California’s measures seek to cross state lines.
On Sunday, Gov. Jerry Brown signed SB826, which requires public companies with headquarters in California to have at least one female director by the end of next year, and SB822, which restores internet protections known as net neutrality in the state.
Both face challenges rooted in the Constitution’s Commerce Clause, which reserves the regulation of trade between the states to Congress.
The Department of Justice sued minutes after California’s net neutrality rules became law. “Under the Constitution, states do not regulate interstate commerce — the federal government does,” Attorney General Jeff Sessions said in a statement announcing the suit.
SB826 did not draw immediate legal opposition. But the mandate that boards include one or more women, which imposes a fine for firms that fail to comply, may violate the federal and state constitutions by in effect requiring companies to discriminate against men wanting to serve on boards.
“If you avoid passing laws because of a risk that it will be overturned in court, then you’re never going to push the envelope on anything,” said state Sen. Scott Wiener, D-San Francisco, who authored the SB822 net neutrality bill and voted in favor of SB826, the boardroom diversity bill by his colleague Hannah-Beth Jackson, D-Santa Barbara.
California’s net neutrality bill restores prohibitions against internet service providers giving certain websites or apps special treatment — for example, speeding up downloads of video services that pay a provider additional fees. The Federal Communications Commission under President Barack Obama instituted similar protections in 2015, but overturned them in December under Chairman Ajit Pai, who was appointed by President Trump.
The administration’s complaint against California cited the 1996 Telecommunications Act, which stated a policy of preserving a “vibrant and competitive free market” for internet services “unfettered by Federal or State regulation.”
San Diego State University Professor Steven Andrés said the internet has typically been classified as interstate commerce, and is thus subject to federal regulation.
But Stanford law Professor Barbara van Schewick said that because the FCC disavowed its power to regulate internet service providers’ behavior in the December order, it cannot turn around and say states can’t regulate them either.
“If the FCC doesn’t have authority to adopt net neutrality rules, then it can’t prevent the states from adopting their own net neutrality rules,” van Schewick said.
The boardroom mandate faces different hurdles. The gender requirement may violate antidiscrimination laws, for one. And many California companies are incorporated outside the state — typically in Delaware, thanks to that state’s business-friendly laws. Federal law says a company is subject to rules concerning its internal affairs in the state where it is incorporated, not the one where it is headquartered, said Joseph Grundfest, a professor and corporate governance expert at Stanford Law School.
Several California trade groups have opposed the bill, with the California Chamber of Commerce the most vocal among them. The chamber argued against the bill for singling out gender.
“The reality is there’s going to be litigation, and California will lose based on the internal affairs doctrine,” Grundfest said.
While 165 public companies headquartered in California have all-male boards, according to Bloomberg data, there are only 72 public companies that are headquartered and chartered in California to begin with, Grundfest said. Even if the law stands up to litigation, it will have a “trivial effect,” he said.
Apple, chartered in California and headquartered in Cupertino, is the only Fortune 500 company that would need to add a woman to its board, according to Grundfest’s research. It already has two female directors; under the new law, by 2021 it would need to bring on a third or face fines. Apple declined to comment.
One problem for companies that might want to challenge the law, though, is the backlash they would face from the public and employees, who are increasingly criticizing corporate America for its lack of gender balance.
Kellie McElhaney, director of the Center for Equity, Gender, and Leadership at UC Berkeley’s Haas School of Business, said she encourages companies she consults for to support the law because it makes strong business sense. Studies show that companies with diverse boards tend to perform better because they are likely to mirror their customers and clients.
Companies would be better off vocally supporting the law rather than suing to avoid compliance, McElhaney said.
Jackson, SB826’s author, is optimistic that once the rule is in place, companies would see the benefits of having more women on their boards and would take additional measures to include people of different races and ethnicities.
Brown seems aware of the law’s pitfalls.
“I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation,” he wrote Sunday in a signing statement. “Nevertheless, recent events in Washington, D.C. — and beyond — make it crystal clear that many are not getting the message.”
Wiener said the pushback against the net neutrality and boardroom diversity laws is par for the course — the criticism that comes from California being on the edge.
“They always say that, and 10 years later, they’re doing exactly what California’s doing,” he said. “Ultimately, other states frequently do what we do. I’m very comfortable with California continuing to play that role.”
Other states are considering their own net neutrality protections, and Congress may take up the issue on a federal level, replacing agency rules with firmer law.
Besides the Justice Department’s move to block California’s internet rules, the December order by the FCC faces its own legal challenge. More than 20 states’ attorneys general along with public interest groups and private businesses filed a lawsuit against the FCC. Arguments in that case are scheduled to begin Feb. 1.
San Francisco Chronicle business editor Owen Thomas and Chronicle wire services contributed to this report.