You remember California's climate legislation signed into law just last year—Senate Bill 253, the Climate Corporate Data Accountability Act, and Senate Bill 261, Greenhouse gases: climate-related financial risk? (See this PubCo post.) The U.S. and California Chambers of Commerce, the American Farm Bureau Federation and others have just filed a new complaint against the California Air Resources Board challenging these two California laws. The lawsuit seeks declaratory relief that the two laws are void because they violate the First Amendment, are precluded by federal law, and are invalid under the Constitution's limitations on extraterritorial regulation, particularly under the dormant Commerce Clause. The litigation also seeks injunctive relief to prevent CARB from taking any action to enforce these two laws. These California laws have the potential to affect thousands of companies, including companies domiciled in other states, and many will be alert to see if these laws survive this legal action unscathed. To some extent, the litigation will also function as a dress rehearsal for the litigation that's likely to surface when the SEC finally adopts its long-awaited climate disclosure rules. What does this litigation augur for the SEC's anticipated climate disclosure rules? While the dormant Commerce Clause is unlikely to play much of a role in a future challenge to the SEC's expected climate disclosure regulations, the First Amendment claim is certainly one that we have seen used successfully in the past and are likely to see again. For example, it was raised in connection with challenges to Rule 14a-8 and to the stock repurchase rules, as well as at a recent House Financial Services subcommittee hearing on oversight of the SEC's proposed climate disclosure, where the contention that the proposal's compelled speech would violate the First Amendment was a topic of discussion. (See this PubCo post.) Now, we'll see how well it plays in federal court in California.

In this press release, Tom Quaadman, executive director of the Chamber's Center for Capital Markets Competitiveness, remarked that business and government need to work together to address climate change,

"and that requires policies that are practical, flexible, predictable, and durable. California's corporate disclosure laws are the opposite of that and violate the First Amendment by forcing businesses to engage in subjective speech. With many public companies already disclosing material climate risks, businesses are well ahead of government regulators. California's laws usurp the role of federal regulators, opening the door for other states to take an opposite approach to disclosure, leaving businesses and their investors caught in the middle of a political scrap between states. The resulting fragmentation will undermine the competitiveness of American capital markets, ushering in an era of duplicative and conflicting state-imposed requirements."

What's even worse, he said, is that "these laws demand that both public and private businesses with even minimal operations in the state calculate their greenhouse gas emissions from their whole supply chain, no matter where those emissions take place, and subjectively measure and report their worldwide climate-related financial risks and proposed mitigation strategies to California. The costs and compliance issues of this law will be felt by businesses of all sizes, but especially small, Main Street businesses."


In a dialogue with SEC Chair Gary Gensler in October last year regarding developments in climate disclosure, Quaad man observed that policymakers in different states and across the globe were working to impose a plethora of mandatory reporting requirements for climate disclosure. The problem was that they were not consistent. While the Chamber supported disclosure of material climate information, he cautioned that the actions by these policymakers had created a real risk that companies will face duplicate, differing, overlapping and even conflicting requirements. In particular, he noted that California had adopted sweeping climate disclosure requirements that will apply to many non-California companies that do business in California. He viewed the California legislation as quite sweeping, encompassing both public and private companies. As an aside, he noted that, if the SEC had come out with rules like California's, the Chamber's lawyers would be in court right now. Of course, as to California, that prospect has now come to pass. (See this PubCo post.)

As a reminder, SB 253 would mandate disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities (public or private) with total annual revenues in excess of a billion dollars that "do business in California," however that ends up being defined. SB 253 has been estimated to apply to about 5,300 companies. SB 261would require subject companies to prepare reports disclosing their climate-related financial risk, in accordance with TCFD framework, and describing their measures adopted to reduce and adapt to that risk. With a lower reporting threshold of total annual revenues in excess of $500 million, SB 261 has been estimated to apply to over 10,000 companies. (For more information about this legislation, see this PubCo post.)

In the complaint, the plaintiffs maintain that they are in favor of policies that would reduce GHG emissions "as much and as quickly as reasonably possible, consistent with the pace of innovation and the feasibility of implementing large-scale technical change," and that they support the disclosure of material information, including climate-related information, as necessary to protect investors, but those policies "must be informed by the best science, a careful analysis of available alternatives, and attention to legal rights and requirements." In addition, "a patchwork of inconsistent state-by-state regulatory regimes, under which multiple states attempt to regulate emissions nationally through conflicting means" don't help either business or consumers.

These laws, they profess, will impose massive costs on businesses, with the burden of compliance falling disproportionately on small and medium businesses. They argue that both laws apply to any company exceeding a certain revenue threshold that does any business in California and that estimating GHG emissions is "enormously burdensome"; reporting Scope 3 emissions alone, they contend, will cost many companies more than $1 million per year and, in many instances, may be inaccurate. According to the complaint, the "burden of estimating Scope 3 emissions flows up and down the supply chain. Small businesses nationwide will incur significant costs monitoring and reporting emissions to suppliers and customers swept within the law's reach. For example, scores of family farm members of AFBF will need to report emissions to business partners that do business with entities covered by S.B. 253." Plaintiffs also cite the reservations California's Governor expressed at the time of his signing of these bills regarding financial impact. (See this PubCo post.)

In summary, the plaintiffs charge that the two California laws "unconstitutionally compel speech in violation of the First Amendment" by "impermissibly compel[ling] thousands of businesses to make costly, burdensome, and politically fraught statements about 'their operations, not just in California, but around the world,'... in order to stigmatize those companies and shape their behavior." Plaintiffs cite legislative analysis indicating that public availability of these compelled statements "'might encourage them to take meaningful steps to reduce [greenhouse-gas] emissions.'" In addition, they charge that these two laws "seek to regulate an area that is outside California's jurisdiction and subject to exclusive federal control by virtue of the Clean Air Act and the federalism principles embodied in our federal Constitution. These laws stand in conflict with existing federal law and the Constitution's delegation to Congress of the power to regulate interstate commerce."

First Amendment claims. Plaintiffs assert that both S.B. 253 and 261 violate the First Amendment right to refrain from speaking "by compelling companies to engage in costly speech on 'climate change,' an issue the Supreme Court has acknowledged is 'controversial.'" S.B. 253 and 261, they maintain, "compel companies to publicly express a speculative, noncommercial, controversial, and politically-charged message that they otherwise would not express, and in the case of S.B. 261, expressly requires companies to communicate that message on their own websites." They argue that these laws are subject to the highest level of scrutiny—strict scrutiny—because both laws "compel a business to speak noncommercially on controversial political matters." They're controversial, plaintiffs contend, because "the laws require companies to speak about the effects of, and proper response to, climate change, anything but uncontroversial topics. Nor is the speech factual, but rather is "subject to reasonable debate," and "is far from the recitation of a pure, rote 'fact.' Even the estimation of emissions is a matter of opinion."

To support the contention that the speech at issue here is "non-commercial," plaintiffs argue that "[n]ot all speech made by a business is 'commercial speech.'... Rather, commercial speech is 'usually defined as speech that does no more than propose a commercial transaction.'" As a result, they contend, the laws are subject to strict scrutiny and "the burden is on the State to prove that the laws 'are narrowly tailored to serve compelling state interests.'" Both laws fail that test, they argue: they do "not further any legitimate government interest of the State of California, let alone a compelling one." In addition, the legislation is not "narrowly tailored" and "makes no meaningful effort to restrict its scope to information that is needed to achieve any legitimate governmental purpose."

In case the "non-commercial" argument is too tough a sell, plaintiffs argue that, even under a lower level of scrutiny, "the laws are nonetheless unconstitutional. Under any form of scrutiny, required disclosures cannot be 'unjustified' or 'unduly burdensome.'" To justify the compelled speech, they argue, "the State must show that 'the harm' it seeks 'to remedy' is 'more than 'purely hypothetical,'... and that the required disclosures 'will in fact alleviate [that harm] to a material degree." But the State has not justified the legislation by connecting the required disclosures "to any concrete, direct, and immediate interests, instead relying on vague, generalized statements."

And the public statements required by the two laws are also vague and speculative, they assert, requiring companies to "estimate[e] their future risk from climate change." Indeed, the key term in S.B. 261—"climate-related financial risk"—is not defined "with enough specificity to enable companies to comply." And SB 253 requires companies to report Scope 3 emissions; calculating Scope 3 emissions is either "a subjective undertaking, requiring myriad judgment calls about how to identify and quantify another entity's emissions," or it will force companies "to demand information from their non-covered partners in the supply chain." Plaintiffs conclude that the "compelled reports of Scope 3 emissions are not purely factual but rather are full of subjectivity and guesswork," which can subject companies to "enormous penalties and public opprobrium should they happen to guess incorrectly."


Government-compelled speech in violation of the First Amendment seems to be a favorite argument of the business organizations such as the Chamber and the National Association of Manufacturers. Most recently, NAM challenged the Rule 14a-8 regulatory process for shareholder proposals on the basis, in part, that it compelled companies to speak in violation of their First Amendment rights (see this PubCo post), and the Chamber relied in part on the First Amendment in its challenge to the SEC's company stock repurchase rules, where it questioned the validity of the requirement to disclose the rationale for stock repurchases (see this PubCo post). You may remember that the Chamber was part of the triumvirate—with NAM and the Business Roundtable—thattook on the SEC over the conflict minerals rules on a First Amendment basis with some success. In April 2014, the D.C. Circuit issued a decision in National Association of Manufacturers, et al. v. SEC, concluding that that the conflict minerals rules "violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have 'not been found to be "DRC conflict free."' Why? Because, by "compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment." (See this PubCo post.) As a result, Corp Fin issued guidance advising that companies "should comply with and address those portions of Rule 13p-1 and Form SD that the Court upheld." Following remand in 2017 and the entry of final judgment by the D.C. District Court, Corp Fin issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule that provided substantial relief to companies subject to the rule. (See this PubCo post.)

By way of background, the test for compelled commercial speech was set forth by SCOTUS in in Zauderer v. Office of Disciplinary Counsel (1985), where the issue involved an affirmative obligation to disclose factual and non-controversial information. SCOTUS applied a more lenient test than for restrictions on speech, holding that compelled commercial speech "rights are adequately protected as long as disclosure requirements are reasonably related to the State's interest in preventing deception of consumers," provided that the requirement is not "unjustified or unduly burdensome disclosure" so as to chill protected commercial speech. (For further discussion of the applicable standards of review, see this PubCo post.)

It's worth noting here that the author of an academic paper observed (note 153) that Justice Clarence Thomas has written that he has "never been persuaded that there is any basis in the First Amendment for the relaxed scrutiny this Court applies to laws that suppress non-misleading commercial speech" and that he "would be willing to reexamine Zauderer and its progeny in an appropriate case to determine whether these precedents provide sufficient First Amendment protection against government-mandated disclosures."

For additional discussions of the issue of "compelled commercial speech" under the First Amendment, see my posts of 4/14/14, 7/16/14, 7/29/14, 8/18/15, 3/13/17.

Supremacy Clause and the Clean Air Act. Plaintiffs further contend that, because the two California laws "operate as de facto regulations of greenhouse-gas emissions nationwide, they are precluded by the Clean Air Act," which empowers the "federal government to implement programs to regulate pollution, including greenhouse gases," and therefore, under the Supremacy Clause, "displaces state regulation of interstate greenhouse-gas emissions." The Supremacy Clause would preempt any conflicting state regulation, and that's particularly true, they assert, "where the scheme of federal regulation is so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it." The Clean Air Act, they maintain, is just such an "intricate regulatory regime." Because of the Clean Air Act and principles of federalism, "California lacks the authority to regulate greenhouse-gas emissions outside of its own borders. Yet that is precisely what this legislation intentionally accomplishes, using a legal mechanism (requiring extensive disclosure of information about out-of-state emissions) that is itself precluded by the Clean Air Act and the Constitution, as part of a calculated program for mobilizing public pressure. Accordingly, this legislation violates the federal Constitution's Supremacy Clause."

Extraterritorial impact—the dormant Commerce Clause. Plaintiffs also argue that the two laws do "not limit reporting requirements to emissions produced in California or to companies' expected climate change financial risks in California—rather, both laws require companies to make sweeping reports about their emissions and risks everywhere they operate, whether in California, in other states, or even abroad. States may not regulate out-of-state emissions by requiring disclosure of data about such emissions in this manner." Although the laws do not directly require companies to reduce their out-of-state emissions, plaintiffs contend that the disclosure requirements "are aimed at stigmatizing companies for the purpose of pressuring them to lower their emissions nation- and even world-wide."

These laws, plaintiffs contend, intrude on congressional authority to regulate interstate commerce and "place upon interstate commerce a burden that far outweighs any benefits to the State of California." Not only do the laws "require companies to spend significant time and money" in "making public statements regarding climate change," they "also subject companies, including those in the supply chain that have no intention of doing business in California, to significant political and economic pressure to conform their conduct to the policy preferences of the State of California." Nor do plaintiffs find any significant benefits to California from these two laws: the "State does not (and cannot reasonably) maintain that the laws will have a meaningful impact on climate change, a global phenomenon. Nor does the State explain, let alone demonstrate, how the compelled speech would benefit anyone. The State does not identify any risk of fraud or danger associated with any particular transaction and does not (and cannot) establish that the compelled speech (which applies to private as well as public companies) will be material to investors." In addition, they maintain, the laws are "overbroad," applying to companies that exceed certain revenue thresholds, even if their business "is de minimis and is unlikely to have any impact in the State.... Because the laws so heavily intrude on Congress's authority to regulate interstate and foreign commerce, and because the benefits to California are so limited, the laws are invalid under the Constitution's limitations on extraterritorial regulation, including the Dormant Commerce Clause."


In connection with the consideration of these two bills, the California State Senate Judiciary Committee undertook an analysis, one aspect of which addressed the issue of the dormant Commerce Clause, a topic that has been in the spotlight since release of SCOTUS opinion decided this summer. The analysis argues that the bill does not introduce clear dormant Commerce Clause issues. As explained in the analysis, Section 8 of Article I of the U.S. Constitution grants Congress the power to regulate interstate commerce, implying that the "states may not usurp Congress's express power to regulate interstate commerce." According to the analysis, this rule prohibiting

"state interference in interstate commerce, sometimes known as the dormant Commerce Clause, serves as an absolute bar to regulations that discriminate against interstate commerce, i.e., by favoring in-state businesses or excluding out-of-state businesses. But when a state passes a law that 'regulat[es] even-handedly [across all in-state and out-of-state businesses] to effectuate a legitimate local public interest,' that law 'will be upheld unless the burden imposed upon such commerce is clearly excessive in relation to the putative local benefits.' There is no facial dormant Commerce Clause issue here. This bill grants no favoritism for in-state companies—all U.S.-based companies doing business in California with annual gross revenues in excess of $1 billion are subject to the bill's reporting requirement. That leaves only the questions of whether the bill's reporting requirement serves a legitimate local interest, and whether the burden imposed by the reporting requirement is clearly excessive in relation to the benefits conferred."

The analysis concluded that both prongs were satisfied—that requiring companies to report GHG emissions serves a legitimate local interest and that the burden imposed by the reporting requirement is most likely not clearly excessive in relation to the benefit: the "bill does not impose any new restrictions on GHG emissions—covered companies are required only to tabulate and report on what is already there, i.e., their enterprise-wide GHG emissions. Moreover, the bill limits its application to only the most profitable companies in the country and which do business in California, so the added economic cost of tabulating and auditing scope 1, 2, and 3 GHG emissions is unlikely to impose a significant burden on the affected companies."

The issue of the dormant Commerce Clause came to the fore in June after Justice Gorsuch issued the majority opinion in National Pork Producers v. Ross. I admit I'm definitely on the side of the pigs here, as were 63% of California voters in 2018, when they (we) voted to approve Proposition 12, which prohibits the sale in California of pork from pigs that were born of mothers placed in conditions of extreme confinement, such as gestation crates. As described in this opinion piece in the NYT, the "life of many pigs, never rosy, has become miserable: They are hidden away in sheds with no dirt to root in, no straw for bedding, and no access to the outdoors. Breeding sows spend much of their lives in tiny pens called gestation crates. At 2 by 7 feet, the crates are barely bigger than the sows, leaving them unable to even turn around." The law requires that, for pork sold in California, "a sow cannot be confined in such a way that it cannot lie down, stand up, fully extend its limbs, or turn around without touching the side of its stall or another animal." The pork industry sued, contending that the law unfairly applied to many businesses outside of California and unduly burdened interstate commerce, violating the dormant Commerce Clause. The pork industry estimated that the cost of compliance would increase production costs, affecting both California and out-of-state producers, but because California imports almost all the pork it consumes, most of the compliance costs would fall on farms outside of California. The district court held that the complaint failed to state a claim as a matter of law and dismissed the case. The decision was then affirmed by the Ninth Circuit. The industry appealed to SCOTUS.

The pork industry acknowledged that Prop 12 did not discriminate against out-of-state producers. That put the industry in a tough spot from the get-go. Instead, the industry invoked a purported "extraterritoriality doctrine," which, they claimed, prohibits, on an "almost per se" basis, the "enforcement of state laws that have the 'practical effect of controlling commerce outside the State,' even when those laws do not purposely discriminate against out-of-state interests." The Court disagreed, concludingthat the "argument falter[ed] out of the gate." In the Court's view, the purported "almost per se" extraterritoriality doctrine "would cast a shadow over laws long understood to represent valid exercises of the States' constitutionally reserved powers."

Alternatively, the industry asserted, the Court must apply the balancing test enunciated in Pike v. Bruce Church, Inc. The industry contended that, under Pike, "a court must at least assess 'the burden imposed on interstate commerce' by a state law and prevent its enforcement if the law's burdens are 'clearly excessive in relation to the putative local benefits.'" However, on the issue of the viability of the Pike balancing test in this instance (where no discrimination or transportation is involved), the opinions were fractured: a minority (Justices Gorsuch, Thomas and Barrett) concluded that the Pike balancing test created "a task no court is equipped to undertake," particularly where, as here, the "competing goods are incommensurable." To reach a decision as to which set of concerns should win out, "[y]our guess is as good as ours. More accurately," Gorsuch said. "your guess is better than ours. In a functioning democracy, policy choices like these usually belong to the people and their elected representatives."

The majority, however, disagreed, endorsing the continued viability of the Pike balancing test. As Justice Sotomayor (joined by Justice Kagan) wrote in her partially concurring opinion, a majority of the Court did not support the view that "judges are not up to the task that Pike prescribes." Applying that test, however, the Justices splintered again. In the end, a plurality of four Justices (as counted by Justice Kavanaugh in his dissent) declined to find that the industry had met the threshold requirement of plausibly alleging a substantial burden on interstate commerce, a requirement that Sotomayor asserted "plaintiffs must satisfy before courts need even engage in Pike's balancing and tailoring analyses." As Gorsuch phrased it, the substantial harm to interstate commerce alleged by the industry "remains nothing more than a speculative possibility" and insufficient to state a claim. Dissenting, Chief Justice Roberts, joined by Justices Alito, Kavanaugh and Jackson, would have found that the industry had "plausibly alleged a substantial burden against interstate commerce, and would therefore vacate the judgment and remand the case for the court below to decide whether petitioners have stated a claim under Pike." Accordingly, the Court affirmed the judgment of the Ninth Circuit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.