Virginia Legislation Would Penalize Lack of Diversity in Firms Seeking Economic Development Aid

Recent Virginia legislation raises interesting constitutional issues under the Fourteenth Amendment’s equal protection clause. Virginia legislators have introduced bills that would make corporate board diversity a factor in whether to give corporations tax incentives for economic development. In deciding whether to approve tax incentives to a company, the MEI Project Approval Commission would have to consider whether “at least 30 percent of [its] board of directors consists of women and historically underrepresented groups.” The requirement is contained in House bill HB 212 and Senate bill SB 393.

The legislation doesn’t strictly require a quota, but there are instances in which courts have struck down state laws that merely encouraged the consideration of race and gender, without requiring quotas. One example is when a federal appeals court struck down a California law that required general contractors to either subcontract percentages of the work to minority, women, and disabled veteran-owned subcontractors, or demonstrate good faith efforts to do so. The required “goals” were not particularly onerous — “not less than” 15% for minority business enterprises, 5% women, 3% disabled veteran. And companies merely had to try to meet them (not succeed).

But the Ninth Circuit Court of Appeals struck down the law, because even though “the statute does not require set-asides” based on race or gender, “it encourages them.” (See Monterey Mechanical Co. v. Wilson, 125 F.3d 702 (9th Cir. 1997), striking down California Public Contract Code § 10115(c)).

So, the fact that the Virginia legislation does not impose a rigid quota for women and historically underrepresented groups does not insulate it from a constitutional challenge. A desire to help historically underrepresented groups doesn’t give government officials broad leeway to promote race or gender in selection, even as one of many factors, as the Supreme Court illustrated last year in striking down admissions policies at the University of North Carolina and Harvard University that were designed to promote racial diversity, and open doors to historically underrepresented groups like African-Americans.  (See Students for Fair Admissions v. Harvard, 600 U.S. 181 (2023)).

Nor is a desire for gender balance a sufficient reason to encourage the use of gender in selection. There are court rulings striking down gender-balance requirements for government boards, such as Back v. Carter (1996), and striking down diversity requirements for allocations of benefits like broadcasting licenses, such as Lamprecht v. FCC (1992).

California’s legislature passed statutes requiring corporate boards to meet racial and gender diversity metrics. The California statutes are currently being challenged, and some judges think they are unconstitutional. For example, Los Angeles Superior Court Judge Terry Green struck down California’s racial-diversity requirement for corporate boards in Crest v. Padilla, Case No.20STCV37513 (Apr. 1, 2022). Los Angeles Superior Court Judge Maureen Duffy-Lewis struck down California’s gender-diversity requirement in Crest v. Padilla, Case No. 19STCV27561 (May 13, 2022). Those rulings were issued under the California constitution’s equal protection clause, which apparently mirrors the federal constitution when it comes to race but may be more stringent than the federal constitution when it comes to gender-based classifications. The California Court of Appeal stayed those injunctions, then vacated the stays, which may suggest that California’s board diversity requirements will be struck down. These are not the only pending lawsuits against the California statutes. This is an evolving area of jurisprudence, and different judges may look at these issues differently.

The Virginia legislation could conceivably create litigation risks for companies that consider race or gender in board selection in order to qualify for aid. People not selected for company boards due to their race might bring lawsuits under 42 U.S.C. 1981, the federal statute that bans racial discrimination in contracts. It has been interpreted as banning some kinds of racial preferences at the expense of whites.

The Supreme Court ruled that 42 U.S.C. 1981 was violated by a University of Michigan admissions policy giving black and Hispanic applicants extra points for racial diversity on their college applications, in footnote 23 of its Gratz decision. (See Gratz v. Bollinger, 539 U.S. 244, 276 n.23 (2003). It is conceivable that firms could also be embroiled in constitutional litigation brought by whites or males, since lawsuits alleging equal protection violations sometimes sue private entities along with government officials (see Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970)); private companies have been sued for colluding in constitutional violations (see Dossett v. First State Bank, 399 F.3d 940 (8th Cir. 2005)), and private discrimination under government pressure can violate the equal protection clause. (See Truax v. Raich, 239 U.S. 33, 38 (1916)).