Ninth Circuit: California GHG Laws Partially Unconstitutional

• The Ninth Circuit ruled that parts of California's Climate-Related Financial Risk Act (SB 261) and Climate Corporate Data Accountability Act (SB 253) are unconstitutional.
• SB 261 was entirely struck down as unconstitutional compelled speech, requiring subjective ideological assessments rather than factual commercial disclosures.
• SB 253's requirements for Scope 1 and Scope 2 emissions reporting were upheld, as they involve factual commercial speech.
• The court enjoined the enforcement of SB 253's mandate for Scope 3 emissions, deeming it insufficiently linked to a company's own operations to be commercial speech.
• This decision stems from a challenge by the U.S. Chamber of Commerce, asserting that the laws constituted compelled speech violating First Amendment rights.

The Ninth Circuit panel found California's Climate-Related Financial Risk Act, known as SB 261, to be unconstitutional due to its violation of First Amendment protections against compelled speech.

The Ninth Circuit recently issued a significant ruling regarding two California statutes, the Climate-Related Financial Risk Act (SB 261) and the Climate Corporate Data Accountability Act (SB 253), which mandate extensive greenhouse gas disclosures from large corporations. In a split decision, the appellate panel partially affirmed and partially reversed a lower court's ruling that had previously rejected the U.S. Chamber of Commerce's challenge to these laws. This decision means that certain provisions of these ambitious California GHG laws are either entirely or partially unconstitutional, marking a notable curtailment of the state's efforts to compel climate-related reporting.

The U.S. Chamber of Commerce initiated the legal challenge, contending that the disclosure requirements constituted compelled speech that exceeded California's legitimate interest in reducing emissions. The appellate court's determination centered on First Amendment protections, distinguishing between factual commercial speech and more subjective, value-laden statements. This distinction proved critical in determining the constitutionality of various components of the two state laws, ultimately limiting the scope of mandatory climate disclosures in California.

The Ninth Circuit panel found California's Climate-Related Financial Risk Act, known as SB 261, to be unconstitutional due to its violation of First Amendment protections against compelled speech. The court determined that the disclosures mandated by SB 261 were not factual commercial speech, which typically receives less stringent scrutiny, but rather resembled "subjective ideological assessments." U.S. Circuit Judge Jacqueline Nguyen, writing for the majority, explained that SB 261 compelled companies to offer opinions on the financial risks climate change posed to their operations and business models, requiring "predictive judgments about uncertain future conditions."

Judge Nguyen further elaborated that these compelled disclosures forced companies to go beyond providing economic information directly tied to commercial transactions. Instead, the law required businesses to share "value-laden judgments on a politically fraught subject," thereby placing these disclosures outside the scope of the commercial speech doctrine. Consequently, SB 261 failed to satisfy strict scrutiny, as it was not deemed narrowly tailored enough to achieve California's stated objectives of mitigating information asymmetries for investors, reducing emissions, or correcting misleading speech. The Ninth Circuit had previously stayed the enforcement of SB 261 in November, pending the outcome of this appeal.

The Climate Corporate Data Accountability Act, or SB 253, faced a more nuanced outcome. This law targets corporations with over $1 billion in annual revenue operating within California, requiring them to report greenhouse gas emissions from various sources. Specifically, it mandates reporting for emissions from sources directly owned or controlled by the companies (Scope 1), emissions from their purchased energy (Scope 2), and indirect emissions originating from their value chain, encompassing suppliers and customers (Scope 3). The majority opinion upheld the requirements for Scope 1 and Scope 2 emissions reporting.

The court reasoned that the Scope 1 and Scope 2 requirements regulate commercial speech because they compel the disclosure of factual information directly related to emissions generated by the reporting entities' own operations and have a bearing on capital transactions. The panel acknowledged California's substantial interests in reducing emissions and mitigating information asymmetries for investors, concluding that these disclosure requirements directly advanced those interests and were no more extensive than necessary. As a result, the appellate court affirmed the trial judge's denial of a preliminary injunction for these two categories of emissions.

However, the third requirement, pertaining to Scope 3 emissions, was treated differently. The Ninth Circuit reversed the trial judge's denial of a preliminary injunction for this part of SB 253, effectively enjoining its enforcement. The panel determined that Scope 3 emissions, which involve "diffuse third-party conduct in the value chain," were insufficiently linked to a company's own operations and capital transactions to qualify as commercial speech. While a portion of SB 253 had already gone into effect last month, the Ninth Circuit had declined to issue a stay on its enforcement in November, unlike its action on SB 261.

U.S. Circuit Judge Mark Bennett issued a dissenting opinion, expressing disagreement with the majority's analysis regarding SB 253. Judge Bennett contended that the majority's reasoning for upholding the Scope 1 and Scope 2 requirements, which passed intermediate scrutiny, effectively equated the interests of investors in companies with the interests of consumers in products. This perspective highlights a potential area of contention in how courts interpret the boundaries of commercial speech and the state's ability to compel disclosures for different audiences and purposes.

Lawyers and compliance officers should advise clients on the reduced scope of mandatory climate disclosures in California following this Ninth Circuit ruling, particularly regarding the unconstitutionality of SB 261 and the injunction against Scope 3 emissions reporting under SB 253. Companies must re-evaluate their compliance strategies to align with the court's distinction between factual commercial speech and subjective, value-laden disclosures.

Source: Original reporting via Courthouse News Service