Sweeping climate change disclosure laws recently enacted by California Gov. Gavin Newsom may never take effect if business groups prevail in a new federal lawsuit challenging the legislation. But absent an injunction, the law remains in effect, which means thousands of companies are subject to its requirements. Sedina Banks and Samantha Pannier of Greenberg Glusker dig into the details of the lawsuit and what companies should do as the case plays out in court.
The lawsuit over California’s new climate disclosure rules, brought by the U.S. and California chambers of commerce as well as the American Farm Bureau Federation, Los Angeles County Business Federation, Central Valley Business Federation and Western Growers Association, seeks to overturn Senate Bill 253 (the Climate Corporate Data Accountability Act) and Senate Bill 261 (the Climate-Related Financial Risk Act).
These laws require large businesses, including both publicly traded and privately held companies doing business in California, regardless of their corporate domicile, to publicly disclose their greenhouse gas (GHG) emissions and their financial risks related to climate change. By including privately held corporations, the laws are a departure from the highly anticipated SEC proposed climate change disclosure rules, which will only require disclosure by publicly traded companies.
The suit claims that these laws “impermissibly compel thousands of businesses to make costly, burdensome, and politically fraught statements about ‘their operations, not just in California, but around the world.’” Plaintiffs further argue that California’s climate change disclosure laws “unconstitutionally compel speech in violation of the First Amendment and 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 federalism principles embodied in our federal Constitution.”
Beginning in 2026, Senate Bill 261 would require companies doing any business in California and generating more than $500 million in annual revenue to disclose climate-related financial risks and information on how the company is addressing such risks. The suit points to the “broad and vague” nature of the definition of “climate-related financial risk” as being an easy mechanism for state regulators to “find something to fault in the disclosure (or lack of disclosure) of any company the State disfavors.” If state regulators find that a company failed to comply with the requirements of SB 261, the company could be liable for up to $50,000 in penalties per reporting year.
Going even further, Senate Bill 253 requires companies doing any business in California and generating more than $1 billion in annual revenues to publicly disclose Scope 1 and Scope 2 greenhouse gas emissions annually beginning in 2026 and Scope 3 emissions in 2027.
- Scope 1 emissions are direct greenhouse gas emissions that stem from sources the company owns or directly controls, regardless of location, including fuel combustion activities.
- Scope 2 emissions are indirect greenhouse gas emissions from the company’s consumed electricity, steam, heat or cooling purchased or acquired by a company, regardless of location.
- Scope 3 emissions are indirect upstream and downstream greenhouse gas emissions, other than Scope 2 emissions, from sources that the company does not own or directly control, and may include purchased goods and services, business travel, employee commutes and processing and use of sold products.
If companies do not comply, the agency designated to administer the law, the California Air Resources Board (CARB), could assess up to $500,000 in penalties per reporting year. Many companies are not currently familiar with, let alone tracking or collecting any data related to emissions.
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Read moreDetailsConstitutional challenges
Plaintiffs raise the following arguments in the suit:
First Amendment claims
The First Amendment of the U.S. Constitution protects the freedoms of speech, religion, press, assembly and the right to petition the government. Many people associate freedom of speech with protection from government censorship, but the Constitution also protects against compelled speech in certain circumstances. This is the First Amendment right at issue in this lawsuit. The plaintiffs allege that the public disclosure of corporate climate impacts “forces thousands of companies to engage in controversial speech that they do not wish to make, untethered to any commercial purpose or transaction.”
Courts apply different tiers of scrutiny depending on the type of speech at issue — rational basis review, intermediate scrutiny, and strict scrutiny. Typically, courts apply intermediate scrutiny to commercial speech, particularly disclosure requirements like consumer warning labels or product packaging. Generally, to pass intermediate scrutiny, the government has the burden of proving that the law furthers an important government interest by means that are substantially related to the government interest.
In 2023, industry groups prevailed in a challenge to California’s Proposition 65 on First Amendment grounds in National Association of Wheat Growers v. Bonta, when the Ninth Circuit ultimately ruled that California Proposition 65 cancer warnings should not be required for products containing the herbicide glyphosate because the state’s listing did not meet the requirements of intermediate scrutiny. Here, in the challenge to California’s climate disclosure laws, the plaintiffs argue for application of strict scrutiny, the most rigorous standard for the government to meet. They contend that the speech allegedly compelled by the laws is “noncommercial, not purely factual, and concerns a controversial political matter.”
Generally, strict scrutiny requires that the government prove the challenged law furthers a compelling government interest in regulating the speech at issue, the law is narrowly tailored to meet the compelling interest and the law uses the least restrictive means of accomplishing the desired objective. Here, the plaintiffs contend that strict scrutiny should apply because the climate change disclosure laws “compel speech concerning the ‘controversial subject[]’ of ‘climate change’” and “do not compel ‘purely factual and uncontroversial information’ that could be subject to a lower standard than strict scrutiny.”
The suit claims that the climate change disclosure laws are neither uncontroversial nor do they compel “factual” speech, because the proposed corporate disclosures would compel speech on contested matters subject to “significant debate and controversy … whose connection to climate change, if any, is subject to reasonable debate.”
Strict scrutiny may be a reach, particularly where the lower standard of intermediate scrutiny is more common in commercial speech cases and a consensus of scientists agree, at least in broad strokes, about the effects of climate change. As a backup, plaintiffs allege that “even if a lower level of scrutiny were to apply, the laws are nonetheless unconstitutional” because “[u]nder any form of scrutiny, required disclosures cannot be ‘unjustified or unduly burdensome.’” The plaintiffs argue that the government has not connected the required disclosures “to any concrete, direct, and immediate interests, instead relying on vague, generalized statements.”
If the plaintiffs succeed in their First Amendment challenge, it is likely to encourage more legal challenges to government-imposed disclosure requirements in the future on similar grounds. The outcome of this case may also foreshadow similar challenges that companies may attempt to mount against the SEC’s forthcoming climate change disclosure rules.
Dormant Commerce Clause claims
Under the Dormant Commerce Clause, states generally cannot pass laws that interfere with the commerce of other states. Here, the plaintiffs argue that the broad scope of the climate accountability package would reach outside of California’s borders “project[ing] its laws into another State” and affect businesses outside of California.
Although California’s climate change disclosure laws on their face are limited to companies that “do business” in California, what constitutes “doing business” is unclear, particularly given that California’s economy is the fifth largest in the world. As plaintiffs argue the laws could be interpreted to “require companies to make sweeping reports about their emissions and risks everywhere they operate, whether in California, in other states, or even abroad.”
However, the regulatory agency overseeing the implementation of the laws and a named defendant, CARB, has not yet issued rules specifying how companies are to report their emissions impact and in how much detail. It is also possible that CARB will enact limiting regulations on the scope of the laws and in particular, what it means to “do business in California.” Unless the deadline for CARB to act is extended, CARB will be required to adopt, on or before Jan. 1, 2025, the implementing regulations.
Supremacy Clause claims
The Supremacy Clause of the Constitution states that the laws of the United States are the supreme law of the land and ensures that state and federal laws on the same subject do not conflict. Under the theory of preemption, federal statutes and regulations can preempt state and local laws on the same subject matter. Here, the plaintiffs claim that the California laws are preempted by the federal Clean Air Act.
This is perhaps their weakest argument. The Clean Air Act regulates air pollutants, including greenhouse gases. The climate change disclosure laws are financial disclosure laws and do not regulate what pollutants, greenhouse gases or otherwise, plaintiffs or other businesses release into the air, and the government will be sure to draw clear distinctions between the two laws. Plaintiffs may have a more successful preemption argument if preemption was based on the highly anticipated SEC climate change financial disclosure rules. However, publication of the final rule has been delayed twice and is currently scheduled to be issued sometime this April.
Conclusion
Though the suit has been filed, California’s climate change disclosure laws are still valid as of this publication, and there are more than 10,000 companies subject to them. This means that unless plaintiffs obtain injunctive relief to halt further implementation of the laws while the court considers the merits of the case, companies should begin or continue preparations to meet the climate change disclosure requirements.
Companies also need to be aware of other climate change disclosure laws in addition to California’s laws. Those large enough to fall under California’s laws will likely also fall under the disclosure rules of some stock exchanges and other jurisdictions like the EU and the SEC’s forthcoming disclosure rules, particularly publicly traded companies. Companies should also be aware that making a report to the SEC or EU under their disclosure rules may satisfy California’s requirements and companies may not have to double-report.
It would be prudent for companies to take this time to begin implementing, or at a minimum, considering a climate data collection process and updating their capacities for making these disclosures. Whether the case is successful or not, companies will likely have some climate change disclosure requirements in the near-term.
Sedina L. Banks
Samantha Pannier
