Court Rules in California Climate Disclosure Case: Laws Remain in Flux

A year after California enacted some of the nation’s most sweeping climate disclosure laws, a United States District Court issued an important ruling related to one of several challenges to these laws. The district court denied a Motion for Summary Judgment that sought to have SB 253 and 261 declared facially invalid under the First Amendment. As a result of this week’s ruling, litigation over the constitutionality of the California disclosure laws will continue. Furthermore, as discussed below, even if the laws ultimately survive a constitutional challenge, many important details remain uncertain.

Background:

In 2023, California passed two laws (SB 253 and SB 261) that require U.S. companies doing business in California and exceeding certain revenue thresholds to publicly disclose their greenhouse emissions and prepare climate risk reports. The SEC proposed similar rules but omitted reporting requirements for indirect upstream and downstream (Scope 3) emissions. The SEC has also paused enforcement of its rules. For further details about the California rules, please see our Client Alert from November 2023.

A broad coalition of businesses are challenging SB 253 and SB 261 in federal district court, including in Chamber of Commerce of the United States of America et al. v. California Air Resources Board et al., No. 2:24-cv-00801 (C.D. Cal. 2024). In this case, the Plaintiffs alleged that SB 253 and 261 violated the First Amendment, the Supremacy Clause (alleging preemption under federal law), and the Constitution’s limitations on extraterritorial regulation.

Plaintiffs moved for summary judgment prior to discovery on the First Amendment issue, bringing a facial challenge to the laws and arguing that they unconstitutionally compel speech. Defendants (the California Air Resources Board, the Chair and Executive Officers of CARB, and the California Attorney General, referred to collectively as “CARB”) moved to deny or defer Plaintiffs’ Motion for Summary Judgment, arguing that the First Amendment does not apply to the laws and that even if it did, the laws would withstand strict or intermediate scrutiny (generally the standard for commercial speech).

The Court’s Ruling:

On November 5, 2024, the district court granted CARB’s motion and denied Plaintiffs’ Motion for Summary Judgment with leave to re-file.

The district court did, however, find that the First Amendment applies to the challenged laws, stating that “[t]here can be no dispute that the primary effect—and purpose—of SBs 253 and 261 is to compel speech.” The court went on to note that “the Supreme Court has made facial challenges hard to win.” It then discussed the standard of review, noting that while the laws likely were content-based regulations of speech, “not all content-based regulations are subject to strict scrutiny.” The court noted that commercial speech is generally subject to intermediate scrutiny but “purely factual and uncontroversial” commercial speech is subject to rational basis review.

Plaintiffs argued in their Motion for Summary Judgment that strict scrutiny applies and that the laws fail any degree of First Amendment scrutiny. CARB argued that discovery was needed before the district court could rule on the Motion for Summary Judgment, including on (1) SB 253’s and 261’s financial and administrative burden, (2) the controversial nature of the speech SBs 253 and 261 regulate, and (3) the existence of out-of-state entities that are covered by SB 253 and 261, but only engage in a single transaction within California.

The district court found itself unable to grant Plaintiffs’ Motion for Summary Judgment, stating that “[t]o determine what level of scrutiny to apply, the Court needs a record on whether SBs 253 and 261 regulate a substantial number of companies that do not make potentially misleading environmental claims.” The district court stated that it did not yet have the necessary information to perform “fact-driven” First Amendment analysis. The district court also signaled that at least one of CARB’s discovery categories concerning the scope of the laws was germane, noting that “the absence of real-world examples of SB 253’s and 261’s overinclusvieness directly impacts whether SB 253 and 261 are appropriately tailored to the State’s aims.”

Plaintiffs are likely to re-file a summary judgment motion after more discovery has been completed, and the court will eventually rule on Plaintiffs’ Supremacy Clause and extraterritoriality claims. The outcome of this case will have significant impacts on whether many companies will remain required to comply with California’s reporting laws, and whether other states or the federal government will implement similar laws. This litigation is expected to continue for many months or years, with discovery and briefing on the merits for all of Plaintiffs’ claims.

Additional Updates:

While the litigation is ongoing, California Senate Bill 219 became law on September 27, 2024. It contains several substantive amendments for both SB 253 and 261 as summarized below:

 

SB 253 – Scope 1, 2 and 3 Reporting
Description	Original	As Amended
Scope 3 emissions	Reporting required beginning in 2027 and annually thereafter, no later than 180 days after disclosure of Scope 1 and 2 emissions	Reporting required beginning in 2027 and annually thereafter, on a schedule to be determined by CARB
Payment of filing fee	Required when filing disclosure	No specific timeline
Disclosure regulations	Required CARB to develop and adopt disclosure-related regulations by January 1, 2025	Extends the timeline to July 1, 2025
Method of disclosure	Required reporting entities to make disclosures to an emissions reporting organization	Allows entities to make disclosures to an organization approved by CARB or directly to CARB
Consolidation of reporting	Silent as to whether subsidiary emissions data could be consolidated and reported at the parent level	Authorizes consolidated reporting at the parent entity level
Reporting of disclosures	Required CARB to contract with an emissions reporting organization to make disclosures publicly available	Authorizes, but does not require, CARB to contract with an emissions reporting organization
SB 261 – Climate Related Financial Risk Reports
Description	Original	As Amended
Public reporting	Required CARB to contract with a climate reporting organization to prepare a biennial public report on climate-related financial risk disclosures	Authorizes, but does not require, CARB to contract with a climate reporting organization
Payment of filing fee	Required when filing disclosure	No specific timeline

 

While SB 219 addresses some concerns, it also leaves many questions unanswered. Even when setting aside the current litigation, substantial uncertainty remains for the following fundamental aspects of SB 253 and SB 261:

• How “doing business” in California will be defined and interpreted.
• Whether the revenue thresholds for SB 253 ($1 billion) and SB 261 ($500 million) are based on a single entity’s revenue, or should include the total revenue of subsidiaries and/or affiliates.
• The geographic scope of revenues that will be counted towards the revenue thresholds.
• For SB 253, whether the Scope 1, 2 and 3 emissions of subsidiaries must be included in the emission totals of the parent.
• How companies will monitor and report Scope 3 emissions data.
• Procedural requirements for administrative penalties that may be recoverable for violations.
• The amount of fees that will be assessed for covered entities.

CARB has not yet commenced any rulemaking. Rulemaking by CARB could answer these questions but may also create new uncertainties and opportunities for challenges.

AB 1305 Remains in Effect:

AB 1305 imposes disclosure requirements for (i) entities selling or marketing voluntary carbon offsets (VCOs) within California, (ii) entities that purchase or use VCOs within California and make claims regarding the achievement of net zero emissions, claims that the entity, related entity, or a product is “carbon neutral,” or makes other claims implying the entity, related entity, or a product does not add net carbon dioxide or greenhouse gases to the climate or has made significant reductions to its carbon dioxide or greenhouse gas emissions, and (iii) entities making claims that they have achieved or are attempting to achieve net zero emissions; the entity, a related or affiliated entity, or the entity’s product do not add net greenhouse gases to the climate or are carbon neutral; or a related or affiliated entity, or the entity’s product has made significant reductions to its carbon dioxide or GHG emissions. (See our reporting for more information.)

We will continue to monitor developments in this litigation and in anticipated rulemakings by CARB. Subscribe here to Paul Hastings’ blog PHast Track to stay up to date on the California disclosure rules as well as other developments related to environment, energy and infrastructure.