Key takeaways
- In late 2023, California passed two laws that will require public and private companies that do business in California to disclose their greenhouse gas emissions and their climate-related financial risks. In January 2024, business groups filed a complaint challenging the laws.
- The challenges include violations of the First Amendment, federal preemption, and dormant Commerce Clause.
- For each, California has strong arguments to defend its authority to require the disclosures, including that:
- the information that companies are required to disclose is commercial and factual,
- the laws focus on disclosure requirements and do not require any affirmative steps related to greenhouse gas emissions within or beyond its borders, and
- the benefit to California consumers and investors of reliable and accurate information is not excessive in relation to compliance costs.
- California has not filed its response, and our piece below is based only on the business groups’ complaint. The parties will be briefing these issues before Central District of California in the coming months, and we will continue to track the arguments, the implications of any rule finalized by the Securities and Exchange Commission, and any additional steps by the California legislature. As we discuss in our prior analysis of these laws, the implementation timelines for the disclosure laws were uncertain even before this litigation.
Introduction
In 2023, California passed two laws that will require public and private companies that do business in California to disclose their greenhouse gas (GHG) emissions and their climate-related financial risks.[1] The Climate Corporate Data Accountability Act (SB-253, referred to here as the GHG emissions disclosure law), requires entities with annual revenues over $1 billion to disclose their GHG emissions to a reporting organization. Unless statutory timelines are delayed,[2] regulated companies must start disclosing their scope 1 and 2 emissions in 2026 and their scope 3 emissions in 2027.[3]
A second law, Greenhouse Gases: Climate-Related Financial Risk (SB-261, referred to here as the financial risk law), requires entities with total annual revenues over $500 million to post their climate-related financial risks on their websites with a description of how they plan to reduce or adapt to those risks. These reporting requirements are set to take effect in 2026. Since these are laws focused on corporate disclosures, they will require reporting but are not prescriptive about actions companies should take related to their GHG emissions or other practices. For more background on these laws and what they require see our recent analysis.
As we expected, on January 30, 2024 business groups including the US Chamber of Commerce, the California Chamber of Commerce, the American Farm Bureau Federation, the Los Angeles County Business Federation, the Central Valley Business Federation, and the Western Growers Association filed a complaint in the Central District of California seeking declaratory and injunctive relief against the two laws.[4] The groups argue that the laws violate the First Amendment, principles of federalism, and the dormant Commerce Clause doctrine. The arguments echo these groups’ criticisms of the Security and Exchange Commission’s (SEC) proposed climate-risk disclosure rule and likely foreshadow some of the arguments we will see in a legal challenge to the SEC’s rule when it is finalized.
California has strong defenses against all these arguments. In the following sections, we explain the business groups’ legal arguments and offer a few of the many counterarguments that California may raise in defense of its authority to adopt these disclosure laws. While we briefly review merits arguments below, California or intervenors may also argue that the case is not ripe for judicial review because CARB has not released any final regulations interpreting the laws.[5]
The First Amendment argument
The plaintiffs argue that the California laws violate the First Amendment by “compelling companies to engage in costly speech on climate change,” which they deem controversial.[6] They argue that because the speech is “noncommercial, not purely factual, and concerns a controversial political matter,” the court should apply strict scrutiny. They contend that the laws would fail under strict scrutiny because they do not further a legitimate government interest, are not sufficiently narrowly tailored, and will create high costs for businesses. The plaintiffs also argue that if the court applies a more deferential standard of review, the laws should be struck down because “[u]nder any form of scrutiny, required disclosures cannot be ‘unjustified’ or ‘unduly burdensome.’”
The First Amendment’s free speech clause protects the communication of ideas and information. Commercial speech is included in these protections, and restrictions upon it generally receive intermediate scrutiny[7] from courts. Disclosures, which are compelled speech, usually receive less protection. Courts generally apply the more deferential standard of review, articulated in Zauderer, to disclosure mandates because disclosures “trench much more narrowly on [a speaker’s] interests than do flat prohibitions on speech.”[8] In that case, the Supreme Court held that regulators can require a company to disclose information if it is “reasonably related to the State’s interest in preventing deception of consumers.” Compelled disclosures of commercial information are deemed constitutional if the disclosure mandate focuses on “purely factual and uncontroversial information,” is “reasonably related” to a legitimate government interest, and is not “unjustified or unduly burdensome” to the commercial speaker to the extent that it would chill protected speech.
California will need to show that the speech at issue is disclosure that is commercial and factual in nature, and therefore Zauderer should apply and the laws should easily satisfy that standard. The state may argue that the laws require disclosure of factual information, GHG emissions, which are quantifiable. The state may argue that the requirements are reasonably related to a legitimate government interest—the government’s understanding of the GHG impact of companies doing business in the state. Finally, it may show that the laws are not unduly burdensome as the requirements do not chill protected speech or restrain commercial speech.
Preemption: federalism and de facto regulation of emissions
The business groups argue that the laws violate the federal Constitution’s Supremacy Clause, principles of federalism, and the Clean Air Act (CAA) because they pressure companies to reduce emissions of greenhouse gases outside of California’s borders. The plaintiffs describe the law as “aimed at stigmatizing companies for the purpose of pressuring them to lower their emissions nation- and even world-wide”[9] and argue that it is a “de facto regulation” of greenhouse gases beyond its borders, which is preempted by the CAA.
The US Constitution’s Supremacy Clause establishes that federal law is “the Supreme Law of the land.”[10] Federal law can therefore preempt state law either explicitly, through broad preemption language, or implicitly, through its structure or purpose.[11] Implied preemption occurs where the federal government intended to control the entire field of regulation or where the federal law is in conflict with state laws.[12] Implied preemption cases can be challenging for petitioners to raise successfully, as courts are often reluctant to find implied preemption where Congress did not clearly intend it.
California may argue that the new laws are within the state’s authority and not preempted by federal law. It is likely to focus on the law’s disclosure requirements to explain that they require companies to report information about their businesses but do not require any affirmative steps related to greenhouse gas emissions or any other business operations or practices within or beyond its borders. As such, the laws are not emissions regulation and not preempted by the CAA’s federal scheme. Any ancillary impacts related to decisions about emissions reduction are outside the scope of the new laws and at the discretion of the regulated companies. When the SEC finalizes its federal climate risk-disclosure rule, California may be able to mitigate preemption risk related to that federal regulation by allowing companies to submit their SEC disclosures to comply with the state’s laws.
Dormant Commerce Clause
The business groups argue that the GHG emissions and financial-risk disclosure laws violate the dormant Commerce Clause doctrine because they regulate businesses that operate wholly outside of California and they impose significant burdens for minimal in-state benefits.[13] They argue that compliance will be too costly, and that the benefits to California are “slim to non-existent” because the laws will not have a meaningful impact on global climate change. California has successfully defended against similar challenges on other rules, including its Clean Fuel Standard, and insights from past cases will likely influence its approach to this lawsuit.[14]
As we discussed in our prior analysis of California’s laws, under the dormant Commerce Clause doctrine courts consider whether a state law discriminates against out-of-state economic interests on its face, in its purpose, or through its practical effects.[15] If a state law does not discriminate, courts may perform the Pike balancing test, in which they evaluate whether a law imposes burdens on interstate commerce that are “clearly excessive” in relation to the described local benefits. Under Pike, courts uphold a law with “only incidental effects” on interstate commerce unless it determines that the burdens are clearly excessive.
Earlier this year, in National Pork Producers Council v. Ross, the Supreme Court narrowed the range of potential dormant Commerce Clause challenges.[16] While the Court scrapped the dormant Commerce Clause’s extraterritoriality prong and rejected pork producers’ Pike claims as applied,[17] the Court upheld the Pike balancing test for use in future cases.
After National Pork, California may argue that the court should not strike down the laws solely on the basis that California’s laws regulate businesses operating wholly outside of California.[18] However, a court could still consider the business groups’ extraterritorial arguments as one of many factors relevant to the Pike balancing test. Compliance costs are another key consideration because under Pike, courts evaluate whether the burdens on commerce are excessive relative to their potential benefits.[19] The Pike standard is usually challenging for plaintiffs—and though Justices Sotomayor and Kagan recently upheld the test in their National Pork concurrence, they directed courts to proceed “with caution.”[20] In doing so, they signaled that lower courts should continue to hold Pike challenges to a high standard.
California has strong arguments that the burdens of these laws are not excessive in relation to the benefits to the state. First, California may look to statutory language to show that the business groups misconstrued the potential in-state benefits of the laws. As the GHG emissions disclosure law provides, the law aims to ensure that companies that avail themselves of California’s “tremendously valuable consumer market” provide consistent and accurate information so that investors and consumers can make informed choices.[21] California may also show that the burdens of the laws will be manageable for companies. For example, California could explain that many companies will soon be reporting to multiple jurisdictions,[22] and these companies can likely submit their same disclosures to California to mitigate compliance costs.[23]
Next Steps
We will continue to follow this litigation as well as CARB’s stakeholder engagement and timing for the rulemaking processes. For updates, see our Financial Regulation, Climate Change, and Climate-related Risk Disclosure Regulatory Tracker page and sign up for our monthly Regulatory Tracker emails.
[1] The Climate Corporate Data Accountability Act, S.B. 253, 2023-2024 Leg. (Cal. 2023); Greenhouse gases: climate-related financial risk, S.B. 261, 2023-2024 Leg. (Cal. 2023). California also passed a related third law that requires companies to disclose their voluntary carbon offsets and provide evidence supporting their net-zero emissions claims, but that law is not at issue in this suit. Voluntary carbon market disclosures, A.B. 1305, 2023-2024 Leg. (Cal. 2023).
[2] Governor Newsom’s signing statement indicated that he believed the laws’ timelines may be impractical. The emissions disclosure law would require the California Air Resources Board’s (CARB) to adopt implementing regulations by Jan. 2025; however, Governor Newsom did not fund this task in CARB’s 2024 budget. Therefore, timelines are in flux and we will watch for implementation timing updates.
[3] For scope 3, penalties occur even later. Between 2027 and 2030, CARB may assess penalties for non-filing of scope 3 emissions. After 2030, the agency may assess penalties for inadequate reports.
[4] US Chamber et al., Complaint for Declaratory and Injunctive Relief, C.D. Cal., Case 2:24-cv-00801 (Jan. 30, 2024), https://www.uschamber.com/assets/documents/FILED-Chamber-v.-CARB-Complaint.pdf.
[5] Under Supreme Court precedent in Abbott Laboratories v. Gardner, courts consider whether the issues are fit for a court decision and whether the petitioners would suffer hardship if the court withholds their decision. 387 U.S. 136. Courts generally find that a decision is not ripe for judicial review if the agency has not adopted a final decision. Id. at 149.
[6] Complaint at 18.
[7] When courts review commercial speech using the intermediate scrutiny standard, the government needs to demonstrate that the restriction on speech is “narrowly drawn” and advances a “substantial” governmental interest. Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557, 566 (1980).
[8] Zauderer v. Off. of Disciplinary Couns. of Supreme Ct. of Ohio, 471 U.S. 626, 651, 105 S. Ct. 2265, 2282, 85 L. Ed. 2d 652 (1985).
[9] Complaint at 24.
[10] U.S. Const. art. VI, cl. 2.
[11] Altria Grp., Inc. v. Good, 555 U.S. 70, 76 (2008).
[12] Geier v. Am. Honda Motor Co., 529 U.S. 861, 881–82 (2000)
[13] Complaint at 27.
[14] Notably, California updated their law, and the case became moot before the court ever decided the Pike challenge against the standard. See Rocky Mountain Farmers Union v. Corey, 730 F.3d 1070 (9th Cir. 2013). For more on this challenge and California’s defense approach, see our previous paper, State Resource Guide: Drafting a Clean Fuel Standard to Manage Legal Risks.
[15] Pike v. Bruce Church, 397 U.S. 137, 142 (1970).
[16] 598 U.S. 356 (2023).
[17] Although the Supreme Court rejected a per se rule against state laws with extraterritorial effects, the Chief Justice’s concurrence would allow courts to consider extraterritoriality effect in future Pike balancing test cases.
[18] For more on National Pork’s fractured opinion and the recent changes to the dormant Commerce Clause doctrine, see Ari Peskoe’s recent analysis.
[19] In his signing statement, Governor Newsom told CARB to monitor costs, and the agency could use its discretion to respond to such concerns.
[20] National Pork, slip op. at 3 (Sotomayor, J., concurring). See also Yamaha v. Jim’s Motorcycle Inc., 401 F.3d 560, 568 (4th Cir. 2005).
[21] S.B. 261, 2023-2024 Leg. (Cal. 2023); S.B. 253, 2023-2024 Leg. (Cal. 2023).
[22] Therefore, companies are likely to be more prepared for disclosure with each passing year. For example, beginning in 2025, many companies will be required to submit comprehensive disclosures to the European Union (EU). For a detailed list of additional international disclosure regimes, their applicability, and their timelines see EELP Research Assistant Eric Zhao’s (JD 2025) table on Global Climate Disclosure Regimes.
[23] For example, Sustainable Brands estimates that up to 3,000 US companies will have to report to The EU under its Corporate Sustainability Reporting Directive (CSRD). This is more than half of the 5,300 companies that industry groups estimate the GHG emissions law will regulate. Katie Secrist, Preparing for the CSRD’s Impact on US Companies, Sustainable Brands; Complaint for Injunctive and Declaratory Relief at *13, Chamber of Commerce et al. v. California Air Resources Board et al., Docket No. 2:24-scv-00801 (C.D. Cal.).