Federal court denies early challenge to CA climate disclosure laws

The Federal District Court for the Central District of California on November 5 declined to grant summary judgment to the U.S. Chamber of Commerce and other groups challenging California’s new climate disclosure rules on First Amendment grounds. The court determined that before discovery had taken place, it was unable to complete the “fact-driven task” of assessing the law’s scope and determining which level of First Amendment scrutiny should apply.

The lawsuit, brought in January by the U.S. Chamber of Commerce and other business lobby groups, challenges California’s laws SB 253 and SB 261, which were enacted in October 2023 and are on track for implementation with minor recent amendments (see our prior update on the amendments, SB 219). 

SB 253, or the Climate Corporate Data Accountability Act, requires all US business entities – public and private – that “do business” in California and have total annual revenues of more than $1bn to disclose their GHG emissions data. These requirements will begin in 2026 (reporting on prior fiscal year) for Scopes 1 and 2 emissions and in 2027 (reporting on prior fiscal year) for Scope 3 emissions. SB 261, or the Climate-Related Financial Risk Act, requires US business entities with an annual revenue threshold of $500mn that do business in California to prepare biennial reports on climate-related financial risks posed by their operations, beginning in 2026. The California Air Resources Board (CARB) is responsible for promulgating implementing regulations by July 1, 2025.

In the lawsuit before the U.S. District Court, the plaintiffs alleged that SB 253 and SB 261:

• violate the First Amendment by requiring impermissible compelled speech; 
• are pre-empted by federal law, and so violate the Supremacy Clause; and 
• violate the Constitution’s limits on extraterritorial regulation. 

The November 5 order by the court addressed motions regarding summary judgment on the First Amendment issue. A second order will address defendants’ motion to dismiss plaintiffs’ Supremacy Clause and extraterritorial regulation claims, but the court provided no timeline for the issuance of that second order. 

Factual record needed to determine law’s scope

The court determined that the First Amendment does apply to SB 253 and SB 261, because “the primary effect—and purpose—of SB 253 and SB 261 is to compel speech.” The Court also determined, however, that there were genuine disputes of material fact that must be resolved in order to come to a view on whether the laws violate the First Amendment. The decision came after the Ninth Circuit in July ruled in X Corp v Rob Bonta that in a First Amendment facial challenge, lower courts must assess the challenged law's scope and “decide which of the laws’ applications violate the First Amendment,” and “measure the constitutional against the unconstitutional applications”— which is a fact-driven task. 116 F.4th 888 (9th Cir. 2024).

Citing X Corp, the Court stated that it needed more information about which businesses the laws covered to determine which standard of First Amendment scrutiny should apply. Partly at issue is whether SB 253 and SB 261 regulate commercial speech, and thus may be subject to a lesser standard than strict scrutiny. The Court said to make this determination it needs more factual information, including whether the laws regulate a substantial number of companies that do not make potentially misleading environmental claims. Also relevant is whether the plaintiffs can point to examples of the laws’ over-inclusiveness – for example, whether, as plaintiffs allege, there exists a company that “engages in a single transaction within the State, wholly unconnected to climate-related risks” and must comply with SB 253 and SB 261.

The need for more facts on the scoping of the laws delays resolution of the First Amendment issue at least until after further factual development (which may include discovery), and possibly until after CARB promulgates the required implementing regulations for the laws in 2025. Many details remain to be clarified by these implementing regulations, including on scoping, timelines, fees and penalties.