Business Organizations Challenge California's Climate Change Disclosure Requirements As Unconstitutional

On January 30, 2024, several business organizations filed a complaint in federal court in the Central District of California challenging California's Senate Bills 253 and 261 as violating the U.S. Constitution. As discussed previously, these laws require public and private companies that have revenues above a certain threshold and are "doing business" in California to make disclosures relating to climate change risks, including disclosing not only their own direct and indirect greenhouse gas ("GHG") emissions (i.e., Scopes 1 and 2 emissions) but also GHG emissions from sources that those reporting companies do not own or control (i.e., Scope 3 emissions). The complaint alleges that the laws are unconstitutional in three separate ways.

• First, the plaintiffs argue, the laws violate the First Amendment because they "compel companies to publicly express a speculative, noncommercial, controversial, and politically-charged message that they otherwise would not express." The plaintiffs further contend that the vagueness of a key term in SB 261—"climate-related financial risk"—compounds the problem, forcing companies to make guesses at the peril of penalties.
• Second, the laws violate the Clean Air Act (and thus are preempted) and "principles of federalism," the plaintiffs allege, because the laws serve to "pressure companies to reduce their emissions of greenhouse gases, within the State of California and outside of it" and California lacks the authority to regulate emissions outside its borders.
• Third, plaintiffs say that the laws violate constitutional limitations on extraterritorial regulation, including the Dormant Commerce Clause, for imposing burdens on interstate commerce that far outweigh any benefits to California.

Not surprisingly, the business organizations take aim at what they describe as the "enormously burdensome" requirement to estimate and report Scope 3 emissions, which they estimate will cost companies "more than $1 million per year" and will create a burden "up and down the supply chain." This issue, among others, will be worth watching in anticipation of the SEC's issuance of its final climate disclosure rule and how it addresses Scope 3 emissions. The Ninth Circuit has shown a willingness to invalidate state laws under the First Amendment, as the recent decision invalidating Proposition 65's Roundup carcinogen warning requirement illustrates.