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In-scope entities should keep preparing for compliance with Senate Bills 253 and 261 as the lawsuit proceeds past an initial summary judgment motion.

By Joshua Bledsoe, Betty Huber, Nicole Valco, and Matthew Green

On November 5, 2024, in Chamber of Commerce of the United States of America et al. v. California Air Resources Board et al.,1 the US District Court for the Central District of California denied plaintiffs’ summary judgment motion which sought to declare two pieces of legislation unconstitutional for violating the First Amendment.

Senate Bill 253, the Climate Corporate Data Accountability Act (SB 253), and Senate Bill 261, the Greenhouse Gases: Climate-Related Financial Risk Act (SB 261), were signed into law by Governor Gavin Newsom in October 2023 and amended by the more recent Senate Bill 219 (SB 219). The laws aim to enhance transparency and accountability in corporate environmental practices.2

Background of SB 253 and SB 261

SB 253 requires entities doing business in California, with annual revenues over $1 billion, to annually report their Scope 1 and Scope 2 greenhouse gas (GHG) emissions starting in 2026, and their Scope 3 emissions starting at a date to be determined by the California Air Resources Board (CARB).

SB 261 requires entities doing business in California, with annual revenues over $500 million, to publish a climate-related financial risk report in accordance with the recommended framework and disclosures in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures, starting in January 1, 2026, and biennially thereafter.

Read this Latham Client Alert for more detail on these laws.

Background of Lawsuit

The US Chamber of Commerce, the California Chamber of Commerce, and other business groups sued the State of California and CARB on January 31, 2024, alleging that SB 253 and SB 261 were unconstitutional on three separate grounds that the laws (i) violate the First Amendment by compelling speech; (ii) violate the Supremacy Clause by regulating GHG emissions when the US Clean Air Act and federalism principles reserve that authority to the federal government; and (iii) violate the limitations on extraterritorial regulation, such as the dormant commerce clause, because they impose significant burdens on interstate and foreign commerce.3 The plaintiffs filed an early motion for summary judgment on solely their first claim, that SB 253 and SB 261 facially violate the First Amendment.

The Court’s Order to Defer Summary Judgment and Permit Discovery

Judge Otis D. Wright II of the Central District of California granted the State of California’s motion to defer summary judgment on the First Amendment claim until at least the discovery phase. In its analysis, the court found that the First Amendment applies to these laws, as the “primary effect—and purpose—of SBs 253 and 261 is to compel speech.” However, the court ruled that further factual development is necessary to determine which level of scrutiny it should apply: strict scrutiny because the laws are content-based restrictions on speech; intermediate scrutiny because the laws regulate commercial speech; or rational-basis scrutiny because the regulated speech is purely factual and uncontroversial.

Of particular importance in this assessment, the court highlighted the Bolger factors, which weigh in favor of characterizing speech as commercial if (i) “the speech is an advertisement,” (ii) “the speech refers to a particular product,” and (iii) “the speaker has an economic motivation.”4[4] The level of scrutiny informs how tailored and substantial the state interest must be to motivate the law, and is an assessment that often determines the outcome of a case.

The court listed some examples of the type of factual record that the parties must develop:

  • Whether SB 253 and SB 261 regulate a substantial number of companies that do not make potentially misleading environmental claims. The court stated that “if ninety-nine percent of the regulated companies have made advertisements relevant to SBs 253’s and 261’s required disclosures, that may support a finding that SBs 253 and 261 are appropriately tailored to the State’s aims under at least rational basis review.”
  • “Real-world examples of SB 253’s and 261’s overinclusvieness,” such as whether there exists a company that must comply with SB 253 and SB 261 even though it only engages in a single transaction within California, wholly unconnected to climate-related risks.

Because the court decided that discovery is necessary to develop a factual record to evaluate whether the laws comport with the First Amendment, the court denied the plaintiffs’ motion for summary judgment that would have declared the laws unconstitutional. However, the court’s decision allows plaintiffs to refile their motion after discovery.

Looking Ahead

Judge Wright’s rejection of the plaintiffs’ summary judgment motion allows for the parties to conduct discovery on all three of the plaintiffs’ claims, as the ruling does not affect the plaintiffs’ other claims that SB 253 and SB 261 violate the Supremacy Clause and limitations on extraterritorial regulation. Because the court gave the plaintiffs the opportunity to refile the summary judgment motion on the First Amendment claim after discovery, the parties could again submit motions for summary judgment on that claim, or any of the other two claims, at that time.

The extension of the lawsuit through at least the discovery phase makes a trial more likely, though not assured, as both parties could still move for summary judgment after the conclusion of discovery. As this legal battle over California’s climate disclosure legislation continues, stakeholders across industries will closely monitor the developments.

How Should In-Scope Entities Plan?

As this litigation will take months to resolve, and possibly may not conclude until beyond the January 1, 2026, compliance date for SB 261, in-scope entities should continue preparing to comply with SB 253 and SB 261 in the same manner that they did prior to this court decision.

  1. Case No 2:24-cv-00801-ODW (PVCx). ↩︎
  2. SB 219 (i) extends CARB’s rulemaking deadline from January 1, 2025, to July 1, 2025 ; (ii) requires the reporting of Scope 3 emissions under SB 253 starting at a date to be determined by CARB, rather than the previous timeline which required the disclosure of Scope 3 emissions in 2027; (iii) permits covered entities under SB 253 to consolidate emissions disclosure reports at the parent company level; (iv) eliminates filing fee requirements under both SB 253 and SB 261; and (v) permits, but does not require, CARB to contract with a climate reporting organization to develop a program to publicize the required disclosures. ↩︎
  3. A third California climate disclosure bill, which Governor Newsom signed into law at the same time as SB 253 and SB 261, the Voluntary Carbon Market Disclosures Business Regulation Act (AB 1305), was not challenged as part of this litigation. ↩︎
  4. See Bolger v. Youngs Drug Products Corporation, 463 U.S. 60 (1983); Hunt v. City of Los Angeles, 638 F.3d 703, 715 (9th Cir. 2011). ↩︎