Ninth Circuit Oral Argument Highlights: Challenges to California Climate Disclosure Laws (SB 253 and SB 261)

The appeal arose from the district court’s denial of a preliminary injunction, and the panel’s questioning focused closely on the specific First Amendment frameworks articulated in Supreme Court and Ninth Circuit precedent.  In particular, the Court repeatedly returned to whether the climate disclosure statutes compel speech, whether that compelled speech qualifies as commercial speech, how closely the disclosures are “tethered” to commercial transactions, and whether the scope of the reporting requirements can be justified under related cases.  The Court did not rule from the bench.  There is no decision yet on the continuing injunction against enforcement of SB 261, but a ruling is expected sometime within next month.  In the meantime, potentially regulated parties still lack guidance on exactly when—or if—climate risk disclosures will need to be published. 

Plaintiffs’ Arguments
Plaintiffs framed the case as a straightforward compelled-speech challenge.  They argued that SB 253 and SB 261 compel speech and are therefore presumptively unconstitutional, placing the burden on the State to justify the laws under a strict scrutiny analysis.  According to Plaintiffs, California has staked everything on characterizing the disclosures as commercial speech, but the statutes do not meet any recognized definition of that category.  Plaintiffs emphasized the Supreme Court’s caselaw that commercial speech is speech that proposes a commercial transaction, which they argued is not the case here.

Plaintiffs argued that the disclosures are not advertisements, do not concern identified products, and are not economically motivated.  They stressed that, unlike prior compelled-disclosure cases, the statutes are not “closely tethered” to any transaction.  According to the Plaintiffs, SB 261 contains no transaction requirement, no identified product, and no information provided to parties about specific transactions.  Instead, the disclosures must be publicly posted on the websites of both public and private companies regardless of whether any transaction or investment occurs.

Plaintiffs also emphasized the lack of tailoring of the statutes.  They argued that SB 253 requires companies to report Scope 1, 2, and 3 emissions, including emissions of third parties, as the reporting company’s “own” emissions.  Plaintiffs described this as neither purely factual nor uncontroversial.  In relation to SB 261, Plaintiffs stated that the statute compels opinions, judgments, and predictions about climate-related risks, governance, and scenario analysis, forcing companies to express policy views about the likelihood and magnitude of climate-related effects. 

State’s Arguments
California urged the Court to reject Plaintiffs’ narrow definition of commercial speech.  The State argued that commercial speech analysis is a common-sense inquiry.  In the State’s view, the relevant test is whether the disclosures provide parties to actual or potential commercial transactions with information relevant to those transactions, particularly those involving investment, lending, and insurance decisions.

The State emphasized the district court’s findings that uncertainty about climate-related risks leads to market distortions.  For SB 253, California argued that Scope 1, 2, and 3 emissions disclosures are directly relevant to how investors price risk because a company’s overall emissions burden affects future regulatory exposure.  The State argued that investors often evaluate the full emissions profile of a company, and many companies already use these methods of evaluation in estimating and reporting their carbon footprint to potential investors.

Defending SB 261, the State argued that climate-risk assessment is a commercial metric and is not political.  Rather than a policy view, the State argued that SB 261 relates to disclosure of  whether and how companies assess climate-related financial risk but does not dictate that companies express or adopt any government-preferred view on risk.  The State analogized these disclosures to other types of routine business risk disclosures, arguing that standardizing the disclosures addresses gaps and inconsistencies in voluntary reporting that force investors to expend resources assessing risk.

What Comes Next
The Ninth Circuit took the matter under submission and did not rule on either the merits or the continuing temporary injunction against enforcement of SB 261.  However, with the continuing uncertainty among regulated parties regarding the timing for potential SB 261 reporting (already beyond its January 1 statutory deadline), most believe the court is likely to act sometime within the next month. 

The court’s decision is likely to provide important guidance on the constitutional limits of state-mandated climate disclosures, specifically relating to the definition of commercial speech, the scope of permissible compelled disclosures, how politically controversial the court considers climate disclosures to be, what level of scrutiny should be applied to SB 253 and SB 261, and the degree of statutory tailoring required for the law to survive that scrutiny under existing First Amendment precedent.  Pillsbury will continue to actively monitor developments related to the regulations and the Ninth Circuit litigation and will be available to advise clients on any questions that may arise.