After a three-judge panel rejected a lawsuit from conservative groups seeking to overturn Nasdaq's board diversity rule, an entire federal appeals court has agreed to hear the case.
In October, judges on the 5th U.S. Circuit Court of Appeals in New Orleans ruled that the Securities and Exchange Commission did not violate the Securities Exchange Act or the Administrative Procedure Act when it approved Nasdaq's rule in 2021.
Following the decision, the groups that filed the lawsuit — the National Center for Public Policy Research and the Alliance for Fair Board Recruitment — each filed petitions requesting that the full court give its lawsuit another look.
The 5th Circuit on Feb. 19 granted those petitions and vacated the October decision.
"We are rejoicing over the court's vote to rehear the panel decision, as the constitution, state and federal laws and Supreme Court precedents all forbid such invidious discrimination, said Peggy Little, senior litigation counsel at the New Civil Liberties Alliance, the group representing the National Center for Public Policy Research in the lawsuit, in a statement.
The Nasdaq rules "shock the conscience in even being proposed, much less in being approved as law. NCLA looks forward to ending this arrogation of unlawful power over internal corporate governance," she said.
Under the Nasdaq rule, companies without two diverse directors must explain why they do not meet the requirement. That includes "at least one director who self-identifies as female and at least one director who self-identifies as LGBTQ+ or an underrepresented minority," such as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, according to an SEC order.
In reaching their decision in October, the three judges from the 5th Circuit wrote, "This evidence is sufficient to support the SEC's determination that regardless of whether investors think that board diversity is good or bad for companies, disclosure of information about board diversity would inform how investors behave in the market."
But now, the entire 5th Circuit will hear the case.
"We believe the panel decision was correct and will continue to defend the commission's order before the full court," an SEC spokesperson said in an email.
