The odds are growing that a challenge to the Biden administration’s requirement for racial quotas for the board members of publicly listed companies could land on the steps of the Supreme Court after opponents of the diversity rules scored a second chance at the Fifth Circuit this week. 

The majority of Fifth Circuit judges decided this week that the whole circuit will rehear en banc a challenge to Nasdaq’s proposed quotas on the racial, gender, and sexual identities of Nasdaq-listed company board members. Those rules, approved by the Securities and Exchange Commission in August of 2021, are charged with violating First Amendment protections against compelled speech and against discrimination, as well as exceeding the authority of the SEC to protect investors from fraud. 

The latest development in this case, Alliance for Fair Board Recruitment v. SEC, pushes the Fifth Circuit further to the forefront of cutting edge legal issues. Covering Texas, Louisiana, and Mississippi, the federal appeals court tends to lean conservative in its decisions and has recently sent to the High Court a host of challenges to the Biden administration on issues such as abortion, immigration, and social media censorship. 

The Fifth Circuit is unique in its rule that for a case to be heard en banc, it must present novel issues or be at risk of rendering the jurisprudence of the circuit inconsistent. That appears to be the case with the groups, the Alliance for Fair Board Recruitment and the National Center for Public Policy Research, whose successful appeal vacates an October opinion by a three-judge circuit panel that previously denied their petitions to review Nasdaq’s rules. 

The Alliance is run by longtime litigant, Edward Blum. He has set his mission as repealing diversity requirements from corporate boards. In July, Mr. Blum scored a legal victory on behalf of another of his organizations, Students for Fair Admissions, when the Supreme Court overturned the use of affirmative action in college admissions. 

Now, Mr. Blum is charging the SEC with acting capriciously and arbitrarily and exceeding its authority under the Exchange Act of 1934, which protects investors by prohibiting fraud and other unfair trading practices. Any security exchange registered with the SEC cannot have rules that impose any burden on competition not “necessary or appropriate” to further the purposes of the Act.

In October, a panel of the Fifth Circuit ruled that the SEC did account for the costs of diversity rules and did not place an undue burden on competition. It said the SEC’s approval of the rules was consistent with the Administrative Procedure Act, which governs how federal agencies issue regulations.

“The SEC’s point is that because the meaning of diversity varies globally,” Judge Stephen Higginson explained, “it is fair and desirable to let foreign issuers report diversity information according to nationally appropriate standards.” 

“There is a compelling body of credible research on the association between economic performance and board diversity,” SEC commissioner, Allison Herren Lee, said, according to the plaintiffs’ comments on the case in April of 2021. Though Nasdaq cites academic research showing the impact of boardroom gender diversity on firm performance, the plaintiffs say such evidence is “inconclusive.”

The SEC ignored “tremendous costs for firms that dare to defy the quotas,” Mr. Blum’s group alleges in its complaint, and failed to show “that the asserted benefits of the diversity rule outweigh the costs.” Having one or more women directors is not shown to improve corporate performance or investor protections, the Alliance says. Neither will rules on the race or sexuality of board members — lumped together under the term “board diversity” —  necessarily improve firm performance, AFBR says. 

The two organizations challenging the SEC must issue their en banc brief by March 21, giving the agency around a month to respond. If the plaintiffs face defeat in its upcoming rehearing, which is set to take place during the week of May 13, they can then appeal to the Supreme Court.