Key Points

  • The Ninth Circuit held that SB 253's Scope 1 and Scope 2 emissions disclosures regulate commercial speech and likely survive intermediate scrutiny, and it affirmed the denial of a preliminary injunction as to those provisions.
  • The panel held that SB 253's Scope 3 value-chain disclosures are not commercial speech and likely fail strict scrutiny, and it reversed the denial of a preliminary injunction as to that requirement.
  • The panel held that SB 261's climate-related financial risk reports compel noncommercial speech and fail strict scrutiny because less restrictive means were available, and it reversed the denial of a preliminary injunction as to SB 261 in its entirety.
  • The court rejected California's asserted interest in preventing greenwashing as unsupported by the record, while finding its interests in reducing investor information asymmetries and reducing emissions substantial.
  • Judge Bennett, concurring in the judgment in part and dissenting in part, would apply strict scrutiny to both laws and order both preliminarily enjoined; the case was remanded for the district court to decide whether the Scope 3 provision is severable.

A federal appeals court ruled on Monday that California likely may require large companies to report the greenhouse gases their own operations produce, but likely cannot force them to tally supply-chain emissions or publish assessments of how climate change threatens their finances.

A divided panel of the U.S. Court of Appeals for the Ninth Circuit affirmed in part and reversed in part a district court's refusal to preliminarily block two 2023 California laws, the Climate Corporate Data Accountability Act, known as SB 253, and the Climate-Related Financial Risk Act, known as SB 261. Judge Jacqueline H. Nguyen wrote for the majority, joined by U.S. District Judge Kiyo A. Matsumoto of the Eastern District of New York, sitting by designation. Judge Mark J. Bennett would have blocked both laws in full.

The decision splits SB 253, which covers entities doing business in California with more than $1 billion in annual revenue, about 1,971 companies by one estimate the court cited. Those companies must still report Scope 1 emissions, from sources they own or directly control, and Scope 2 emissions, from the energy they buy. But the panel held that Scope 3 reporting, which covers indirect emissions from suppliers, customers and others in a company's value chain, likely violates the First Amendment, as does SB 261, which reaches about 2,675 companies with more than $500 million in revenue.

The case, brought by the U.S. Chamber of Commerce and five other business groups, turned on whether the laws compel commercial speech, a category that receives less constitutional protection than other expression. The groups argued that both statutes compel noncommercial speech and must survive strict scrutiny, which requires the government to show a law is narrowly tailored to a compelling interest.

Judge Nguyen wrote that Scope 1 and 2 data give investors, insurers and other capital-market participants factual information about a company's own operations. "In that respect, emissions disclosures function like product warnings in capital markets: higher emissions may signal a greater risk of diminished returns," she wrote. The majority rejected the groups' argument that the requirements compel ideological expression: "The statute requires companies to report emissions data about their operations. That is a factual disclosure, not a moral one."

The majority also declined to define commercial speech narrowly as speech that proposes a transaction. Applying strict scrutiny to factual disclosures "merely because they do not fit neatly within Bolger or themselves propose a commercial transaction would jeopardize broad areas of ordinary regulation," Judge Nguyen wrote, referring to the Supreme Court's test for identifying commercial speech.

Applying intermediate scrutiny, a middle tier requiring a substantial interest and a law no more extensive than necessary, the majority found two of California's three asserted interests substantial: reducing information gaps between companies and investors, and cutting emissions. It cited a study of mandatory Scope 1 and 2 reporting that documented reductions of about 7 to 8%. It rejected the state's third interest, preventing "greenwashing," holding that "The record does not show that companies discussing climate change routinely engage in misleading speech."

Scope 3 came out differently. "Because Scope 3 disclosures concern diffuse third-party conduct in the value chain, they are insufficiently tethered to the reporting entity's own operations and capital transactions to qualify as commercial speech," the majority held. Under strict scrutiny, the court noted that such data originate with third parties or must be estimated from industry averages, and that "Every study in the record linking mandatory disclosure to emissions reductions concerns Scope 1 or Scope 2 reporting; none examines mandatory Scope 3 reporting."

SB 261 requires companies to post climate-related financial risk reports on their own websites every two years, following a framework from the Task Force on Climate-related Financial Disclosures. The majority wrote that the law "requires companies to answer a speculative and contested policy question: 'How should climate change shape the company's future operations and economic planning?'" It called strict scrutiny "a standard which the State all but concedes it cannot satisfy," and said California could have used less restrictive means, such as publicizing existing voluntary disclosures or directly regulating emissions.

Judge Bennett, concurring in the judgment in part and dissenting in part, argued that the majority had stretched the commercial speech category too far. "Because the majority opinion can be read as equating investors' interest in companies with consumers' interest in products, there may be 'no end to the information that states' can now 'require [companies] to disclose,'" he wrote.

He offered a hypothetical modeled on the majority's own reasoning: "In the face of increased immigration enforcement, higher numbers of undocumented immigrant employees may signal a greater risk of diminished returns due to potential employee turnover." He also warned that the reasoning could reach individuals' employment records, such as prior income and work attendance.

Judge Bennett would generally treat compelled disclosures as commercial speech only when they inform market participants about a specific product, and he concluded that emissions data describe a company, not its stock. The majority answered in a footnote that "The dissent's hypotheticals invoke undeniably controversial political topics and introduce questions we have not been asked to—and do not—decide."

Governor Gavin Newsom signed both bills on Oct. 7, 2023, and the groups sued in January 2025. U.S. District Judge Otis D. Wright II of the Central District of California denied a preliminary injunction, finding both laws regulated commercial speech. On Nov. 18, 2025, the Ninth Circuit enjoined SB 261 pending appeal but not SB 253.

Eugene Scalia of Gibson Dunn & Crutcher LLP argued for the business groups. Deputy Attorney General Caitlan L. McLoon of the Office of the California Attorney General argued for the state officials, who include Lauren Sanchez, chair of the California Air Resources Board, and Attorney General Rob Bonta.

The case now returns to the district court to decide whether the Scope 3 provision can be severed from the rest of SB 253, which contains a severability clause. The panel said that absent severance, the constitutional defect would exist in "every application" of SB 253, so that enforcing the statute as written would cause the business groups irreparable injury.