The Eleventh Circuit handed down a decision on June 3 overturning the district court’s denial of a preliminary injunction in American Alliance for Equal Rights v. Fearless Fund. In a two-to-one decision, the majority decided in favor of American Alliance for Equal Rights on numerous legal issues that impact diversity, equity, and inclusion strategies.

CASE BACKGROUND

American Alliance for Equal Rights (AAER) filed this lawsuit against Fearless Fund Management LLC, Fearless Fund II GP LLC, Fearless Fund II LP, and Fearless Foundation Inc. on August 2, 2023 in the United States District Court for the Northern District of Georgia. AAER describes itself as a “not-for-profit 501(c)(3) membership organization dedicated to challenging distinctions and preferences made on the basis of race and ethnicity.” AAER is led by Edward Blum, who is also the leader of Students for Fair Admissions (SFFA), the organization that challenged Harvard and UNC’s race-based affirmative action practices in a pair of cases the Supreme Court decided in SFFA’s favor on June 29, 2023.

Fearless Fund Management (Fearless) is a Black women-owned investment firm that invests in businesses led by women of color. Fearless Foundation (the Foundation) is a 501(c)(3) foundation affiliated with Fearless Fund. The Foundation’s charitable mission is to eliminate the significant gap in venture capital funding that persists for women entrepreneurs of color. Among other programs, the Foundation operates the Fearless Strivers Grant Contest (the Grant Program), through which it awards $20,000 grants, tools, and mentorship to certain Black women business owners.

AAER alleged in its complaint that several of its members, identified only as Owners A, B, and C, are individuals who operate their own businesses, and wished to participate in the Foundation’s grant contest, but were ineligible because they are not Black women.

AAER moved for a preliminary injunction with its complaint, intended to prevent the Foundation from awarding any grants during the pendency of the suit. The district court denied AAER’s preliminary injunction motion, finding that although AAER can likely establish associational standing and that Section 1981 applies to the Grant Program, AAER did not show it is likely to succeed on the merits because enjoining the Grant Program under Section 1981 likely impermissibly interferes with the Foundation’s First Amendment freedom of expression. AAER appealed the denial of the motion for preliminary injunction to the Eleventh Circuit. Oral argument was heard on January 31, 2024.

LEGAL ISSUES

The majority held that (1) AAER has standing to challenge the Grant Program, and (2) preliminary injunctive relief is appropriate because the Foundation’s contest is substantially likely to violate Section 1981, substantially unlikely to enjoy First Amendment protection, and inflicts irreparable injury. The dissent disagreed that AAER had standing.

Standing

AAER asserted associational standing on behalf of its members. The Foundation argued that AAER’s associational standing failed because (1) the members on whose behalf AAER purported to sue were not identified by name but merely pseudonymously; and (2) AAER failed to demonstrate that any member was “able and ready” to apply for the Grant Program. The Eleventh Circuit rejected both arguments.

The majority held that while an organization must “identify” a member who could demonstrate associational standing, the organization need not identify such members by legal name.

The majority held that AAER, through the Owner declarations, demonstrated that the Owners were “able and ready” to apply for the grant contest. According to the majority, the Owner declarations did more than enough to assert that the Owners demonstrated that they would have standing in their own right because they stated in their declarations that they were prepared to apply, met the race-neutral eligibility criteria, and could apply if the race-based requirement was removed.

The dissent disagreed, opining that the Owners had manufactured injuries to support the case but lacked any genuine concrete and particularized injury. The dissent would have held the Owner declarations asserted in conclusory fashion that the Owners were “able and ready” to apply but did not include details to back up that conclusion.

The Eleventh Circuit’s decision that organizations can sue on behalf of pseudonymous members conflicts with the Second Circuit’s recent decision in Do No Harm v. Pfizer finding the opposite, thus creating a split in the circuits.

Finding Preliminary Injunctive Relief Appropriate

The court found preliminary injunction was appropriate because the Foundation’s contest is substantially likely to violate Section 1981, substantially unlikely to enjoy First Amendment protection, and inflicts irreparable injury.

Violation of Section 1981

The court held that Section 1981 applies to the Grant Program because the contest creates contracts. In reaching its decision, the court focused on the language of the original rules for the contest—specifically, the language stating that ”by entering [the] contest,” applicants “agree[d] to these official rules, which are a contract.”

The court also noted that under the contest rules, a grantee received $20,000 and mentorship in exchange for granting Fearless “permission to use its idea, name, image, and likeness for promotional purposes” and agreeing to indemnify Fearless and arbitrate any disputes arising out of the program. The court described that exchange as a textbook agreement supported by consideration and mutual obligation. The court rejected the Foundation’s argument that the Grant Program provides discretionary gifts that do no confer enforceable rights on contest entrants.

Affirmative Action Defense Not Applicable

The court rejected the Foundation’s argument that the Grant Program is lawful because it is a valid remedial program under Weber and Johnson, a pair of cases in which the Supreme Court found under Title VII of the Civil Rights Act that employers can consider race when taking voluntary actions that mirror the goals of the statute. The Supreme Court held that an affirmative action plan is lawful if it: (1) is designed to “eliminate manifest racial imbalances in traditionally segregated job categories;” (2) “does not unnecessarily trammel the interests of the white employees” by “requir[ing] the[ir] discharge” or “creat[ing] an absolute bar to the[ir] advancement;” and (3) is “a temporary measure,” “not intended to maintain racial balance, but simply to eliminate a manifest racial imbalance . . . in traditionally segregated job categories.”

The Eleventh Circuit acknowledged that it had previously held the Weber/Johnson defense applies to Section 1981 claims. However, the court held that the Foundation’s Grant Program did not constitute a valid affirmative action program because the program completely barred the participation of non-Black business owners, which it interpreted as an “absolute bar” to their advancement.

The court rejected the Foundation’s argument that the program did not create an absolute bar because those who were ineligible for the Grant Program could seek funding from other sources.

The First Amendment Does Not Protect the Grant Program

Whether the First Amendment protected the Grant Program was the primary issue on appeal. The District Court had found the First Amendment likely protects the Grant Program because grantmaking is a form of expressive conduct. The Eleventh Circuit reversed the district court’s decision, holding that the First Amendment likely does not protect the Grant Program.

The court held that the First Amendment protects the right to “advocate” race discrimination, but not “practice” it. The court described Title VII and Section 1981 as examples of permissible content-neutral regulations of conduct.

The court distinguished the Grant Program from 303 Creative, in which the Supreme Court held that a wedding website designer had a First Amendment right to refuse to create wedding websites for same-sex couples, notwithstanding a state antidiscrimination law that prohibits discrimination based on sexual orientation. The Court held that the wedding website designer in 303 Creative had not claimed a right to refuse to serve same-sex couples entirely, but only refused to create their wedding websites. In this regard, the Court held, the First Amendment protected her only from having to express a certain message with which she disagreed—same-sex marriage—as opposed to protecting her from having to serve a particular customer based on their protected characteristics.

The Eleventh Circuit said that the Grant Program was more analogous to Runyon v. McCrary, in which the Supreme Court held that a private school’s First Amendment right to freedom of association did not permit the school to deny admission to students of color because even if “invidious private discrimination may be characterized as freedom of association,” it has never been accorded “affirmative constitutional protections.”

The Eleventh Circuit had previously held in Coral Ridge Ministries Media Inc. v. Amazon that “donating money qualifies as expressive conduct” which is protected by the First Amendment. The court held that the decision in Coral Ridge did not apply to Fearless for three reasons. First, the court held that Coral Ridge “had nothing to do with race discrimination,” and “prohibitions on race discrimination are uniquely resistant to First Amendment challenges.”

Second, the court held that the Foundation does not simply donate money through the Grant Program, but rather orchestrates a “bargained-for exchange.” Third, the court held that Fearless was not being compelled to subsidize speech, but rather simply to include non-Black entrants in the Grant Program, which Coral Ridge did not address. The court stated that if the Grant Program was a form of expression protected by the First Amendment, then every act of race discrimination would be protected, including firing employees based on race.

NEXT STEPS AND LIMITATIONS

The Grant Program will remain enjoined pending the outcome of the case on the merits. The Foundation has two weeks to petition for rehearing (by the panel or by the en banc Eleventh Circuit) and 90 days—from the date of the decision or the denial of rehearing, whichever is later—to file a petition for a writ of certiorari with the Supreme Court. Assuming the Eleventh Circuit’s decision stands, the case will go back to the district court and the parties will proceed with discovery, summary judgment briefing, and/or trial.

It is important to keep in mind that this decision applies only to cases brought in the Eleventh Circuit. No other circuit has yet considered when Section 1981 applies to charitable grantmaking, and when the First Amendment protects it. It is possible that other courts may come to different conclusions regarding some or all of the legal issues decided by the Eleventh Circuit.

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