The decision by the Eleventh Circuit Court of Appeals imperils one strategy for remedying societal racial inequities and creates legal risk for many DEI initiatives.
TAKEAWAYS
- A panel of the Eleventh Circuit held that grant programs that require awardees to cooperate with promotional campaigns or to arbitrate disputes are “contracts” covered by Section 1981.
- The court held that limiting grant eligibility to Black applicants likely was an unlawful act of discrimination, even if intended to remedy a manifest racial disparity.
- The decision may lead many nonprofits and foundations to reconsider the parameters of opportunity building programs that use race as a selection criterion.
On June 3, 2024, the U.S. Court of Appeals for the Eleventh Circuit issued a decision in American Alliance for Equal Rights vs. Fearless Fund Management, LLC, that has potentially far-reaching implications for nonprofit initiatives to direct grants to underserved minority populations. The Court of Appeals reversed a district court’s denial of a preliminary injunction and held that the Fearless Foundation (“Fearless”), the nonprofit foundation of an Atlanta-based venture capital firm, Fearless Fund Management LLC, should be enjoined from issuing grants reserved for small businesses owned by Black women. The court found that Fearless’s grant contest was “substantially likely” to violate the federal prohibition against race discrimination in making and enforcement of contracts, under 42 U.S.C. § 1981 (“Section 1981”). The Eleventh Circuit also found that the American Alliance for Equal Rights (AAER), a membership organization, had standing to bring suit based on anonymous declarations of its members who alleged that they had been harmed by being excluded from eligibility for the grant contest.
As The Washington Post observed, the Fearless decision “is being closely watched because of its possible implications for race-conscious programs in the private sector, particularly in the world of grant-giving and foundations.”
The Case
Fearless Fund Management is a self-described “venture capital fund that invests in women of color-led businesses” and, through its nonprofit foundation, supplies grants to such businesses using a competitive application process called the “Fearless Strivers Grant Contest.” The grant contest awards $20,000 to four winners, along with digital tools to assist with business growth and mentorship. Critically, eligible businesses must be at least “51% Black woman owned.”
AAER is a § 501(c)(3) membership organization that filed suit against Fearless and bills itself as an organization dedicated to “ending racial classifications and racial preferences in America.” The founder of AAER, Edward Blum, also founded Students For Fair Admissions, the plaintiff in the suits against Harvard University and the University of North Carolina which resulted in the Supreme Court’s June 2023 decision ending race-based affirmative action in higher education admissions.
In AAER’s lawsuit against Fearless, AAER sought a preliminary injunction barring Fearless’s grant contest. At the district court, the two central arguments raised by AAER were: (1) that Fearless’s grant contest constitutes a “contract” for Section 1981 purposes because entrants enter into a bargained-for exchange with Fearless when they apply, and (2) that the contest violates Section 1981 because, by its terms, it categorically excludes non-Black applicants from eligibility because of their race.
In response, Fearless asserted that AAER lacked standing to sue because the individual members of AAER were proceeding pseudonymously as “Owners A, B, and C,” without revealing their names even under seal to the court, and further, that AAER had not adequately alleged that each member had suffered a concrete and particularized injury. Moreover, Fearless argued that the contest did not constitute a contract but rather a valid “remedial program.” Fearless contended that its “provision of a charitable donation is a discretionary gift, not a contractual award,” and that although the contest’s rules previously used the term “contract” to describe its application process, that label was not determinative of Fearless’s legal relationship with contest applicants. Fearless further contended that, even if Section 1981 were to apply, the contest was lawful because it was designed to correct a manifest racial imbalance in access to capital for Black women-owned businesses and did not bar the advancement of other non-Black women. Fearless also argued that the contest was a protected exercise of Fearless’s First Amendment rights.
The district court concluded that AAER had standing to bring a lawsuit, that Fearless’s grant contest constituted a contract for purposes of Section 1981, and that the contest did not qualify for any “remedial program” exception to Section 1981’s bar against racial discrimination. Nonetheless, the district court denied AAER’s request for an injunction because it had not shown a substantial likelihood that it could overcome Fearless’s First Amendment rights, finding that the contest likely constitutes expressive conduct.
Court of Appeals Decision and Reasoning
AAER subsequently appealed. The Eleventh Circuit took up each issue in turn, ultimately ruling against Fearless in a two-to-one opinion and ordering the district court to preliminarily enjoin Fearless’s contest during the pendency of the litigation.
Standing
The Eleventh Circuit affirmed the district court’s finding that AAER had standing, notwithstanding its failure to identify by name individual members “ready and able” to participate in the contest. As the Court noted, organizations are entitled to vindicate the rights of their members by suing on their behalf, provided the organization demonstrates: “(a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization’s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.” The Court held that identification of members does not require identification by legal name and that a plaintiff need only assert specific allegations sufficient to demonstrate that an individual suffered or would suffer harm. Notably, this finding conflicts with the Second Circuit’s decision in Do No Harm v. Pfizer, which recently held that failure to specifically identify members by legal name resulted in a lack of standing. Disagreeing with the Pfizer court, the Eleventh Court noted that the anonymous declarations sufficiently asserted that each owner was prepared to enter the contest and would have been eligible but for the owner’s race, stating that there is “no persuasive reason to think that the United States Constitution concerns itself with the particular name by which a litigant is called.”[1]
Application of Section 1981
In considering the likelihood of success of AAER’s claim (a key element in determining whether an injunction is appropriate), the Eleventh Circuit rejected Fearless’s argument that its contest did not constitute a contract under Section 1981. Contrasting the grant with the “simple” act of “donating money,” the Eleventh Circuit pointed to the contest’s exchange of consideration: a winning entrant “obtains $20,000 and valuable mentorship and, in return, grants Fearless permission to use its idea, name, image, and likeness for promotional purposes and agrees to indemnify Fearless to arbitrate any disputes that might arise. By any measure, that is a bargained-for exchange supported by good and sufficient consideration. It is, in other words, a contract.”
Goal of Remedying Discrimination Does Not Allow Race-Based Exclusion
The Court further rejected Fearless’s argument that it qualified for the “remedial program” exception for employers recognized by the Supreme Court in the 1987 case Johnson v. Transportation Agency. Under Johnson, a private employer’s race-conscious remedial program does not violate Title VII’s prohibition against discrimination if it (1) addresses “manifest racial imbalances” and (2) doesn’t “unnecessarily trammel” the rights of others or create “an absolute bar to” the advancement of other employees. The Eleventh Circuit panel assumed, without deciding, that the Johnson exception could apply as well to Section 1981 non-employment claims. The majority opinion also did not question (or even address) Fearless’s argument that the contest’s rules were designed to help remedy a manifest imbalance in the availability of investment funds for Black female entrepreneurs. (The dissenting opinion noted research that “shows that Black-women-founded companies have received far less than even one percent of all venture-capital funding in recent years.”) The Court nonetheless held that Fearless’s contest “flunks” the Johnson test because it “categorically bars non-black applicants.” The Court rejected Fearless’s argument that non-Black potential entrants can seek funding from other sources, opining that discrimination by one actor is not permissible simply because others do not discriminate.
No First Amendment Protection for Categorical Race-Based Bars on Eligibility
Finally, the Eleventh Circuit disagreed with the district court that the grant contest could be considered “a form of expressive conduct.” The Court of Appeals held that Fearless misunderstood “the critical distinction between advocating race discrimination and practicing it.” The Court distinguished the Supreme Court’s 2023 decision in 303 Creative LLC v. Elenis—which held that a website designer couldn’t be compelled to create material celebrating a same-sex wedding—on the grounds that Fearless’s “categorical race-based exclusion” was not sufficiently expressive to warrant protection under the Free Speech Clause.
Implications for DEI and Targeted Programs to Increase Minority Opportunities
The Eleventh Circuit’s decision does not have direct application beyond the dispute between AAER and Fearless, and it may not even be the last word in the case. Fearless may request that the full Eleventh Circuit exercise its discretion to reconsider en banc the decision of the three-judge panel; on June 25, 2024, the Court granted Fearless an extension until July 24, 2024, to submit a petition for rehearing. Fearless also has the option to file a petition for certiorari in the U.S. Supreme Court, although the Supreme Court grants fewer than 5% of such petitions. Further, the decision is not binding precedent outside the Eleventh Circuit, which includes Alabama, Florida and Georgia.
Nonetheless, the Fearless Fund decision has caused consternation among many nonprofit organizations and private or corporate foundations. Grant programs and other pipeline-building programs that use race as an eligibility criterion may be found to violate Section 1981. Programs that use proxy categories for race—such as “underrepresented populations”—may invite legal challenges if, based on context, the eligibility rules categorically exclude certain racial groups. In addition, because the decision treats any program with an exchange of “tangible benefits” as a contract under Section 1981, other programs designed to promote diversity, equity and inclusion (DEI)—common among professional societies and trade associations—that subsidize opportunities or memberships for minority members may be vulnerable to challenge, even if they do not involve cash grants.
In the wake of the 2023 Students for Fair Admissions v. Harvard decision, colleges and universities have turned to other strategies for promoting racial diversity among their student bodies and supporting opportunities for minority applicants. As explained in Pillsbury’s August 18, 2023, Client Alert, other organizations can apply these strategies outside of the higher education context:
- Focusing on inclusion, rather than race-conscious selection;
- Tracking and analyzing demographic data to evaluate the effectiveness of diversity-building initiatives;
- Increasing outreach and training;
- Adopting diversity as a stated part of an organization’s mission; and
- Expressly encouraging applications from minority demographic populations, without excluding other applicants.
The Biden Administration’s guidance to colleges and universities also emphasizes that institutions may lawfully consider how race has impacted an individual applicant’s lived experience. Similarly, the Eleventh Circuit’s Fearless Fund decision indicates that grant programs may lawfully consider factors such as the personal commitments, views, or experiences of applicants, but not the race of applicants.
In addition, under the reasoning of the Fearless Fund ruling, donation programs may continue to consider race as a basis for donation decisions, to the extent such giving does not involve an exchange of benefits that could qualify the program as a contract under Section 1981.
One lesson is clear, however: Any association, foundation, or other program that lists race as an eligibility criterion for grants or other tangible benefits should carefully evaluate the program’s rules with guidance from legal counsel.
[1] Judge Rosenbaum dissented from the majority opinion on standing grounds, characterizing the three declarations AAER submitted from anonymous members as “cookie-cutter declarations” that are “thread-bare and devoid of substance,” containing an “utter lack of relevant information (other than that the owners meet the other eligibility criteria).
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