The Fearless Foundation has agreed to shut down its grant program for Black women business owners, settling a lawsuit that has been closely watched by nonprofit grant makers. The decision comes after the Eleventh Circuit Court of Appeals ruled against the Fearless Foundation in June, issuing a preliminary injunction blocking the program from operating while the litigation continued in the trial court. The settlement avoids an adverse decision on the merits at the trial court and an eventual appeal to the U.S. Supreme Court that could have resulted in a decision with nationwide effect. Instead, the impact of the lawsuit is largely limited to the Eleventh Circuit states of Alabama, Florida, and Georgia. Although the Fearless suit is over, it is unlikely to be the last. Nonprofits across the country, particularly in the Eleventh Circuit states, should therefore carefully consider the Fearless litigation as they continue their work to advance racial equity and justice.
The Fearless Lawsuit Alleged Violations of 42 U.S.C. Section 1981
The Fearless Foundation is the nonprofit 501(c)(3) arm of Atlanta-based Fearless Fund Management, LLC. Fearless Fund is a venture capital firm that invests in businesses led by women of color, which overwhelmingly do not have access to venture capital funding. Through the Foundation, Fearless sponsored the Fearless Strivers Grant Contest, through which eligible Black women business owners could apply for and receive $20,000 grants. The contest was governed by written rules that specifically stated that by submitting an entry, applicants agree to be bound by the rules “which are a contract.” Entries would be judged by Fearless based on the viability and strength of the business, how the business intended to use the grant, and the potential for business growth. Other contest rules provided that the contest winner would receive money, and, in exchange, Fearless would obtain certain rights from the entrant, including the right to use the contestant’s name, image, and likeness for “public relations, advertising, [and] promotional purposes”; a release and promise to indemnify Fearless for various liabilities; and a promise to resolve any disputes between the parties through arbitration instead of litigation.
The American Alliance for Equal Rights (AAER) sued Fearless in federal court, alleging that the grant program discriminated against its members on the basis of race in violation of federal law. AAER is a 501(c)(3) nonprofit membership organization founded by a conservative legal activist who was also involved in successfully challenging the use of race in connection with college admissions in Students for Fair Admissions v. Harvard and UNC, 600 U.S. 181 (2023). AAER claimed that its members were able and ready to apply for the contest but were not eligible because they were not Black.
AAER specifically alleged that the program violated 42 U.S.C. Section 1981. Section 1981 prohibits discrimination on the basis of race in the making or enforcement of contracts. It was enacted as part of the Civil Rights Act of 1866 to remedy discrimination against Black people in the wake of the Civil War, granting all persons the same rights to make and enforce contracts “as is enjoyed by white citizens.”
The Eleventh Circuit Found the Fearless Grant Program Likely Violates Section 1981
AAER appealed the trial court’s initial rejection of its request to enjoin the grant program. On appeal, a 2-1 panel of the Eleventh Circuit reversed the lower court’s decision and granted AAER’s request for a preliminary injunction, finding it probable that the grant program constituted a “contract” within the meaning of Section 1981, that it did not qualify for any applicable remedial-program exception, and that it was unlikely to be protected by the First Amendment.
The Eleventh Circuit explained that the grant program constituted a contract not only because the contest rules stated as much (though the term “contract” was later removed from the rules), but because the parties engaged in a bargained-for exchange of value. The program awarded $20,000 to winners in exchange for publicity rights in the winners’ names and likenesses, limits on liability and indemnification promises, and an agreement to arbitrate any disputes that might arise. Because the program resulted in a contractual relationship between Fearless and the winner, the court concluded that Section 1981 applied.
Fearless argued that if Section 1981 applied, the program qualifies for an exemption for “remedial programs” articulated by the U.S. Supreme Court in a line of employment discrimination cases, including United Steelworkers of America, AFL-CIO-CLC v. Weber, 443 U.S. 193 (1979) and Johnson v. Transportation Agency, 480 U.S. 616 (1987). In these cases, race-conscious remedial programs that address racial inequities and do not create an absolute bar to applicants based on race are permissible. The Eleventh Circuit declined to decide in this case whether the remedial program exception applies to non-employment-related Section 1981 cases; nevertheless, it determined that even if the exception did apply, the Fearless contest did not meet the standard for remedial programs articulated by the U.S. Supreme Court because the contest included a categorical bar to entry for non-Black business owners.
The Eleventh Circuit also rejected Fearless’s argument that the grant program was protected by the First Amendment. Focusing on the difference between “advocating race discrimination and practicing it,” the majority said that the First Amendment did not protect the “very act of discrimination” of excluding applications from business owners who were not Black women.
Aftermath and Takeaways
AAER and Fearless settled the lawsuit on September 11, 2024, with Fearless agreeing to permanently shut down its grant program. This means the courts will not have the opportunity to decide the case on the merits. Nevertheless, the Eleventh Circuit’s preliminary injunction ruling marks the first time a court has held that a private, race-based, nonprofit grantmaking program may violate federal civil rights law. Although other nonprofit organizations that engage in race-based or race-conscious grantmaking may be understandably concerned about what the Fearless ruling means for their own programs, groups should consider the following:
- This opinion is limited to the Eleventh Circuit. Federal courts in the Eleventh Circuit states of Alabama, Florida, and Georgia are bound by decisions of the U.S. Court of Appeals for the Eleventh Circuit, meaning the Fearless decision has legal implications for organizations operating programs in those states. Organizations located or engaging in race-based or race-conscious grantmaking in Alabama, Florida, and Georgia should therefore carefully consider whether such programs constitute “contracts” within the meaning of Section 1981. Groups operating in other states are not subject to the Eleventh Circuit’s jurisdiction, and courts in other jurisdictions could rule differently in future litigation, should it arise.
- Section 1981 only applies to race-based contracting. Section 1981 prohibits discrimination on the basis of race in the making or enforcement of contracts. Non-race-based eligibility criteria, such as gender, income, geographic location, etc., are not within the scope of Section 1981. Programs not involving race-based eligibility criteria are therefore not impacted by the Fearless ruling. Organizations may wish to consider whether it is possible to modify any programs that include race-based eligibility criteria to achieve the programmatic goals without reference to race. For example, organizations may consider broadening eligibility criteria to include other demographics that are representative of the population that the organization aims to serve.
- Grants may constitute contracts. While grants and contracts are often considered distinct concepts for nonprofits, the Fearless ruling applied basic contract law principles to conclude that Fearless’s grant contest was a “contract” under Section 1981. In short, a contract exists if there is a bargained-for exchange of value between the parties. And intellectual property licenses, promises to indemnify or release liabilities, or agreements to resolve disputes by arbitration can all be sufficient consideration to make a contract. For organizations that are in the Eleventh Circuit or are otherwise looking to restructure programs to minimize risk of legal challenge under Section 1981, a move away from providing funds using grant agreements that subject the grant recipient to material legal obligations and toward a trust-based philanthropy model of charitable giving may be worth considering.
- The decision does not impact organizations that have missions of furthering diversity or supporting racial equity. Because Section 1981 only applies to contracts based on race, the racial justice missions of civil rights groups and other organizations are unaffected by this decision. Nonprofits remain free to espouse missions aimed at ending racial discrimination and furthering racial equity—Section 1981 does not speak to these goals writ large, only to race-based contracts.
The Eleventh Circuit’s Fearless decision serves as one federal appellate court’s view of the application of Section 1981 to private nonprofit grant programs, even if the programs aim to remediate discrimination. While all indications are that AAER will continue to challenge such programs (see the injunction issued in the Northern District of Texas against Founders First Community Development Corporation in August 2024), the law remains unsettled. The panel’s approach may be indicative of how other courts will resolve similar suits, or sister circuits may carve a new jurisprudential path entirely. Venable’s Nonprofit Organizations Practice Group will continue to monitor developments in this area.
