A Tale of Two Cases – DEI Programs Under Scrutiny

At a Glance

• Last month, two courts reached different conclusions about the legality of companies’ diversity equity and inclusion programs under Section 1981. The cases display different tactics and defenses and raise questions about how different courts will respond to these kinds of claims in the future.
• In Correll v. Amazon.com, Inc., a judge in the U.S. District Court for the Southern District of California held that the plaintiff failed to plead an existing or future contract which Amazon impaired or blocked through racial discrimination.
• In American Alliance for Equal Rights v. Fearless Fund Mgm’t, the U.S. District Court for the Northern District of Georgia and the U.S. Court of Appeals for the Eleventh Circuit held American Alliance had standing to sue. The Eleventh Circuit further granted injunctive relief, overruling the district court in this respect.

Last month, two courts reached different conclusions about the legality of companies’ diversity equity and inclusion (DEI) programs under Section 1981. The cases display different tactics and defenses and raise questions about how courts will respond to these cases in the future.

The Amazon Case

In Correll v. Amazon.com, Inc., 2023 WL 6131080 (S.D. Cal. Sept. 19, 2023), a white male plaintiff alleged that he visited Amazon’s website with the intent to sell collectible coins and comic books. But when he arrived at the site, the plaintiff found Amazon’s seller programs “denied and deprived heterosexual white males,” among other groups, “the full and equal accommodations, advantages, facilities, privileges or services based on their sexual orientation, race, and sex.” The plaintiff brought suit under Section 1981 and California’s Unruh Civil Rights Act, and Amazon later moved to dismiss the claims on two grounds: (1) lack of standing, and (2) failure to state a claim.

Did the plaintiff have standing to sue? To establish standing, the plaintiff claimed that he suffered an injury in fact — discrimination — because he viewed “identity-based incentive programs” on Amazon’s site for which he could not qualify. The plaintiff further claimed that he was “able and ready” to serve as an Amazon Professional Seller (APS) but “knew his business would be at a competitive disadvantage as a result of his identity.” In opposition, Amazon argued that the plaintiff could not have experienced an injury because he was never able to sell collectible coins and comics as an APS: both categories were closed to new APS participants before the plaintiff expressed an interest to be a seller. But the district court initially deferred without prejudice any decision on standing, finding discovery was necessary to determine if Amazon had indeed banned all new sellers in the applicable categories prior to the plaintiff’s expressed intent to sell his products. 

Was the plaintiff’s deterrence from applying sufficient to support a Section 1981 claim? The plaintiff argued that Amazon’s programs did not preclude him from contracting as a seller, but “[Plaintiff] did not desire to participate in a marketplace which provided some benefit programs only to minorities.” In contrast, Amazon argued that the plaintiff’s claim that he was deterred from contracting is not sufficient to make a Section 1981 claim. On this front, the district court agreed with Amazon — the plaintiff failed to plead an existing or future contract which Amazon impaired or blocked through racial discrimination. The court noted the question of whether deterrence from contracting deterrence is sufficient under Section 1981 was an issue of first impression in the Ninth Circuit. Nevertheless, the court explained, “[s]everal other circuits [i.e., First, Fifth and Eighth Circuits] have held that a defendant must preclude the plaintiff from entering into a contract to establish a Section 1981 claim, whereas mere deterrence is insufficient.”

The Fearless Fund Case

In American Alliance for Equal Rights v. Fearless Fund Mgm’t, LLC, 2023 WL 6295121 (N.D. Ga. Sept. 27, 2023), injunction granted 2023 WL 6520763 (11th Cir. Sept. 30, 2023), the American Alliance for Equal Rights (the Alliance) sued the Fearless Fund — whose mission is to bridge the gap in venture capital funding for women of color — under Section 1981, claiming that the Fearless Strivers Grant Contest (Contest), which awards $20,000 grants to small businesses that are majority-owned by Black women, is discriminatory because it excludes non-Black applicants. The Alliance claimed that its undisclosed members (identified simply as Owners A, B, and C) were “ready to apply for the Contest but for their ineligibility due to their race.” The Alliance moved for declaratory judgment that the Contest violates Section 1981 and injunctive relief barring Fearless Fund from continuing the Contest. The district court denied the Alliance’s motion.

Importantly, the Eleventh Circuit reversed in a two-to-one decision that could open the door for injunctions in that circuit (i.e., the federal courts in Alabama, Florida and Georgia) of any contracting that includes “racially exclusionary program[s].”

Did the Alliance have standing to sue? Both the district court and the Eleventh Circuit agreed that the Alliance had standing to bring suit.

• Does the failure to identify members preclude standing? No. “[F]or prospective equitable relief, organizational plaintiffs need not ‘name names’ to establish standing,” the district court held. “An organizational plaintiff seeking retrospective relief may be required to list at least one name, but only after some discovery. In other words, requiring specific names at the motion to dismiss stage is inappropriate.”¹
• Is the Alliance really just a sham and not worthy of being treated as a membership organization? No. Relying on SFFA, the district court held that “[w]here, as here, an organization has identified members and represents them in good faith, our cases do not require further scrutiny into how the organization operates.” ²
• Could the Alliance’s members show but-for race discrimination? Yes. The Alliance explained that its members’ claimed injuries were instead based on “their inability to apply for the grant funding, as opposed to their ultimate inability to obtain the grant funding.” The court rejected Fairless Fund’s claim that an organization would be barred from bringing a Section 1981 claim because of the need to show but-for causation of all injured members on an individualized basis.  

Was the Contest a contract? Because Section 1981 applies to only contracting, whether the Contest and grant is a contract was key to the case. Fearless Fund argued that the Contest and grant is a charitable donation, and as a discretionary gift, it does not constitute a contractual award. In contrast, the Alliance asserted that the Contest is a unilateral contract rather than a charitable donation.  

The district court and the Eleventh Circuit agreed with the Alliance. At the district court level, Judge Thomas W. Thrash Jr. held that “the Contest operates as a unilateral offer to contestants that they may accept by completing their entry,” and “contestants relinquish rights to the Fearless Fund that amount to legal detriments.” On review, the Eleventh Circuit agreed, approving the district court’s holding that the Alliance “clearly” has standing and has “clearly shown the existence of a contractual regime that brings this case within the realm of § 1981.”

Could the Alliance show irreparable injury to grant preliminary injunction? The Alliance claimed that by facing a racial barrier from applying for the Contest, it and its members experienced irreparable injury in the lost opportunity to apply for the Fearless Fund grant. In opposition, the Fearless Fund asserted there could be no presumption of irreparable harm because Section 1981 does not mandate injunctive relief.

Although the district court agreed with the Fearless Fund, in a split two-to-one decision on September 30, 2023, the Eleventh Circuit held that the Alliance “established that the [Fearless Fund’s] racially exclusionary program . . . is substantially likely to violate [Section] 1981.” The panel majority also found that the Alliance established irreparable injury, and that the balance of equities and public interest favored enjoining the Contest.

Is Section 1981 unconstitutional as applied to the Contest under the First Amendment? The Fearless Fund argued that the First Amendment right to free speech bars the Section 1981 claim because anti-discrimination statutes cannot compel an organization’s expressive conduct.  

Once again, the district court agreed with Fearless Fund, noting that “donating money qualifies as expressive conduct.” The district court found that Fearless Fund “clearly intends to convey a particular message in promoting and operating its grant program: ‘Black women-owned businesses are vital to our economy” and that the Fearless Fund carried out its commitment to that message “by supporting ‘entrepreneurs who might otherwise lack the access to capital necessary to bring their businesses to life.’”

But the Eleventh Circuit overruled the district court, finding that the Fearless Fund’s Contest is not “expressive services” or “pure speech.” “Although the First Amendment protects the defendants’ right to promote beliefs about race,” the panel explained, “it does not give the defendants the right to exclude persons from a contractual regime based on their race.”

Does the Contest qualify as an affirmative action program? The Fearless Fund argued that its Contest was a valid affirmative action program, which would defeat the Alliance’s Section 1981 claim. The district court disagreed. According to Judge Thrash, the Contest was not an affirmative action program because (a) the Fearless Fund is not an employer, and (b) the means of overcoming a manifest racial imbalance in Black women-owned business’s access to capital seemed unlikely to satisfy strict scrutiny, to the extent strict scrutiny became the standard after SFFA.³ The Eleventh Circuit implicitly agreed with the lower court by enjoining the Fearless Fund’s Contest.

What to make of these two cases? Expect courts to continue to reach divergent outcomes until the issue is finally settled by the Supreme Court.