Eleventh Circuit’s Fearless Fund Ruling and Its Potential Effect on the Use of Race-Conscious Criteria in Grantmaking

At a Glance

• On June 3, 2024, a three-judge panel of the Court of Appeals for the Eleventh Circuit held that the American Alliance for Equal Rights (the Alliance) was entitled to a preliminary injunction preventing Fearless Fund from holding a grant competition.
• The Alliance argued that a venture capital firm and its affiliated charitable foundation (Fearless Fund) violated 42 U.S.C. §1981 (Section 1981) by administering a competition offering grants to businesses that are owned at least 51% by Black women.
• While grantmakers should carefully consider the Eleventh Circuit’s rationale in Fearless Fund while crafting their grant programs, they should keep in mind that this judicial holding rests on very particular facts.
  
  

In the wake of last year’s Supreme Court decision in Students for Fair Admissions, Faegre Drinker has been tracking numerous legal developments regarding the use of race-conscious criteria in various fields of endeavor, including employment matters, contracting, college admissions and scholarships, and charitable grantmaking. American Alliance for Equal Rights v. Fearless Fund Management LLC, et al., represents one of the most closely watched cases in this area. In this case, an activist organization (the Alliance) argued that a venture capital firm and its affiliated charitable foundation (Fearless Fund) violated 42 U.S.C. §1981 (Section 1981) by administering a competition offering grants to businesses that are owned at least 51% by Black women.

On June 3, 2024, a three-judge panel of the Court of Appeals for the Eleventh Circuit held that the Alliance was entitled to a preliminary injunction preventing Fearless Fund from holding the grant competition. In reaching its decision, the Eleventh Circuit found that (i) the Alliance — a membership organization with the stated goal of “challenging distinctions made on the basis of race and ethnicity in federal and state courts” — had standing to sue; (ii) the grant competition constituted a “contract” and therefore was subject to Section 1981’s prohibition on the use of race-based discrimination in private contracting; and (iii) Fearless Fund’s grants did not constitute expressive conduct that is protected by the First Amendment.

The Eleventh Circuit’s jurisdiction extends only to federal courts in Alabama, Florida and Georgia. Nevertheless, grantmakers and other organizations across the nation should familiarize themselves with the rationale of the Fearless Fund decision, as it could form the basis of future challenges to the use of race-conscious criteria in philanthropic grants and other diversity-related programs.

Background and Holding

Fearless Fund’s grant competition was administered by Fearless Foundation, a 501(c)(3) organization, which accepted applications from and offered grants exclusively to businesses owned at least 51% by Black women. Grant recipients were required to provide rights in their name, image and likeness to Fearless Fund in order to publicize the grant and use the businesses and their owners’ stories in Fearless Fund’s public materials. The Alliance — which is led by Edward Blum, who also founded Students for Fair Admissions — sued Fearless Fund on behalf of its members who, it alleged, were denied the opportunity to contract with Fearless Fund because they are not Black women, i.e., allegedly on account of their race.

The Alliance brought suit in the federal District Court for Northern Georgia. The Alliance sought a preliminary injunction under Section 1981, which prohibits racial discrimination in contracting, even between private parties. Although the District Court held that the Alliance had standing to sue, it rejected issuing any injunction, largely on the grounds that Fearless Fund’s contest may constitute expressive conduct protected by the First Amendment.

In considering the Alliance’s appeal, the Eleventh Circuit first affirmed the District Court’s holding that the Alliance had standing to sue on behalf its members, even though those members did not enter Fearless Fund’s contest. The court concluded that the Alliance demonstrated its members were “able and ready” to enter the contest had they not been deterred by Fearless Fund’s racially exclusive rules.

The Eleventh Circuit then concluded that Fearless Fund’s grantmaking program was, indeed, a “contract” subject to Section 1981’s bar on racial discrimination in contracting. The court noted that Fearless Fund actually described the application process expressly as a “contract” until it was sued. Further, in exchange for the grant of funds, grantees provided Fearless Fund with name, image and likeness rights, agreed to indemnify Fearless Fund, and agreed to arbitrate their disputes. In short, the parties had exchanged mutual, enforceable promises — and a contract therefore was made. The court accordingly rejected the argument that the program was merely a means for “conveying ‘discretionary gifts’ that confer ‘no enforceable rights on contest entrants.’”

Likewise, the Eleventh Circuit rejected Fearless Fund’s argument that the contract was permissible due to a judicial exception to Section 1981’s prohibition on racial discrimination in contracting. That exception, articulated in 1979 by the Supreme Court in United Steelworks of America v. Weber, recognizes the validity of “remedial programs” that seek to address manifest racial imbalances without creating an absolute bar to the advancement of others. In holding that Fearless Fund’s program was not covered by this “remedial program” exception, the Eleventh Circuit observed that Fearless Fund limited its grant program to only Black women business owners and  thus “categorically bar[red]” non-Black applicants entirely from consideration.

Finally, the Eleventh Circuit rejected the District Court’s conclusion that Fearless Fund’s grant contest may constitute expressive conduct that could be protected by the First Amendment. The Eleventh Circuit emphasized that the Supreme Court has held that “the First Amendment does not protect the very act of discriminating on the basis of race.” It cited a 1976 case, Runyon v. McCrary, in which the Supreme Court held that a school could be sued by Black children for refusing to admit them on racial grounds. In Runyon, the Supreme Court held that while the First Amendment protected the right “to engage in association for the advancement of beliefs and ideas” — even racially discriminatory beliefs and ideas —  it does not protect the right to exclude individuals from such associations based on race. In applying this distinction to Fearless Fund’s grant contest, the Eleventh Circuit concluded that the contest did not merely reflect a desire to advocate for more Black women to own businesses. Instead, the court held that Fearless Fund engaged in racially discriminatory action by excluding would-be grant applicants based on race.

Four Practical Considerations for Grantmakers

Grantmakers should carefully consider the Eleventh Circuit’s rationale in crafting their grant programs. In doing so, however, they should keep in mind that this judicial holding rests on very particular facts. Of particular importance is that Fearless Fund categorically excluded non-Black women from consideration for grants, rather than stating race as a preference or positive consideration in a process open to women of all races. With that in mind, here are some practical considerations to keep in mind regarding the Eleventh Circuit’s decision:

1. Many grants likely will be construed as contracts for purposes of Section 1981. As long as a grantee confers meaningful rights on the grantor (e.g., publicity rights) or gives up meaningful rights that it otherwise could exercise (e.g., the right to litigate disputes rather than arbitrate them), consideration likely is being exchanged such that a contract will be found to exist — even though a grant intuitively may feel more like a “discretionary benefit” conferred by a grantor.
2. The use of categorically exclusive racial criteria in competitive grant programs will be vulnerable to challenge under Section 1981. If a grantor states that only applicants of a certain race are eligible or will be considered, the practice could be deemed not to constitute the reflection of a viewpoint (e.g., the desire to promote diversity or equity by engaging in action intended to remediate the effects of past racial discrimination) but, instead, an impermissible discriminatory practice.
3. The use of race-conscious criteria as nonexclusive factors was not addressed by the Eleventh Circuit. The rationale of the Fearless Fund holding suggests that a grantmaker may be able to use more holistic criteria, short of an “absolute bar,” to achieve diversity, inclusion and equity objectives that could qualify under the “remedial program” exception articulated by the Supreme Court in United Steelworks of America v. Weber. In such scenarios, it will be important to consider whether the terms and conditions of a particular grant program are clearly designed to address “manifest racial imbalances” without “unnecessarily trammel[ing]” the rights of other individuals or organizations or imposing an “absolute bar” to others.
4. It is not clear how — or if — the Eleventh Circuit’s analysis in Fearless Fund would apply to an unsolicited, noncompetitive grant made to an individual or organization in order to achieve the grantor’s objective of remediating the effects of past racial discrimination. A nonrecipient of such a grant, whether an individual or an organization, would face an uphill battle in attempting to establish standing to challenge the legality of such a grant, as it would be difficult to demonstrate the harm suffered as a result of the grantor’s decision (e.g., that the nonrecipient otherwise would have received the grant in question).

Three Concluding Observations About Both the Breadth and Narrowness of the Decision

1. Outside of grantmaking, the Eleventh Circuit’s rationale and decision in Fearless Fund seems to be an extension of the Supreme Court’s majority opinion in Students for Fair Admissions that is applicable to many other industries and contexts. Perhaps the most significant aspect of that broader applicability is the use of Section 1981 as the vehicle for pressing claims based on arguably race-conscious decisions.As we have discussed in previous client alerts, while government supplier diversity programs are already under constitutional attack after Students for Fair Admissions on equal protection grounds (see Landscape Consultants of Texas, Inc. v. City of Houston), private supplier diversity programs promoted by for-profit and nonprofit corporations are subject to challenge under Section 1981, especially to the extent that such programs give more weight to certified minority contractors in selection processes.
2. While the First Amendment free speech clause defense was deemed inapplicable to justify what the Eleventh Circuit found in Fearless Fund constituted race discrimination, we encourage organizations not to overread the opinion as standing for the proposition that First Amendment rights are never applicable in evaluating race conscious programs. The Eleventh Circuit’s opinion itself noted that the First Amendment may be a shield against government regulation or sanction of expression in this area considering the Supreme Court’s decision in 303 Creative. And the Eleventh Circuit in Honeyfund.com v. DeSantis recognized that organizational free speech rights may overcome laws aimed at restricting programs like diversity, equity and inclusion training.
3. Finally, it is important to underscore that not only is the Fearless Fund decision limited to its particular facts, but (as noted above) it also is geographically limited in its precedential effect. Grantmakers operating outside of Alabama, Florida and Georgia still should consider the rationale of this ruling as illustrative of possible concerns, but they are not legally bound by the ruling.

Faegre Drinker will continue monitoring developments in Fearless Fund and related proceedings.