BACKGROUND

On January 31, 2024 attorneys for a Black women-owned venture capitalist firm presented oral arguments in the 11^th Circuit Court of Appeals to challenge a temporary injunction that has prohibited the group from awarding grants exclusively to Black women entrepreneurs. The ongoing legal dispute between Fearless Fund Management LLC (“Fearless”) and The American Alliance for Equal Rights (“AAER”), a nonprofit started by Edward Blum, could have broad legal implications for race-based diversity, equity, and inclusion initiatives across all industries, including emerging fund manager programs, minority business accelerators, diversity grant programs, or other race-based economic development initiatives.

Fearless is a venture capital firm established by Arian Simone and Ayana Parsons, both Black women, with the aim of bridging the venture capital funding divide for women of color. In 2022, this demographic received only 0.13% of such funding. To help remedy this disparity, Fearless established the Fearless Strivers Grant Contest, overseen by Fearless Fund's philanthropic division, the Fearless Foundation, a registered 501(c)(3) nonprofit organization. This grant competition is open only to Black women and a recipient is selected four times annually to receive a $20,000 grant, along with structured mentorship and resources to foster business growth.

AAER has filed a racial discrimination lawsuit against Fearless on behalf of three undisclosed White and Asian women. The lawsuit argues that the Fearless Strivers Grant Contest constitutes unlawful discrimination under Section 1981 of the Civil Rights Act of 1866, which prohibits racial discrimination in private contracts.¹

This case is part of a recent surge in legal challenges targeting corporate diversity initiatives including lawsuits initiated by AAER under Section 1981 against major law firms such as Morrison & Foerster LLP, Perkins Coie LLP, and Winston & Strawn LLP. Efforts to limit corporate diversity, equity, and inclusion measures have intensified since the Supreme Court's June 2023 decision striking down affirmative action in college admissions.²

LEGAL ARGUMENTS

AAER

AAER contends that the Fearless Strivers Grant Contest violates Section 1981's ban on racial discrimination in contracts by excluding non-Black women. They argue that Fearless is not merely providing donations but conducting a contest where winners are selected based on the strength of their businesses.

AAER points to the requirement for entrants to consent to the official rules, which were expressly designated as a "contract." They emphasize that these rules include provisions granting Fearless certain rights concerning the use and disclosure of ideas in the entry, the utilization of the entrant's name, image, and likeness for public relations purposes, as well as clauses mandating arbitration and releasing and indemnifying Fearless.³

Fearless

Fearless contends that the grants provided by the foundation are discretionary gifts aimed at furthering the organization's mission and do not grant contest entrants any enforceable rights. An amicus brief filed by Professor Roger Colinvaux elaborates on this argument, stating that whether an activity is considered charitable does not hinge on whether the funding entails a contract or if the money is disbursed as a grant, loan, or investment. Instead, the crucial factor is whether the giving aligns with the nonprofit's mission, and whether that mission is in line with recognized charitable purposes.⁴

Fearless also argues that applying Section 1981 to its program would violate the First Amendment by forcing Fearless to modify the content of its intended speech, which is to emphasize the importance of Black women-owned businesses to the economy.⁵ Lastly, Fearless asserts that AAER lacks standing because it has not identified members of its organization who have standing, opting instead to refer to them anonymously as Owners A, B, and C, and has not provided specific details regarding their preparedness to apply to the grant program.

MITIGATION STRATEGIES

Following the Supreme Court's decision to strike down affirmative action, we have seen several challenges initiated against programs operating at the intersection of education and employment. These include grant programs, internships, and mentorship programs.⁶ More challenges to DEI-related initiatives are likely to arise as activist groups aim to broaden the application of the court's rationale for striking down race-conscious decision-making to other areas.

Below are some measures that organizations of all kinds can use to mitigate their legal risk:

Avoid Protected Characteristics

One approach for organizations to minimize risk involves shifting attention away from groups covered by laws such as Title VII to those without such protections.⁷ For instance, an organization could introduce a program aimed at fostering socioeconomic diversity, as socioeconomic status isn't legally protected under federal anti-discrimination laws. As long as the organization doesn't use this new classification as a stand-in for a protected group, such a classification remains legally valid.

Additionally, rather than restricting program or grant participation solely to members of specific groups, organizations can extend eligibility to individuals from diverse demographic backgrounds who share a commitment to the program or grant's mission. In this approach, consideration of an applicant's identity is only relevant insofar as it reflects their individual character.

Avoid Preferential Language

Instead of showing "preference" towards certain groups, organizations can consider implementing DEI initiatives that are neutral regarding identity but effectively combat bias in the workplace. For instance, they could establish structured recruitment and promotion procedures that rely on transparent, merit-based criteria, or they could eliminate stereotypical language from employee evaluation processes. These strategies don't elevate specific groups over others; instead, they aim to even the playing field for everyone.

Avoid Tangible Benefits

Under Title VII, plaintiffs seeking to bring a discrimination claim must have experienced an "adverse employment action," signifying a substantial alteration in their terms or conditions of employment, rather than a minor inconvenience or trivial slight. Similarly, under section 1981 of the Civil Rights Act of 1866, claimants must have encountered discrimination in the establishment or enforcement of a contract. Therefore, one way for organizations to mitigate risk is by implementing DEI programs that foster a more diverse and inclusive workplace culture overall, without directly impacting the benefits or employment opportunities of individual employees.

For example, organizations could: (i) establish a more physically inclusive office environment by implementing features like all-gender bathrooms, nursing rooms, or child-care facilities; (ii) expand outreach efforts to a wider array of colleges to attract a more diverse candidate pool; (iii) offer support to community organizations dedicated to DEI issues, such as through pro bono work and philanthropic initiatives; or (iv) provide employee education or training covering topics such as bias, allyship, or inclusive leadership.

CONCLUSION

While the Fearless Fund case holds significance and potential impact, the underlying question regarding the legality of employing race-conscious strategies to address racial inequalities will remain a subject of contention. It could be several years before there is clarity for organizations operating in this space, but as long as advocates of DEI strategically adapt, the fundamental mission of fostering a fairer future will persist for many years to come.

¹ American Alliance for Equal Rights v. Fearless Fund Management, LLC, et al., No. 23-13138.

² Students for Fair Admissions, Inc. (SFFA) v. President & Fellows of Harvard College and SFFA v. University of North Carolina, Nos. 20-1199 & 21-707.

³ The District Court did not directly analyze whether Section 1981 applies to charitable giving because it found that AAER had sufficiently shown that the Fearless Strivers contest was contractual in nature, and therefore Section 1981 applied. See Am. All. for Equal Rts. v. Fearless Fund Mgmt., LLC , No. 1:23-CV-3424-TWT, 2023 WL 6295121, at *5 (N.D. Ga. Sept. 27, 2023).

⁴ See American Alliance for Equal Rights v. Fearless Fund Management, LLC, et al., No. 23-13138, Brief Of Professor Roger Colinvaux As Amicus Curiae In Support Of Defendants-Appellees And Affirmance, Dkt. 100.

⁵ See American Alliance for Equal Rights v. Fearless Fund Management, LLC, et al., No. 23-13138, Brief for Appellees, Dkt. 63, pg. 17-24.

⁶ On December 19, 2023, a dues-paying member of the Wisconsin Bar filed a complaint against the Bar over its “Diversity Clerkship Program,” a summer hiring program for first-year law students. Suhr v. Dietrich, No. 2:23-cv-01697-SCD (E.D. Wis. 2023); On January 4, the Foundation Against Intolerance and Racism reported that it had sent a letter to the National Institutes of Health (“NIH”) on November 30, 2023, concerning the NIH’s Consortium Underrepresented Student Program, a summer internship program for individuals from underrepresented groups; On February 5, 2024, AAER filed a complaint and motion for a preliminary injunction against Hidden Star, a nonprofit organization that provides grants of $2,750 to “minority and low-income entrepreneurs” through its Galaxy of Stars grant program. The program also connects recipients to Hidden Star’s expertise and resources, including an online community.

⁷ Title VII of the Civil Rights Act of 1964 is a federal employment law that prohibits employment discrimination based on race, color, religion, sex (including pregnancy), and national origin.

 

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