On June 3, 2024, the Eleventh Circuit authorized a preliminary injunction in American Alliance for Equal Rights v. Fearless Fund Management, LLC et al.,1 ruling that a grant contest that awards funding and mentorship opportunities exclusively to Black women-owned businesses is substantially likely to violate federal anti-discrimination law. The injunction will prevent the Fearless Fund from awarding race-based grants while the case proceeds. The decision – which comes almost one year after the Supreme Court's decision last June in Students for Fair Admissions v. Harvard and Students for Fair Admissions v. University of North Carolina ("SFFA")2 striking down affirmative action in college admissions – represents a significant development in efforts to challenge corporate diversity, equity and inclusion ("DEI") initiatives.
Procedural History
The Atlanta-based Fearless Fund, under its foundation arm, operates the Fearless Strivers Grant Contest (the "Contest"), which awards $20,000 and provides mentorship opportunities to grantees. Pursuant to the grant eligibility criteria at issue in the case, an applicant must be a Black woman who is a principal owner of a US-based small business.3
The American Alliance for Equal Rights (the "Alliance") represented several members – identified in the lawsuit as Owners A, B and C – who were not Black women but claimed they desired to participate in the Contest.4 The Alliance filed suit challenging the Contest under 42 U.S.C. § 1981 ("Section 1981"), which prohibits private parties from discriminating on the basis of race when making or enforcing contracts.5
Last September, the United States District Court for the Northern District of Georgia denied the Alliance's request for a preliminary injunction, finding that the Alliance had standing to bring the claim but had shown neither a substantial likelihood of success on the merits nor that it would suffer irreparable injury.6 The court also found that the Contest was likely to be expressive speech protected by the First Amendment, such that the traditional Section 1981 analysis would not apply.7
A motions panel of the Eleventh Circuit subsequently granted the Alliance's request for a preliminary injunction pending appeal.8 Fearless Fund appealed, and the Eleventh Circuit heard oral argument in January 2024. This ruling followed.
The Ruling
A split panel of the Eleventh Circuit found it "substantially likely" that the Contest violates Section 1981 and is not protected by the First Amendment.
First, the Eleventh Circuit affirmed the district court's finding that the Alliance had organizational standing to sue because (a) its members – who were identified only by pseudonyms – had an injury-in-fact because they were "able and ready" to enter the Contest but would have been prohibited under the Contest's terms; (b) the Alliance "seeks racial equality for its members," which is "an interest germane to [the Alliance's] purposes"; and (c) neither the asserted claim nor requested injunctive relief would require individual proof or the participation of individual Alliance members.9
Second, the Eleventh Circuit held that Fearless Fund operated the Contest through "contracts" within the meaning of Section 1981, because each award, rather than being a "discretionary gift," constituted a "bargained-for exchange supported by good and sufficient consideration."10
Third, the Eleventh Circuit held that the Contest is not a valid remedial program that might be exempt from Section 1981. Fearless Fund had argued in its brief that its grants "seek to address the 'manifest racial imbalance' in access to capital for Black women-owned businesses," citing that only 0.13% of venture capital funds go to the 2% of small businesses owned by Black women, and relying on precedents allowing certain types of race-conscious remedial programs under limited circumstances.11 The court did not address this argument in depth – and specifically noted that its decision does not address whether such remedial programs remain permissible following SFFA – but concluded that the Contest was not a valid remedial program because it "unquestionably create[d] an absolute bar to the advancement of non-[B]lack business owners" by "categorically bar[ring] non-[B]lack applicants."12
Finally, the Eleventh Circuit held that Fearless Fund's contest constituted a categorical race-based exclusion that could not be protected by the First Amendment. To arrive at this finding, the majority distinguished between speech that may be discriminatory and "the very act of discrimination itself"14 (emphasis in original). The majority specifically noted that if Fearless Fund's refusal to consider applications on the basis of race were considered protected speech, "then so would be every act of race discrimination, no matter at whom it was directed"15 (emphasis in original).
Accordingly, the panel majority found that the Alliance had established a substantial likelihood of success on the merits of its claim.
Potential Implications
The Eleventh Circuit's ruling relates only to the issuance of a preliminary injunction; it is not a permanent injunction or final decision on the merits. However, it is the latest ruling in a series of challenges to various types of race-conscious initiatives following the Supreme Court's decision on race-conscious university admissions policies, and may lead to more challenges to grant programs and other initiatives that operate in a race-conscious manner.
Section 1981 is one of a complex set of anti-discrimination laws and regulations in the areas of employment, education and contracting that govern conduct for US businesses, educational institutions, nonprofits and government entities. The application of these laws and regulatory enforcement priorities is hotly contested, and federal, state and local regulators often have overlapping authority. WilmerHale's Anti-discrimination Practice is closely monitoring developments in this area and is regularly advising clients on the evolving legal landscape and how best to design and implement lawful initiatives and efforts to promote diversity, equity and inclusion.
Footnotes
1.American Alliance for Equal Rights v. Fearless Fund Management, LLC, Fearless Fund II, GP, LLC, Fearless Fund II, LP, Fearless Foundation, Inc., No. 23-13138 (11th Cir. 2024).
2. See Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 143 S. Ct. 2141, 2157 (2023).
3. See Official Rules, https://www.fearlessfund.foundation/official-rules (last accessed June 5, 2024).
4. Decision at 5.
5. "All persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts, to sue, be parties, give evidence, and to the full and equal benefit of all laws and proceedings for the security of persons and property as is enjoyed by white citizens, and shall be subject to like punishment, pains, penalties, taxes, licenses, and exactions of every kind, and to no other." 42 U.S.C. § 1981(a).
6. Decision at 6; see also American Alliance for Equal Rights v. Fearless Fund Management, LLC et al., No. 1:2023cv03424 - Document 115 (N.D. Ga. 2023).
7. American Alliance for Equal Rights v. Fearless Fund Mgmt. LLC, No. 23-CV-3424, 2023 WL 6295121, at *6-8 (N.D. Ga. Sept. 27, 2023).
8. American Alliance for Equal Rights v. Fearless Fund Mgmt. LLC, No. 23-13138, 2023 WL 6520763 at *1 (11th Cir. Sept. 30, 2023).
9. Decision at 7-14. In a dissenting opinion, Judge Rosenbaum asserted that the Alliance lacked standing to sue because its members had neither suffered an injury-in-fact nor established that they had a genuine interest in entering the Contest or would enter the Contest if the eligibility requirements were lifted. Judge Rosenbaum concluded that the Alliance members' lack of standing meant there was no "genuine, live dispute," and that the court lacked jurisdiction over the matter. See Decision at 48 (Rosenbaum, C.J., dissenting). While the court's finding of standing represents a victory for parties seeking to challenge corporate DEI initiatives, it is notable that the majority's finding in this area is not universally accepted. Though the Eleventh Circuit's finding of standing is aligned with decisions of the Fourth and Tenth Circuits, the Court's decision breaks from the Second Circuit, which in March denied standing in a case challenging a race-conscious fellowship program, where the plaintiff's members were not identified by name. See Do No Harm v. Pfizer Inc., No. 23-15, 2024 WL 949506 (2d Cir. Mar. 6, 2024). Last month, in a decision aligned with the dissent in the Eleventh Circuit's Fearless Fund decision, the United States District Court for the Northern District of Ohio denied standing to America First Legal in its attempt to halt Hello Alice's grant program for Black-owned small businesses, ruling that the plaintiff's members had failed to allege any injury that would allow them to seek relief. See Roberts & Freedom Truck Dispatch v. Progressive Preferred Ins. Co., No. 23-cv-1597 (N.D. Ohio May 21, 2024).
10. Decision at 15-16.
11. Appellees' Brief at 75.
12. Decision at 18.
13. Id. at 24.
14. Id. at 23.
15. Id. at 23-24.
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