Key Takeaways from the Fearless Fund Case

Monday, November 4, 2024 

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Navigating “Reverse Discrimination” Litigation and Advancing Racial Equity

Recent legal attacks on race-conscious investing have caused anxiety among those in diversity, equity, and inclusion (DEI) and race equity spaces. In particular, the case American Alliance for Equal Rights v. Fearless Fund has caused nonprofits involved in race-conscious programming to question their strategies and companies to wonder whether they should defund or even abandon their DEI initiatives.

While these “reverse discrimination” lawsuits have changed the decision calculus for many organizations, funders should not be scared away from the essential work they’ve been doing to promote race equity. This article aims to put the Fearless Fund case into perspective and provide guidance to help organizations continue pursuing their race equity missions within the bounds of the law.

Brief Background on Fearless Fund

The Fearless Fund case has garnered significant media attention since it was filed in the Northern District of Georgia in August 2023. The suit was brought by American Alliance for Equal Rights (AAER), an advocacy organization founded by Edward Blum, the same anti-affirmative action activist behind Students for Fair Admissions (SFFA), in which the U.S. Supreme Court struck down Harvard College’s and the University of North Carolina’s race-conscious affirmative action programs as unconstitutional.

In Fearless Fund, AAER attacked the “Strivers Grant Contest,” a competition through which the Fearless Foundation (the 501(c)(3) arm of the Fearless Fund venture capital firm) awarded $20,000 grants to businesses owned by Black women founders. The purpose of the grantmaking program was to bridge the well-documented gap in venture capital funding for businesses owned by women of color; funding that amounts to less than 0.1% of total U.S. venture capital funding. The litigation focused on the Strivers Grant Contest only and did not directly challenge the venture capital investments made by Fearless Fund’s business arm into women of color-owned businesses.

AAER argued that the contest was discriminatory and violated Section 1981 of the Civil Rights Act of 1866. Section 1981 prohibits discrimination based on race in the making and enforcement of contracts. The law was passed during the Reconstruction era to remedy the persistent economic exclusion of Black Americans.

The Fearless Fund case is the anti-affirmative action movement’s first attempt to use Section 1981 to challenge the legality of remedial race-based philanthropy. AAER  was successful in the 11th Circuit Court of Appeals on June 3, 2024, when the court issued a 2-1 decision upholding a preliminary injunction preventing Fearless Foundation from moving forward with the Strivers Grant Contest. The panel found that the grant contest was a contract subject to Section 1981 and that AAER was “substantially likely” to prevail in its lawsuit. The trial court below had declined to grant a preliminary injunction to halt the contest after determining that it may be protected under the First Amendment as expressive conduct.

On September 11, 2024, AAER and Fearless Fund announced their agreement to settle the case. Details of the settlement were not made public. Fearless Fund’s CEO Arian Simone issued a statement calling the settlement “a win and positive outcome for the Fearless Fund and our community,” noting that the organization had “strategically avoided a Supreme Court ruling... because a ruling not in our favor at the Supreme Court would've ended minority-based funding across the country and that would not be wise.” 

Indeed, the settlement avoided a final ruling on the merits.  Any precedential value of the 11th Circuit’s preliminary injunction decision is limited to Alabama, Florida, and Georgia.

Surge of “Reverse Discrimination” Litigation and Chilling Effect

The Fearless Fund case is part of a coordinated campaign by a handful of advocacy groups to dismantle affirmative action, race-conscious philanthropy, and corporate DEI programs across the country.  Emboldened by the Supreme Court’s SFFA decision, groups such as AAER, America First Legal (AFL), and Do No Harm have brought dozens of lawsuits, filed government complaints, and sent company demand letters challenging race-conscious activity far outside the context of higher education.

For example, a complaint recently filed by AFL-backed Faculty, Alumni, and Students Opposed to Racial Preferences against Northwestern University asserts that “faculty hiring at American universities is a cesspool of corruption” with “faculty and administrators… openly discriminating on account of race and sex when appointing professors… by hiring women and racial minorities with mediocre and undistinguished records over white men who have better credentials, better scholarship, and better teaching ability.” 

These "reverse discrimination” cases invoke Section 1981 and seek to turn it on its head. Many cases have been dismissed for lack of standing. Many others have settled. The barrage of cases has put pressure on organizations engaged in race equity grant making and activities. Many organizations that have supported race-conscious programs and scholarships are becoming more hesitant about funding them. Legal attacks have also caused a decreased appetite for race-conscious investing. As a result, the funding for Black-founded startups has begun to dry up again. 

Putting Fearless Fund in Perspective

While the Fearless Fund case is important, racial justice advocates should not give it more weight than it deserves. It is helpful to consider not only what the 11th Circuit did, but what it did not do. The court’s decision did not grapple with persuasive arguments made by amici that Section 1981’s drafters did not intend for the law to regulate charitable giving and that interpreting the section to prohibit remedial race-based philanthropy would disrupt the charitable sector and pervert the purpose of the statute. Other circuits, or the Supreme Court, could find these arguments compelling.

According to the 11th Circuit’s interpretation of Section 1981, pure donations – without the element of a bargained-for exchange – fall outside the ambit of the statute (which applies only to contracts). Moreover, the decision left open the argument that grant making activities that align with and advance a charity’s tax-exempt anti-discrimination mission may be protected by the First Amendment as expressive conduct.

The court also suggested that the remedial-program exception to the anti-discrimination prohibition contained in Title VII of the Civil Rights Act of 1964 (which prohibits employment-related discrimination) may apply in Section 1981 cases arising outside the employment contract context. However, the court did conclude that this defense was not available to the Fearless Foundation because its contest “unquestionably ‘created an absolute bar’ to the advancement of non-black business owners.”  Grant programs that do not impose an “absolute bar” based on an applicant’s race present a lower litigation risk.

The Fearless Fund decision did not involve, and does not impose, new limits on corporate DEI programs. Employers may still engage in a wide range of race-conscious activities, including targeted outreach to increase the diversity of applicant pools, voluntary employee affinity groups, and mentorship and training opportunities open to all applicants.

Notably, Fearless Fund did not attack non-charitable venture investments. Venture investors should take some comfort in the fact that anti-affirmative action organizations have not begun challenging private investment decisions. As a practical matter, venture capital deal flow and funding decisions are generally private and not race-exclusive. Private funders should document their investment rationale and continue to focus on investing in under-resourced founders whose businesses align with the funders’ values, mission, and business direction.

Stay the Course

It will likely take years for the law on race-conscious philanthropy and investing to settle. The Supreme Court may eventually weigh in and resolve conflicts between lower courts. Until then, in the absence of a definitive executive order or legislation, we can expect continued legal challenges and conflicting judicial opinions. Organizations engaged in race equity work should stand firm and continue pursuing their missions. 

Abandoning DEI and race equity programs would be handing race equity opponents a premature victory.  Instead, organizations committed to race equity should monitor the shifting legal landscape and consult with legal counsel in structuring race-conscious giving programs to maximize impact while minimizing risk. Pro bono resources may exist for small nonprofits that cannot afford legal counsel. For example, the Lawyers’ Committee for Civil Rights Under Law and Legal, Education, Advocacy and Defense (LEAD) for Racial Justice Initiative have established programs to help small nonprofits. Lawyers and their clients are in this fight together.

Final Thoughts

One upside to this rash of “reverse discrimination” litigation is bringing many perspectives into the conversation. DEI and pro bono professionals, as well as nonprofit, civil rights, corporate governance, insurance, and investment management lawyers have come together to strategize how to best protect their clients against this wave of challenges. Diverse teams are familiarizing themselves with new laws and tactics to help their clients continue to successfully pursue their race equity missions and continue fighting the good fight.

Christina Holder is corporate public interest counsel with Lowenstein Sandler. Based in Roseland, NJ, she counsels nonprofits, social enterprises, and microbusiness clients on various business legal needs. In her role, she collaborates frequently with J. Danielle Carr, Lowenstein’s Chief Officer of Inclusion and President of ALFDP.