On June 3, 2024, the U.S. Court of Appeals for the Eleventh Circuit granted a preliminary injunction prohibiting a venture capital fund from awarding grants based on race and gender. In reversal of the district court, the majority found the grant contest “substantially likely to violate” 42 USC Section 1981, a federal statute enacted as part of the Civil Rights Act of 1866 prohibiting private parties from racial discrimination in contracts. This appellate court’s decision in American Alliance for Equal Rights v. Fearless Fund Management, LLC, highlights the heightened legal scrutiny currently faced by diversity, equity, and inclusion (DEI) programs offering benefits or aid based on protected characteristics, and race in particular.

Background

The Atlanta-based venture capital fund defendant sought to “bridge the gap in venture capital funding for women of color” through a contest providing mentorship opportunities and $20,000 in grants to Black women-owned small businesses.

The American Alliance for Equal Rights (AAER) is a conservative activist group spearheaded by the legal strategist behind the recent Supreme Court decision curtailing affirmative action in college admissions. The group seeks to dismantle DEI efforts and eliminate distinctions based on race and ethnicity.

On August 2, 2023, AAER brought suit in the Eleventh Circuit against the defendant on behalf of several members who alleged that they desired to participate in the grant contest but were barred as non-Black women. AAER contended that: (1) defendant’s grant program created a contractual relationship with applicants; and (2) the program’s terms restricting eligibility to businesses owned by Black women violated Section 1981.

Ruling

With a split panel, the majority ruled it was “substantially likely” that defendant’s grant program violated Section 1981 and was thus not protected under the First Amendment. The dissent contended that AAER lacked standing. Although the decision currently applies only to the Eleventh Circuit, it will likely influence prospective interpretations of Section 1981 vis-à-vis private contracting.

AAER Had Standing to Sue on Behalf of Pseudonymous Potential Applicants

First, the Eleventh Circuit determined that AAER had standing under Article III of the U.S. Constitution. Specifically, non-profit membership groups such as AAER had standing to file suit on behalf of pseudonymous potential applicants who were “able and ready” to apply for a grant but were excluded by the program’s terms. Judge Rosenbaum, dissenting, alleged that AAER’s potential applicants failed to establish sufficient injury. “Although three of American AAER’s members pay lip service to the idea they are ‘ready and able’ to participate in [defendant]’s Contest, their declarations show, in context, that none has a genuine interest in actually entering the Contest.” The Eleventh Circuit’s split panel of justices renders the issue of AAER’s standing ripe for review by the Supreme Court.

Defendant’s Grant Contest Created a Contract

Next, the Eleventh Circuit agreed with the district court’s finding that the grant contest constituted a contract predicated on race under Section 1981. While the statute was first enacted in the wake of emancipation to ensure all citizens were provided with the same legal protections as white citizens, it has since been interpreted as protecting people of all races from discrimination in contracts.

The court focused on the language of the original rules for the contest stating, “by entering [the] contest,” applicants “agree[d] to these official rules, which are a contract.” Additionally, a grantee of defendant’s largess received $20,000 and mentorship in exchange for granting defendant “permission to use its idea, name, image, and likeness for promotional purposes” and agreeing to indemnify defendant and arbitrate any disputes arising out of the program. The court described that exchange as a textbook agreement supported by consideration and mutual obligation. The court’s expansive interpretation of Section 1981 is novel, creating greater protections against discrimination in private contracting. Specifically, the decision expanded the scope of Section 1981 to private grants or personal mentorship by private entities. Moreover, defendant’s grant program was not a remedial measure entitled to exception under Section 1981. As opposed to other remedial programs combatting discrimination, the court founds that defendant’s contract “erects an ‘absolute bar’ to non-Black applicants” and thus fails to qualify for an exception.

The Grant Contest Was Not Protected “Expressive Conduct” Under the First Amendment

Finally, the defendant could not assert the First Amendment as a defense to the Section 1981 claim because its grant contest was not deemed “expressive conduct” protected by the First Amendment. The majority distinguished defendant’s grants from a 2023 Supreme Court ruling allowing a web designer to refuse to make wedding websites for same-sex couples. The web designer did not claim a right to refuse to serve same-sex couples, rather contended she was not obligated to create expressive speech on their behalf. In the case at hand, defendant “flatly” refused to accept non-Black women applicants. In sum, the court held that defendant’s grant program crossed the line and lost the opportunity to use the First Amendment as a shield because it practiced race discrimination instead of advocating race discrimination.

Key Takeaways

The overarching ruling established that AAER has standing to sue on behalf of its pseudonymous members, defendant’s contest constituted a contract erecting an absolute bar to non-Black applicants, and the contest was thus substantially likely to violate Section 1981. Defendant’s grant program will remain enjoined pending the outcome of the final case on the merits.

Although the ruling currently applies exclusively to the Eleventh Circuit, it marks yet another challenge to programs attempting to remediate historical discrimination by offering aid or benefits based on race or gender. The outcome further opens the door for plaintiffs to challenge race-conscious policies by broadly classifying contracts under Section 1981 and granting standing to pseudonymous applicants who are “able and ready” to apply.

Given the ever-changing legal landscape surrounding DEI initiatives, employers should consider the implications under both Section 1981 and relevant state and local laws before enacting programs or offering aid – whether it be to applicants, employees, contractors, grantees, or vendors/suppliers – predicated upon protected categories such as race or gender.