On June 3, 2024, a Federal Court of Appeals ruled against the Fearless Fund, a venture capital firm with a nonprofit Foundation running a program called the “Strivers Grant Contest,” to provide $20,000 grants to businesses owned by Black women. Specifically, the Court of Appeals ruled that a preliminary injunction halting the program should be imposed pending a full legal challenge to the program’s race-based nature.
The lawsuit was filed last year by the American Alliance for Equal Rights (Alliance), which was also involved in the 2023 Students for Fair Admissions Supreme Court case challenging affirmative action in college admissions. Now, in this Fearless Fund case, the Alliance argues that the Foundation’s contest violates Section 1981 of the 1866 Civil Rights Action, a federal law prohibiting race discrimination in contracting. The grant application contest was open only to businesses that are at least “51% black woman owned,” which the Foundation explains is consistent with its mission to bridge a gap in venture capital funding for women of color founders. The Alliance represents several business owners who wish to participate in Fearless Fund’s contest but are not black women.
When the Alliance initially filed the case, the trial court denied the Alliance’s request for an injunction to prevent the Foundation from operating the program during the pendency of the case. The Alliance appealed that denial, arguing before the Eleventh Circuit Court of Appeals that the Foundation was effectively entering into a contract with the grant recipients based on race, violating Section 1981’s ban on race discrimination in contracting. The Fearless Foundation argued that it was not engaged in contracting, but charitable giving, and that the First Amendment protected the Foundation’s program because the contest is a form of expressive conduct reflecting its commitment to the black women-owned business community.
The Court of Appeals rejected these arguments, holding that the program likely violates Section 1981 and, therefore, the Foundation must pause its program pending a final ruling at the trial court. In reaching that conclusion, the Court of Appeals first reasoned that the contest was not purely charitable giving, but involved contracting, because it required a winner to give the Foundation the right to use a winner’s name and likeness as a condition for receiving a grant, among other reasons. The Court of Appeals also reasoned that the First Amendment guarantees a right to engage in association to advance beliefs and ideas, but does not protect the act of discriminating based on race. Therefore, the Foundation’s refusal to entertain applications from business owners who are not black females likely violates federal law.
This ruling only applies to whether the court should issue a preliminary injunction during the pendency of the underlying challenge to the case. There is not yet a final ruling. Additionally, the Eleventh Circuit’s rulings are not binding in California and therefore, do not change California law.
However, it is important to take note of this ruling. The court’s reasoning and the ongoing legal challenges to similar race-based programs have potentially far-reaching implications. For example, nonprofit scholarship providers, as well as their related educational institutions such as community colleges and private universities, with existing programs with raced-based eligibility criteria, are vulnerable to similar legal challenges, creating a substantial risk of costly litigation to defend existing programs.
Should a binding ruling come down that such programs are unlawful, organizations and institutions operating race-based programs may need to discontinue the programs to comply with the law, creating complex legal implications for existing diversity initiatives. Discontinuing a current program may also affect an organization’s existing legal commitments made to donors to fund such programs. Accordingly, organizations and institutions may want to start looking at how these issues impact their approach to donor relationships, restricted donations, scholarship rules, gift agreements, endowments, and related development activities.
LCW attorneys are closely monitoring further developments in the Fearless Fund case. They are available to discuss these developments with clients seeking to understand the potential implications for their programs or partnerships.