A New Threat to Race-based Charitable Organizations

In a case contending that a nonprofit fund benefiting Black female entrepreneurs is discriminatory, the Eleventh Circuit has sided with the plaintiff, enjoining the fund from further grant-making pending conclusion of the litigation. The decision poses risks for nonprofits with race-based charitable purposes. (American Alliance for Equal Rights v. Fearless Fund, 2024 WL 2812981 (11th Cir. 6/3/24))

Background.

The defendant in the case, the Fearless Foundation, is a 501(c)(3) organization that, through its Fearless Funds, runs a contest awarding $20,000 grants and mentoring opportunities four times per year to small businesses owned by Black women. According to Fearless, Black women secured less than 1% of all venture-capital funding last year — the organization aims to “bridge the gap in venture capital funding for women of color.”

However, another 501(c)(3), the American Alliance for Equal Rights, challenged the grant contest, alleging it violates § 1981 of the 1866 Civil Rights Act’s ban on racial discrimination in contracting. Alliance contends that three of its members, anonymous female small business owners, are excluded from consideration for Fearless grants because they are not Black.

Enacted immediately after the Civil War to combat discrimination against newly-freed people in contexts ranging from employment to retail, § 1981 has recently been invoked in “reverse discrimination cases.” Alliance has asked the court to find that nonprofit charitable programs intended to advance civil rights can violate § 1981.

Last September, a Georgia federal district court denied Alliance’s request for a preliminary injunction, saying Fearless’ conduct in awarding grants is “expressive” and that the First Amendment may bar Alliance’s claims. The district court could not “conclude that § 1981 allows the Plaintiff injunctive relief prohibiting the Foundation’s chosen speech and expression.” It further found that that Alliance had not “carried its heavy burden of showing a clear likelihood of success on the merits.”

The Eleventh Circuit’s decision.

However, last week, the Eleventh Circuit reversed, finding that Alliance is likely to succeed on the merits of its § 1981 claim. The district court’s finding that the First Amendment can protect categorical race-based exclusion “risks sowing the seeds of antidiscrimination law’s demise,” the appellate court said.

The Eleventh Circuit remanded, instructing the district court to enter a preliminary injunction precluding Fearless from closing its current grant contest. Absent injunctive relief, it said, Alliance’s members would suffer “irreparable injury” through lost opportunities to compete for Fearless funding and mentorship.

Roger Colinvaux, a professor at Catholic University’s Columbus School of Law, disagreed with the appellate court’s analysis. He said that the Eleventh Circuit notes that Alliance is a 501(c)(3) organization, but “never mentions or acknowledges that the Fearless Fund is a charity and that the contest is the expression of Fearless’ charitable mission. Instead of considering the charitable context for Fearless’ program, the court likens Fearless’ conduct to regular commercial activity, like hiring employees. A reader of the court’s opinion alone would falsely believe that Fearless’ contest was just like any contest — for example, a sweepstakes, but only for Black-women owned businesses.”

Fearless’ counsel Mylan L. Denerstein, a partner at Gibson, Dunn & Crutcher, said, “the majority ruled that an 1866 law designed to provide economic freedom to newly-freed slaves actually prohibits the Fearless Foundation from providing grants to Black women. We disagree.” She added that “the discrimination in access to funding that Fearless Foundation seeks to address is long-standing and irrefutable.”

But Alliance President Edward Blum countered that “civil rights laws do not permit racial distinctions because some groups are overrepresented in various endeavors, while others are under-represented. Programs that exclude certain individuals because of their race such as the ones the Fearless Fund has designed and implemented are unjust and polarizing.”

What’s ahead.

Colinvaux said the appellate court’s “failure to wrestle with the charitable context of Fearless’ contest … calls into question decades of charity law and practice.” The court “does not cite any precedent for applying § 1981 to the distribution of charitable assistance,” he added.

The decision “will encourage charities in other jurisdictions to fight for a more thoughtful, nuanced opinion that takes into account the charitable context” and likely lead to an eventual circuit split on the underlying issues, according to Colinvaux. “At the end of the day, there’s a good chance the Supreme Court will have to take this up,” he concluded.

Denerstein said “this is the first court decision in the 150+ year history of the post-Civil War civil rights law that has halted private charitable support for any racial or ethnic group. The dissenting judge, the district court, and other courts have agreed with us that these types of claims should not prevail.”

She added that this is “not the final outcome in this case; it is a preliminary ruling without a full factual record. We are evaluating all of our options.”