Black Business Fund Appeal Tests Post-Civil War Law in DEI Cases

A legal advocacy group’s challenge to an Atlanta venture fund’s grants for Black women entrepreneurs could help define the reach of a Civil War-era anti-discrimination statute and the legality of diversity programs spanning employment, education, and more.

The US Court of Appeals for the Eleventh Circuit in Miami will hear arguments Wednesday in the case brought by the American Alliance for Equal Rights, which sued on behalf of three unnamed White and Asian women arguing Fearless Fund Management’s grant contest for Black-women-owned businesses amounts to illegal discrimination under Section 1981 of the Civil Rights Act of 1866.

A panel of judges from the Eleventh Circuit previously ordered a pause on the grant program while the litigation proceeds, disagreeing with a lower federal court that denied AAER’s request for injunction.

The case is part of a recent flurry of legal challenges to corporate programs aimed at promoting diversity, including lawsuits that American Alliance for Equal Rights brought under Section 1981 against large law firms such as Morrison & Foerster LLP, Perkins Coie LLP, and Winston & Strawn LLP. Conservative-backed efforts to rein in corporate diversity, equity, and inclusion policies escalated following the June 2023 US Supreme Court ruling that struck down affirmative action in college admissions.

AAER founder Edward Blum also led the charge in challenging those university admissions policies.

Section 1981 “has really become the legal weapon of choice for those who oppose DEI programs,” said Lauren J. Hartz, an attorney with Jenner & Block who was hired to defend law firms in several of the recent diversity challenges.

There are key legal questions yet to be answered about the statute, including the standing for activist groups like AAER to sue without naming individual plaintiffs who have been harmed by the policies, she said. It’s also unclear the extent to which Section 1981 applies to certain programs, such as Fearless Fund’s grant contest, because the section specifically applies to racial bias in contractual arrangements.

“The Eleventh Circuit’s decision isn’t going to be the last word on any of these issues, but it could create a precedent other courts are going to examine,” Hartz said.

One of Few Appeals

The Fearless Fund case could become the first of the recent DEI challenges to yield a substantive federal appellate court decision. While a lawsuit against Pfizer Inc. alleging discrimination in its fellowship program is pending appeal at the Second Circuit in New York, the judges hearing that case in October indicated it could be found moot after the company amended its program criteria.

Many of the targeted corporations and law firms have revised their diversity policies to remove explicit racial preferences, and the challengers have subsequently dropped their lawsuits.

The program, the Fearless Strivers Grant Contest, offers $20,000 grants to small businesses that are majority-owned by Black women. The fund had advertised three application periods earlier in 2023 without issue, but faced the legal challenge preventing it from announcing a winner or closing applications for the year’s fourth grant as scheduled on Sept. 30.

“What we are dealing with is an all-out assault on programs that are intended to promote economic equality for African Americans in this country,” said Keith Harrison, an attorney with Crowell & Moring LLP who authored an amicus brief for a coalition including the ACLU, NAACP, and Lawyers’ Committee for Civil Rights Under Law. “They were successful on affirmative action. They hope to be successful on Section 1981.”

Legal fights over racial preferences traditionally have focused on employment and higher education, Hartz said. But in the last several months, activist groups are increasingly bringing “challenges to programs that operate at the intersection of education and employment—so for example training programs, fellowship programs, mentorship programs,” such as the program targeted in the Pfizer case.

The evolving case law around Section 1981 will help determine the statute’s reach to govern diversity programs in those arenas, she said. And it’s conceivable the Second Circuit could reach a different conclusion in the Pfizer appeal than the Eleventh Circuit in the Fearless Fund appeal, creating a circuit split on the requirements for legal standing, she added.

Remedy for Past Inequities

Congress enacted Section 1981 in the post-Civil War Reconstruction era, in response to cultural barriers and state laws that prevented formerly enslaved Black Americans from getting jobs, buying homes and farmland, and otherwise advancing socially and economically.

Because of this congressional intent, Harrison argues in his brief that corporate diversity policies aimed at remedying past racial injustice shouldn’t be considered discriminatory under Section 1981, even if they include racial preferences.

“Whether you call it a grant or a contract, it was the intent of Congress that remedial race-conscious programs like this aimed at creating a more equitable economic environment for the Black community are not only consistent with the act but a good thing for this country,” Harrison said.

Regardless of congressional intent, opponents of DEI programs say the text of the statute and prior courts’ interpretations show Section 1981—among other areas of federal law—bans all forms of racial discrimination, regardless of which races are being favored or disfavored.

In one such case from 1976, the Supreme Court sided with White litigants to find that Section 1981 protects Americans from employment discrimination regardless of their race, color, or ethnicity, in McDonald v. Santa Fe Trail Transportation.

The notion of trying to redress past injustice should be interpreted differently today than it was during Reconstruction, said Ilya Shapiro, an attorney with the Manhattan Institute who authored an amicus brief for the American Civil Rights Project, Manhattan Institute, and Buckeye Institute.

“Trying to remedy someone’s past condition of servitude where they themselves had been a slave is different from doing something 150 years later,” he said. “It’s purely skin color, purely race. I don’t think that argument about status, the status of literally having been a slave, I don’t think that’s compelling reason to allow differential treatment based on race in 2024.”

As another potential defense for Fearless Fund’s grant program, the US District Court for the Northern District of Georgia found in its September decision that the program could be protected as expressive conduct under the First Amendment.

Shapiro criticized that rationale in his brief, saying it “seemingly declares all of life to be Constitutionally protected performance art, a step that would expand the First Amendment’s freedom of speech into an exemption of all conduct from all substantive law.”

Grant Program Halted

The Eleventh Circuit also rejected the First Amendment defense in its first look at the case, issuing a split 2-1 decision in September that ordered Fearless Fund to pause the application deadline for its grant program.

Judges Robert J. Luck and Andrew L. Brasher, both appointed by former President Donald Trump, led the split decision pausing the program. Judge Charles R. Wilson, a Clinton appointee, dissented and said the program should be allowed to continue, partly because AAER lacks legal standing to bring the challenge.

Luck also is scheduled to hear Wednesday’s arguments in Miami, joined by Judges Kevin C. Newsom and Robin S. Rosenbaum—Trump and Obama appointees, respectively.

Gilbert C. Dickey of Consovoy McCarthy PLLC is scheduled to present AAER’s oral argument. Jason C. Schwartz and Mylan L. Denerstein of Gibson Dunn & Crutcher LLP are scheduled to argue for Fearless Fund.

With so many murky legal questions around the use of Section 1981 in DEI challenges, the Eleventh Circuit could opt to issue a narrow decision that focuses on one issue or to write a broad opinion that touches on all the questions as the district court did, Hartz said.

If Fearless Fund focuses on the First Amendment defense, it’s likely to have “an uphill battle,” given the Eleventh Circuit’s prior decision to issue the injunction, she said.

The case is American Alliance for Equal Rights v. Fearless Fund Management LLC, 11th Cir., No. 23-13138, oral arguments scheduled 1/31/24.