DEI Rollbacks Create Legal, Governance Risks Under Section 1981

In the wake of political backlash against diversity, equity, and inclusion initiatives, many companies have scaled back or abandoned the racial equity commitments made in 2020.

While much of the public debate the reputational risk and cultural signaling, the legal consequences of this retrenchment are becoming more acute.

The rollback of race-conscious contracting practices—particularly when it comes to relationships with Black-owned businesses—may trigger liability under 42 U.S.C. § 1981, expose governance vulnerabilities, and require rethinking what it means to contract fairly in American capitalism.

The Contracting Risk

Section 1981 was enacted after the Civil War to guarantee all persons in the US the same right to make and enforce contracts “as is enjoyed by white citizens.” While the statute is often overlooked in corporate compliance discussions, it remains a potent tool for challenging race-based interference with commercial relationships.

Recent DEI pullbacks—especially those terminating or reducing contracts with Black vendors—may expose companies to Section 1981 litigation. Even in the wake of the Supreme Court decision Comcast Corp. v. NAAAOM, which imposed a but-for causation standard, companies are vulnerable if plaintiffs can show that race was a motivating factor in the decision to alter or end a contractual relationship.

This risk isn’t hypothetical. As companies such as Target and McDonald’s face public scrutiny for reversing course on supplier diversity, Black-owned businesses are left with fewer procurement opportunities and diminished access to markets that briefly opened during the post-George Floyd DEI wave.

If those opportunities didn’t evaporate because of objective performance metrics, but due to external political pressure or discomfort with racial equity branding, that may be enough to support a Section 1981 claim.

Dual Exposure Problem

Legal risk under Section 1981 is often viewed in isolation, but it now exists in tension with the increasing threat of reverse discrimination litigation—highlighted in recent cases challenging race-conscious programs in employment, venture funding, and supplier relationships. Corporate DEI strategies now sit in a “dual exposure” zone: Retreat too far, and they risk Section 1981 litigation from marginalized vendors and employees; maintain forward-leaning commitments, and they may invite lawsuits from plaintiffs claiming racial preference.

This dual risk underscores the need for clear governance processes, documented decision-making, and strategic communication. Companies must evaluate whether their DEI actions—both forward and backward—align with long-term business interests, legal compliance, and stated corporate values.

Materiality, Disclosure Considerations

For public companies, the consequences of DEI reversals extend beyond civil rights law. A growing body of commentary suggests that changes to DEI policies may trigger obligations under Regulation S-K if such policies were previously material to business strategy or investor communications.

Shareholders may reasonably expect continuity and transparency when companies make sweeping commitments about racial equity. Sudden reversals, particularly those unaccompanied by public disclosure or rationale, could implicate securities law. Inconsistent DEI strategies also raise reputational risks that intersect with brand value, customer loyalty, and employee engagement—all of which may be relevant to risk disclosures in management discussion and analysis sections of corporate filings.

Contracting as Governance

I have argued that corporate stakeholders should reframe contracting as more than a transactional or procurement function, but as a site of governance. Contracting practices that repeatedly marginalize Black vendors, exclude them from supply chains, or condition access on the avoidance of public racial discourse, reflect deeper systemic norms.

This dynamic privileges the status quo, allowing racial inclusion only when it doesn’t disrupt dominant expectations of control.

Boards and executives shouldn’t view supplier diversity and inclusive contracting as discretionary add-ons, but as integral to long-term value creation, legal compliance, and market competitiveness. This requires treating racial equity commitments as serious governance matters—not symbolic gestures easily reversed when political winds shift.

Looking Ahead

As corporate America faces growing scrutiny from all sides of the DEI debate, decision-makers must navigate the legal, ethical, and economic stakes of their contracting choices. Section 1981 offers a reminder that contracting isn’t a race-neutral act—and that companies may be held accountable when race plays a decisive role in who gets to participate in the marketplace.

Organizations that wish to reduce exposure should avoid reactionary policies, recommit to transparent performance-based evaluations, and embed equity within broader governance structures. As the legal landscape evolves, inclusive contracting isn’t just good policy. It may soon be essential risk management.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Carliss Chatman is a professor at SMU Dedman School of Law. She writes on corporate governance, contract law, race, and economic justice.

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