In Fearless Fund, a Federal Appeals Court Issues Section 1981 Injunction (Pending Appeal) in Emerging DEI Litigation Landscape

Section 1981, the federal law that prohibits discrimination on the basis of race in the making and enforcement of “contracts,” has been at the center of the emerging litigation landscape for diversity, equity, and inclusion (“DEI”) policies in recent months. This includes recent Section 1981 lawsuits against major law firms, companies like Pfizer and Amazon, and entities in a range of other industries. A federal appeals court recently issued one of the first Section 1981 decisions to follow the Supreme Court’s Harvard/UNC affirmative action decision, finding (in an injunction order pending appeal) that a grant program exclusively for Black women-owned businesses “is substantially likely to violate 42 U.S.C. § 1981.” American Alliance for Equal Rights v. Fearless Fund Management et al., No. 23-13138, Dkt. No. 8-2 (11th Cir. September 30, 2023) (“Fearless Fund”).

This Fearless Fund lawsuit was filed in August by the American Alliance for Equal Rights (“AAER”), an organization run by Edward Blum, who also spearheaded the lawsuits against Harvard and UNC. Fearless Foundation (“Fund”) is a nonprofit organization that provides grants to businesses led by women of color, including a “Strivers” program that awards $20,000 grants as well as business support and mentoring services to Black women-owned businesses. AAER alleges that the Fund program violates Section 1981’s “guarantee of race neutrality” in making “contracts.” In the district court, O’Melveny represented the National Venture Capital Association and Venture Forward, as amicus in support of Fearless Fund, in a brief that highlighted historical imbalances in venture capital and the importance of grant programs in addressing those imbalances and promoting economic growth.

On September 26, the federal district court declined to enjoin the Fund from proceeding with the Strivers program during the litigation. But plaintiff appealed, and on September 30, the federal appeals court (the 11th Circuit) enjoined the Fund “from closing the application window or picking a winner” for the Strivers grant program, pending a full appeal. In a short order, reflecting the preliminary stage of the appeal, a majority of the court concluded that “the plaintiff has established that the defendants’ racially exclusionary program” is “substantially likely to violate” Section 1981.

In granting AAER’s request for “an injunction pending appeal,” the appeals court rejected the district court’s conclusion that the First Amendment renders Section 1981 “unconstitutional” as applied to the Fund. The Fund had argued, and the district court had agreed, that the Strivers program was expressive conduct reflecting the Fund’s message in support of Black women-owned businesses. The district court relied on the Supreme Court’s recent decision in 303 Creative LLC v. Elenis, 143 S. Ct. 2298, 2308 (2023), for the proposition that “antidiscrimination statutes cannot be used to compel an organization’s expressive conduct.” The appeals court disagreed, stating that “[a]lthough the First Amendment protects the defendants’ right to promote beliefs about race, it does not give the defendants the right to exclude persons from a contractual regime based on their race.” See Runyon v. McCrary, 427 U.S. 176 (1976). With respect to 303 Creative, the appeals court found that the Fund does not “provide ‘expressive services’ or otherwise engage in ‘pure speech.’”

The appeals court further held (contrary to one dissenting judge) that AAER’s Section 1981 claim does not fail on the basis that it is brought, at least in part, “on behalf of white members.” Citing the Supreme Court’s 1976 decision in McDonald, the court stated that Section 1981 “was meant, by its broad terms, to proscribe discrimination in the making and enforcement of contracts against, or in favor of, any race.” McDonald v. Santa Fe Trail Transp. Co., 427 U.S. 273, 295 (1976).

Finally, the appeals court noted and did not disturb the district court’s findings that (1) AAER has standing to bring suit, as an organization on behalf of members; and (2) that the Strivers program is a “contractual regime that brings this case within the realm of § 1981.”¹

With an “injunction pending appeal” now in place, the parties will proceed to full briefing on the issues raised in the Fearless Fund appeal, and the Fund will not select recipients of the Strivers program or close the application window pending further order of the appeals court.

¹ The district court had also addressed the Fund’s argument that the Strivers contest was permissible as a voluntary affirmative action program, under caselaw such as Johnson v. Transportation Agency, Santa Clara County, Cal., 480 U.S. 616, 626-27 (1987). The district court said it was “unclear” if the Harvard/UNC decision – which interpreted the Equal Protection Clause in context of higher education – “overruled the affirmative action plan defense to § 1981 under Johnson.” In any event, the district court “conclude[d] that, at the preliminary injunction stage, the Foundation’s Contest does not appear to . . . fit within an employer’s traditional affirmative action plan under the exception to § 1981.” The appeals court did not mention or address voluntary affirmative action plans in its order.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Apalla U. Chopra, an O’Melveny partner licensed to practice law in California, Aparna B. Joshi, an O’Melveny partner licensed to practice law in the District of Columbia and Illinois, Tristan Morales, an O’Melveny partner licensed to practice law in the District of Columbia and California, David Cohen, an O’Melveny counsel licensed to practice law in New York, and Aysha A. Chowdhry, an O’Melveny law clerk, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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