The Eleventh Circuit’s Fearless Fund Decision: Implications for Race-Conscious Initiatives

On June 3, 2024, the U.S. Court of Appeals for the Eleventh Circuit granted a preliminary injunction to prevent the Fearless Fund from administering a contest that would have awarded $20,000 grants to small businesses owned by Black women. Reversing a lower court’s opinion, the Court of Appeals ruled in a 2-1 decision that the Fearless Fund’s contest is substantially likely to violate Section 1981 of the Civil Rights Act, 42 U.S.C. § 1981, which prohibits race discrimination in making and enforcing private contracts. Am. All. for Equal Rts. v. Fearless Fund Mgmt., LLC, 103 F.4th 765 (11th Cir. 2024).

Judge Newsom, joined by Judge Luck, authored the majority opinion which found that: (1) the plaintiff had organizational standing to sue because its (non-Black) individual members (who were not named in the complaint) were, but for the fact that the contest was limited to Black women, “able and ready” to apply to the Fearless Fund contest; (2) Section 1981 applied because the contest was a “contract”; and (3) no available defenses applied. The dissent, authored by Judge Rosenbaum, argued that plaintiffs did not have standing because they were “flopping” — a sports analogy to fake an injury for strategic advantage — and did not provide specific enough evidence of being “able and ready” to apply for the contest.

Standing

The court first addressed whether the American Alliance for Equal Rights (the Alliance), an organization led by Edward Blum that sponsors race-based challenges to diversity and inclusion initiatives, had institutional standing to sue the Fearless Fund. The majority found that the Alliance had institutional standing in part because members of the Alliance would have standing to sue individually. Fearless, 103 F.4th at 771-75. The court rejected Fearless Fund’s argument that the Alliance needed to provide an individual member’s legal name, concluding instead that using pseudonyms was permissible. Id. at 772-73. The court also reasoned that the individual members conferred institutional standing to the Alliance because their declarations provided sufficient evidence of being “able and ready” to enter the contest. Id. at 773-75. For instance, the declarations described how the unnamed individuals would have qualified for the contest but for their race and specified how those individuals would use the $20,000 grant if they had received such a grant. Id. at 774.¹ In her dissent, Judge Rosenbaum disagreed that these declarations were sufficient to confer standing, deeming the declarations to be boilerplate generalizations amounting to “faking” an injury. Id. at 780-89.

Judge Rosenbaum’s focus on standing suggests that standing could be a battleground in similar challenges. As her dissent emphasized, the Second Circuit dismissed a similar lawsuit challenging a Pfizer diversity fellowship program on standing grounds. Id. at *15-16; see Do No Harm v. Pfizer Inc., 96 F.4th 106, 112-129 (2nd Cir. 2024) (affirming dismissal of discrimination claims brought by Do No Harm on behalf of white and Asian members where Do No Harm lacked organizational standing for failing to identify members by name and for failing to “signal a concrete readiness to apply to the Fellowship.”).

Contest as a Contract

After determining that the Alliance had standing to sue, the majority opinion held as a threshold matter that Section 1981 of the Civil Rights Act applies because the Fearless Fund contest is a contract. The court framed its conclusion by using a generalized legal definition of the word “contract”:

a contract [is] an agreement between competent parties that is supported by consideration, mutual consent, and mutual obligation. That definition fits Fearless’s contest to a T. Under [the contest rules], a winning entrant obtains $20,000 and valuable mentorship and, in return, grants Fearless permission to use its idea, name, image, and likeness for promotional purposes and agrees to indemnify Fearless to arbitrate any disputes that might arise.

Fearless, 103 F.4th at 775. Because the contest constituted a bargained-for exchange of value, the court found that Section 1981 applied. The majority’s expansive view of what constitutes a contract under Section 1981 provides a broad roadmap that other judges may follow in future challenges to programs with race-based screening criteria.

The majority opinion also cautioned that an initiative will likely still be seen as a “contract” even if it takes steps to distance itself from the label. For instance, the court noted that a program that makes a “switch-eroo” to its rules “to make them seem less contract-y” should still be held accountable if its conduct suggests contract-forming behavior. Id. at 776 n.4. Fearless Fund’s original contest rules had stated that “by entering this contest, you agree to these official rules, which are a contract.” Id. at 775. After the Alliance sued, however, Fearless Fund dropped the “contract” language from its rules and tweaked the specific benefits and obligations exchanged by Fearless Fund and its applicants. Id. However, because Fearless Fund had switched between old and new rules after being sued and it would be “easy for Fearless to return to its old ways,” the majority found that the changes were cosmetic rather than substantive. Id. at 776 n.4.

Substantially Likely to Violate Section 1981

After reconciling the threshold issues of standing and statutory application, the court majority turned to the factors that courts take into account in deciding when a preliminary injunction is appropriate: (1) whether plaintiff has substantial likelihood on success of the merits; (2) whether plaintiff will suffer irreparable harm in absence of relief; (3) balance of equities; and (4) public interest. Id. at 775. The court considered all four factors, with the first factor — likelihood of success on the merits — being most important.

The majority found that the Alliance has a substantial likelihood of success on the merits in its suit against the Fearless Fund. Id. In finding that the contest likely violates Section 1981, the court rejected Fearless Fund’s contentions that it should be exempted from liability as (1) a “valid remedial program” or (2) engaging in protected First Amendment conduct.

Valid remedial program exception: The “valid remedial program” exception, which courts recognize in discrimination cases (Title VII and employment litigation), provides that a race-conscious remedial program does not violate anti-discrimination laws if it addresses “manifest racial imbalances” and does not “unnecessarily trammel” the rights of others or “create an absolute bar to the advancement of other people.” Id. at 776. The court assumed for the sake of argument that the doctrine applied as a defense to a Section 1981 claim, but found that the contest did not qualify because it “unquestionably creates an absolute bar to the advancement of non-black business owners.” Id. at 777. Because the contest rules expressly limited acceptance to “black females,” the court majority found that the contest employed an impermissible categorical bar on non-black applicants. Id.

It is worth emphasizing that Fearless Fund involved a challenge to a contest that was expressly limited by its terms to Black women. However, it remains unsettled whether a program that considers race among other screening factors and does not in any other way impose a categorical race requirement could be a “valid remedial program” exempted from liability under Section 1981. Though the court did not decide whether the “valid remedial program” defense applies in non-employment discrimination cases, the majority opinion displayed skepticism toward the arguments put forth by Fearless Fund. The court noted that the Title VII doctrine extends to Section 1981 only because those claims “are often brought together in the employment context.” Id. at 776. Thus, the decision suggests that courts might narrowly interpret this exception or find that it does not apply in Section 1981 litigation.

First Amendment defense: On the First Amendment defense, the court held that the contest is not protected under the First Amendment because the First Amendment protects only the “right to harbor bigoted views” but not the practice of a “categorial race-based exclusion.” Id. at 779. The court acknowledged that the line between “pure speech” — which is protected — and “the very act of discrimination” — which is not protected — is difficult to draw. Id. In finding that the Fearless Fund contest constituted an act of discrimination rather than expressive speech, the court emphasized that “Fearless simply — and flatly — refuses to entertain applications from business owners who aren’t ‘black females.’” Id.

Next Steps and an Evolving Judicial Landscape

The Eleventh Circuit’s decision in Fearless Fund illustrates that there is judicial appetite for barring diversity initiatives under Section 1981 of the Civil Rights Act. However, cases highlighted by the dissent, such as Do No Harm, also illustrate that judges in other federal circuits could use a lack of standing as a method of dismissing challenges to similar initiatives. The issue of standing seems to be emerging as a litmus test of judges’ willingness to permit similar challenges to proceed.

Overall, both the majority and dissenting opinions also illustrate the fact-intensive nature of the judicial inquiry into whether a particular program violates Section 1981. Courts will scrutinize a program’s specific structure, messaging, and goals to determine, for instance, whether that program is narrowly tailored to address documented historic discrimination versus whether it constitutes an impermissible bar to advancement.

Our team will continue to follow and report on litigation developments in this area. Please contact any author of this Advisory or your regular Arnold & Porter contact if you have questions concerning how the Fearless Fund decision could affect your organization’s potential liability.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.