A June appeals court ruling put grant makers on notice: Any grants limited to members of a specific race could be illegal.
The 2-1 decision by a panel of the U.S. Court of Appeals for the 11th Circuit in American Alliance for Equal Rights v. Fearless Fund temporarily blocked a venture fund and its foundation from making grants to Black women entrepreneurs. The decision is seen as a major blow to racial justice philanthropy, calling into question the constitutionality of a major swath of grant making designed to benefit people of color, particularly Black people, especially in the years since the murder of George Floyd and the racial justice protests that followed.
Foundations that make race-based grants have been on edge since last summer’s U.S. Supreme Court rulings in a pair of cases that tested affirmative action in university admissions. While the court found that accepting students on the basis of race was unconstitutional, it was unclear whether the ruling had any force beyond college campuses.
The 11th Circuit Court’s decision is an early test of the applicability of the Supreme Court’s admissions ruling to philanthropic grant making. The core question — which could culminate in arguments before the Supreme Court — is whether grant making is constitutionally protected free expression or a type of binding contract subject to state law. The Chronicle talked with several legal and foundation experts to see how the case could affect the future of race-based grant making.
Why is the decision important?
From 2020 to 2023, an increasing number of grant makers directed nearly 80,000 grants, totaling just under $17 billion, toward achieving racial equity. It’s not clear how many of these grants specified the race or ethnicity of beneficiaries, but many grant makers did direct their money to organizations led by people of color. Depending on the outcome of the Fearless Fund case, and other cases like it, a significant portion of philanthropy could be viewed as violating civil rights law for discriminating on the basis of race, said Skylar Croy, associate counsel for the Wisconsin Institute for Law & Liberty, a conservative legal nonprofit.
What did the plaintiffs in the Fearless Fund charge?
The American Alliance for Equal Rights, a nonprofit affiliated with Edward Blum, the conservative legal activist behind the Supreme Court college admissions cases, argued that a group of anonymous plaintiffs were injured because they were not eligible to apply for a $20,000 prize offered by the Fearless Fund. Guidelines provided by the fund stipulated that the prize was open only to Black women entrepreneurs.
What did the court rule?
The appeals court did not issue a final rule on the merits of the case. Instead, it provided injunctive relief to the Alliance and sent the case back to the district court, meaning it prohibited the Fearless Fund from completing the contest while the case is being argued.
Although the unnamed potential applicants to the Fearless Fund did not apply for the prize, the court ruled that they were “ready and able” to apply, meaning they would have suffered an injury had they gone through the process. Although the court gave them standing, opening the door to hearing the case, such a tactic might not work in other jurisdictions, said Olivia Sedwick, counsel at the Lawyers Committee for Civil Rights Under Law. “If this came up in another court, before different judges, it’s possible that they wouldn’t have had standing,” she said.
A district court did not grant standing, for instance, in a lawsuit filed last year against the Bexar County, Tex., government and the nonprofit LiftFund. Plaintiffs, who were represented by the Wisconsin Institute for Law & Liberty, claimed small businesses grants were illegally distributed based on race, but the court found they did not have standing to sue because they had not actually filled out the paperwork for a grant.
What is the short-term impact of the decision?
In sending the Fearless fund case back to the lower court, and barring the fund from continuing to offer the prize, the court indicated that the Alliance “established a substantial likelihood that it will succeed on the merits of its claim.”
But the matter has not been resolved, and the injunction is based on the particular circumstances of the Fearless Fund’s case, said Kathleen Enright, president of the Council on Foundations. Other courts, sifting through evidence based on different circumstances, may come to a conclusion that conflicts with the 11th Circuit, ultimately sending the matter to the Supreme Court to resolve.
“The immediate impact of this ruling beyond the present case is limited,” she said.
What’s next in the case?
The case has been sent back to the district court, which has not announced any timeline for proceedings.
Why did the appeals court say a prize meant to benefit Black women was discriminatory?
The two Trump-appointed justices in the majority, with one dissent from a judge appointed by former President Barack Obama, found that the prize violated Section 1981 of a Reconstruction-era civil rights statute. Section 1981 was passed to ensure Black people were not discriminated against when they entered into contracts.
In response to the dissent, which characterized the anonymous would-be applicants to the Fearless Fund’s prize as “floppers,” who disingenuously fake an injury to gain an advantage, the ruling states: “Let us not forget: We’re talking about real-live, flesh-and-blood individuals who were excluded from the opportunity to compete in Fearless’s contest solely on account of the color of their skin. Respectfully, victims of race discrimination — whether white, Black, or brown — are not floppers.”
So a grant is a contract, not a gift?
This is where things get tricky.
There hasn’t been much litigation related to Section 1981 as it relates to philanthropic giving. In its Fearless Fund decision, the appeals court noted that the original language in the prize rules referred to the grant being governed by a contract and that it made stipulations for how the fund could use the recipients’ names, images, and likenesses for the fund’s marketing purposes.
Rose Chan Loui, executive director of the Lowell Milken Center for Philanthropy and Nonprofits at UCLA Law, said contracts typically involve a reciprocal transaction, where each party receives something in “commensurate value in exchange” for goods or services.
Just about every grant agreement includes something in writing related to name, image, and likeness clauses or an agreement to go to arbitration if the parties end up in a dispute, said Chan Loui, who is a member of the Chronicle of Philanthropy’s board of directors. These items, she said, are “administrative stipulations that are not substantive to the actual grant.”
“The only safe grant would be something like putting cash in the basket that goes around at church because you haven’t signed anything or committed to anything,” she said.
What constitutes a contract?
Contracts are generally governed by state law, said the Lawyer’s Committee’s Sedwick. A binding contract can look a lot different in Tennessee than it does in Idaho, she said, and it can depend on a lot of variables.
“Contracts are like snowflakes,” she said. “They’re unique to every circumstance and the parties that are involved.”
Moreover, it’s a matter of debate whether Section 1981 is applicable to charitable gifts. The Council on Foundations’ Enright and others say a grant is free expression and a gift, not a bargain between two parties that would treat grantees more like suppliers or vendors.
“This is philanthropy,” she said. “This is giving.”
The idea that grant agreements that have stipulations about arbitration or that name, image, and likeness clauses are merely administrative rather than substantial functions of a contract is “too cute by half,” according the Wisconsin Institute’s Croy.
The definition of a contract, in which two parties agree to something that confers benefits to each side, is “basic, first year law school stuff,” said Croy, who stressed that binding grant agreements protect grantees, should their funders decide to yank a grant before its term.
How widely will the ruling apply?
The outcome is going to reverberate throughout the 11th Circuit, which includes Alabama, Florida, and Georgia, said Sedwick. Nonprofits and foundations in those states with programs similar in structure to the Fearless Fund “are going to be facing an uphill battle.”
In light of the decision, what should grant makers and charities do?
How nonprofits in those states and throughout the country respond will depend on their risk tolerance, said Tahira Christmon, vice president of external affairs at ABFE, an organization formerly known as the Association of Black Foundation Executives.
Her advice: “Keep going ... and use your lawyers.”
Foundations, especially large ones, often have the resources available to hire lawyers or can depend on expert in-house counsel. Smaller grant makers, and the nonprofits they support, may be less risk tolerant. If they stay the course with work that aims to support people based on race, foundations “have an obligation to support and protect their grantee partners” by providing legal help, Christmon said.
Other pro bono resources, including a legal defense fund managed by the Lawyers Committee for Civil Rights Under Law, may also be available.
Can a nonprofit reduce its exposure to litigation simply by removing racial criteria in its grant applications?
Not necessarily. One of the biggest ways foundations can help grantees is by providing advice on how they communicate their mission. A nonprofit or grant maker that doesn’t stipulate race in its grant applications but has a website that suggests its beneficiaries are Black could attract lawsuits.
Similarly, simply asking applicants their race, or collecting demographic data on the race of grantees — a process that many grant makers adopted in the past few years — could draw the attention of affirmative action opponents looking to test the reach of the Supreme Court’s college admissions ruling.
“That is a huge red flag that is going to significantly increase that organization’s likelihood of getting sued,” Croy said. “One thing attorneys like myself do is literally just go on the internet and look at literature that these organizations are putting out” and search for mentions of race in their grant making.
