The backlash to diversity, equity and inclusion efforts reached philanthropy last August when the American Alliance for Equal Rights (AAER) filed a lawsuit against the venture capital group Fearless Fund and its Fearless Foundation, challenging the foundation’s Fearless Strivers Grant Contest. Now, after nearly a year in court, Fearless has settled with AAER and agreed to end the program.
The case has understandably frightened and confused foundations and nonprofits across the country who support communities impacted by legacies of racial discrimination. At the Council on Foundations, we’ve heard from many funders and nonprofits: How does the lawsuit impact their programs, and in some cases, their very missions? And given the settlement, how should they respond?
The very short answer, which I’ll explain further, is that while foundations must, of course, follow the law, this settlement is not cause for pausing or shifting course on their efforts to support historically marginalized groups.
The settlement and the 11th Circuit ruling
On its face, this case was fallout from the 2023 Supreme Court ruling that ended race-conscious admissions at colleges and universities. In fact, the same person behind that lawsuit, Edward Blum, also led the proceedings against Fearless Fund. By naming the Fearless Foundation as a defendant, Blum and AAER opened the door to big-picture questions about philanthropy: Can charitable organizations and individuals provide funding to whomever they want? Or are there restrictions on giving, especially when that giving is connected to race?
The answer has historically been clear, with prior courts ruling that philanthropies and individuals have a First Amendment right to donate to charitable causes that align with their values. But in June, the 11th Circuit Appeals Court ruled that the First Amendment didn’t apply in this case and that Section 1981 of the Civil Rights Act of 1866 did. Section 1981, which specifically prohibits discrimination on the basis of race in the making or enforcement of contracts, was supposed to help formerly enslaved people escape racism.
It was used for the opposite effect in this case: to attack a grant program that helped businesses owned by Black women survive in an environment where they receive just a sliver of venture capital funding. Regardless, the statute has been interpreted by the courts as protecting people of all races from discrimination in contract formation or enforcement.
The crucial question in the case, then, was whether the Fearless grant program created a contract. Both the District Court for the Northern District of Georgia, where the case was filed, and the 11th Circuit Court agreed that the specific terms of the grant program in the case likely created a contract, meaning Section 1981 applied. The three-person 11th Circuit panel also found that the plaintiffs were likely to succeed on the merits of the case and that the First Amendment would not likely protect the program. This decision likely prompted Fearless to reach a settlement rather than continue a case that, if unsuccessfully appealed to the U.S. Supreme Court, could have resulted in a legal impact nationwide.
In fact, Fearless called the settlement a win and a positive outcome for its community, saying that it was “still funding” while announcing a new loan program for under-resourced entrepreneurs.
How the ruling impacts foundations and nonprofits
While Fearless Fund and its allies have always sought repudiation of the charges, the settlement turned out to be the next-best scenario. By choosing to settle rather than move through trial, Fearless ensured that the impact of the case will be limited to the 11th Circuit states of Alabama, Florida and Georgia. Even there, the case should not immediately impact regular grantmaking that avoids creating contracts with grantees.
The bottom line: the settlement ensured that the impact of the lawsuit is limited to specific facts and circumstances present in this case, not all instances of grant programs related to race.
Because of this, we do not recommend that foundations stop their current grantmaking programs, nor do we believe that nonprofits should stop services that help communities of color, whether they are related to housing, health equity, the environment or other causes.
How to protect your organization against potential threats
Even if the Fearless Fund lawsuit has a narrow impact, there is legitimate concern in the field that other organizations, or even AAER itself, may seek to erode race-conscious giving in future lawsuits. There are a few steps your organization can take to ensure that you stay on the right side of the law and proactively defend against potential threats.
One of the best ways to prepare for a potential Section 1981 challenge is to ensure that the grant program does not create a contractual relationship. Crucially, Fearless Fund included the word “contract” in its original grant agreement, bringing Section 1981 into play. Carefully check your award letters and consider specifying that the grant has no requirements or contractual obligations for the grantee.
Stay alert for other cases unfolding around the country. Don’t overreact when challenges arise. Don’t immediately pause your programs; remember that nonprofits providing crucial services rely on your support daily.
But do take challenges seriously. Evaluate your level of risk. Take the time now to meet with your legal counsel and shore up your grantmaking language. Communicate openly with your grantees. In the meantime, the Council on Foundations and other philanthropy-serving organizations will continue to stand with foundations for the right of individuals and organizations to exercise their views through giving.
Our country is made stronger when we can give according to our values, including supporting historically marginalized groups. We’re proud of the strides foundations have made in helping create a more equitable society for all. Now is not the time to pull back.
Ben McDearmon is the Council on Foundations’ Director of Legal Resources. He is responsible for guiding the legal team’s work and provides legal education, information, and analysis on a wide range of issues to community foundations, corporate grantmakers, private foundations, and other philanthropic organizations. He also serves as a legal reviewer for the National Standards for U.S. Community Foundations program and as a contributing editor to Mastering Foundation Law: The Council on Foundations Compendium of Legal Resources.
