Anti-DEI advocacy groups have a new target: minority-focused grant programs

In the wake of the landmark U.S. Supreme Court decision Students for Fair Admissions, Inc v. President and Fellows of Harvard College, Edward Blum, the founder of Students for Fair Admissions, has started challenging the use of racial classifications and preferences by private corporations. 600 U.S. 181 (2023). Next on his agenda is minority-focused grant programs.

The recent turn to philanthropic organizations advances Blum’s three-pronged attack on diversity, equity, and inclusion efforts: first, in higher education, then on corporate diversity and hiring, and now the group is working to chill race-based funding and grantmaking activity. At the end of the 2022 term, the Supreme Court issued its SFFA opinion which struck down the use of race-conscious admissions programs at Harvard and the University of North Carolina.

Since then, groups such as the American Alliance for Equal Rights (AAER), another Blum-led legal advocacy organization, seek to expand the reach of the SFFA decision from university campuses to the boardroom. Blum’s attacks on the philanthropy sector stand to be the most far-reaching of his efforts to date, given the outsize role that philanthropic donations play in helping fund programs geared towards increasing the social, economic, and political participation of minority groups in the United States. In California, Proposition 209 has long prohibited California universities and other state entities from using race as a criteria in public education, public employment, and public contracting. However, when it comes to private philanthropic activities in California, these attacks represent new territory that could have serious implications for private universities and foundations alike that operate in the state.

In general, Blum’s attacks have relied upon Section 1981 of the 1866 Civil Rights Act. Section 1981 provides that a business cannot discriminate based on race in the making and enforcement of contracts. Under Section 1981, a plaintiff must provide that race is the “but for” cause of being denied a contract or contractual right. Post-SFFA, litigants have relied on Section 1981 to attack a wide range of corporate diversity initiatives – from fellowship programs to consideration of race-based factors in corporate hiring and promotion – on the grounds that these programs create a contractual relationship subject to the statute. Blum and others now seek to use Section 1981 to attack private grantmaking activities. Though AAER’s lawsuits have thus far been careful to target public-facing grant programs rather than private venture capital investing, impact investors and foundations with a focus on advancing diversity initiatives should pay attention to the new law being made in this space.

Most recently, AAER filed suit in the Western District of Texas against Hidden Star Equity Fund, an Austin-based non-profit that runs a “Galaxy Grants Program” for women or minority-owned businesses. Through its Galaxy program, Hidden Star seeks to award a $2,750 grant to at least one business owned by a woman and/or minority. AAER argues that this requirement violates Section 1981’s prohibition on racial discrimination in contracting because the contest creates a contractual relationship between the applicant and the fund.

This is the second such lawsuit AAER has filed. Last year, AAER sued the Fearless Fund, an Atlanta-based, Black women-owned venture capital fund whose mission is to invest in women of color-led businesses. Although a district court denied AAER’s motion for preliminary injunction on First Amendment grounds, a 2-1 panel of the U.S. Court of Appeals for the Eleventh Circuit granted AAER’s emergency motion for injunctive relief. See American Alliance for Equal Rights v. Fearless Fund Management, LLC, Case No. 23-13138, 2023 WL 6520763 (11th Cir. Sept. 30, 2023). With the injunction now in place, the 11th Circuit recently heard arguments on the merits of the appeal and seemed skeptical of the Fearless Fund arguments in the case. The forthcoming decision in that case is one to watch. The Court will likely weigh in on several key legal issues including the type of contractual relationship needed to trigger Section 1981 protection, the types of First Amendment arguments that may apply to grantmaking activities, and issues of Article III standing.

Both the Fearless Fund and Hidden Star cases preview a broader strategy by legal organizations like AAER to use Section 1981 as a vehicle for challenging philanthropic donors, foundations, and grant programs geared toward minorities and women. AAER has strategically begun by targeting relatively smaller funds in friendly jurisdictions, likely leading up to larger-scale attacks on bigger philanthropic organizations in the future. Indeed, Blum confirmed that “employment is one area that I think will garner greater attention, not just from me, but from other organizations, other legal policy foundations. I also think that some of the things that we associate with higher education — internships, scholarships, certain research grants — those need to be revisited if they have been race-exclusive.” (NYTimes, Jul. 8, 2023). In California, for example, AAER is partnering with the California Equal Rights Foundation to challenge “race-based” guaranteed-income programs. As we head into the general election, Blum’s sustained anti-DEI attacks will likely inspire private organizations and politicians to also challenge these types of efforts, and we can expect that philanthropic organizations and grantmaking activities will continue to be heavily scrutinized.