Diversity-centered funding initiatives face legal challenges

Organizations are reexamining how they design, market and measure diversity programs based on gender or racial criteria in the aftermath of a discrimination lawsuit against nonprofit Fearless Fund, which provides grants to businesses owned by Black women.

The suit was brought by American Alliance for Equal Rights (AAER), a conservative organization led by Edward Blum, famous for his role in overturning affirmative action in higher education. Since the Supreme Court rejected race-conscious admissions efforts in June, Blum has signaled his intention to target diversity programs in the private sector.  

AAER claims the Fearless Fund grant program illegally discriminates against other founders, a claim vehemently denied by Fearless Fund and prominent civil rights groups that filed an amicus brief on its behalf. AAER’s lawsuit is already having an impact: An appeals court has indefinitely blocked Fearless Fund from awarding $20,000 grants through its Strivers Grant Contest, which supports small Black women-led businesses. 

While educational institutions, private employers and grant-making organizations are subject to different regulations around employment and contracting practices, Blum has said AAER will challenge DEI programs using legal strategies similar to the one that helped overturn affirmative action in education. Companies using numerical targets in diversity, equity and inclusion (DEI) initiatives could find themselves vulnerable.

Who does this affect?  

Venture capital firms should pay special attention to the case. Many have set goals that include quantitative targets for changing the makeup of their teams and for their ESG investing practices. They’re also being pushed to be more transparent. California last month passed a law requiring VC firms to disclose the demographic data of the founding teams they invest in. The bill’s backers hope shining “sunlight” on VC funding practices will lead to behavior change and increase opportunities for entrepreneurs that are traditionally underrepresented. 

Law firms are also getting dragged into the debate, and not just as legal counsel. Two firms have adjusted fellowship programs aimed at promoting diversity in the legal profession in response to AAER lawsuits, and the conservative group is preparing to file additional lawsuits. AAER’s early success here should concern organizations with similar initiatives and encourage them to reassess how they are structured to avoid litigation. 

Grant-making institutions and charitable foundations should also pay attention to the Fearless Fund lawsuit because its outcome could disrupt those with social justice missions, especially those that prioritize opportunities based on race or gender. 

What’s next? 

The Atlanta-based 11th U.S. Circuit Court of Appeals has temporarily blocked Fearless Fund from running its Strivers Grant Contest. The majority wrote that the grant program is “racially exclusionary” and voiced their opinion that AAER will prevail. The dissenting judge described the lawsuit as a “perversion of Congressional intent” and deemed it unlikely to succeed. 

The case will likely make its way to the Supreme Court, where the decision would have significant implications for how private entities are able to promote diversity. 

In anticipation, companies should review their DEI programs, policies and goals and work with legal counsel to understand how they might hold up in today’s litigious climate.

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