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Appeals Court Rules Funding Process A Contract, Not A Grant

The American Alliance for Equal Rights (AAER), a 501(c)(3) nonprofit “dedicated to challenging distinctions and preferences made on the basis of race and ethnicity,” according to the organization’s website, has standing to sue the Fearless Foundation an Atlanta-based nonprofit that provides business development grants, mentorship and tools to Black female entrepreneurs, affirmed.

The ruling from the U.S. Court of Appeals for the 11th Circuit might have wide application for organizations targeting a specific element of the population for assistance.

The judges ruled three anonymous business owners could serve as injured parties. The judges also determined the rules of the granting process in Fearless Foundation’s “Fearless Strivers Grant Contest,” constituted a contract and were therefore subject to anti racial-discrimination statutes found in 42 U.S. Code § 1981.

The contest would provide four winners $20,000 each — one a month for four months — and other business growth tools and services to businesses that are at least “51% black woman owned.”

In addition to affirming the right to sue, the Court of Appeals overturned a district court ruling which had held the First Amendment made it likely the case would not succeed on its merits, and furthermore that the Alliance had not shown it would suffer irreparable injury.

According to court papers, AAER filed its challenge on behalf of three anonymous female business owners , two in Virginia and one in New York, whose small businesses met the firmographics criteria of eligible contestants. In declarations filed with the court, all three asserted they “meet the nonracial requirements for the contest.”

Initially, the contest rules specified entrants agreed to a series of stipulations, including that the contest rules constituted a contract. According to the ruling, Fearless changed the rules after the Alliance brought suit, eliminating the wording about contracts and adding that Fearless had “‘sole discretion’ to ‘void and disqualify’ entries that undermine its philanthropic agenda, such those that espouse ‘any particular political agenda or message’ or ‘communicat[e] messages inconsistent with the positive images’ with which the Foundation wishes to associate.”

In granting standing, Circuit Judge Kevin Newsom, part of a two-judge majority held “Although Fearless will presumably need to change its contest rules to bring itself into compliance with § 1981, that burden pales in comparison to the interest in rooting out race discrimination in all its forms. Finally, the public interest is well served by vindicating § 1981’s terms and aims by ensuring racial equality in contracting.”

The full ruling is available here: https://media.ca11.uscourts.gov/opinions/pub/files/202313138.pdf

“The majority ruled that an 1866 law designed to provide economic freedom to newly-freed slaves actually prohibits the Fearless Foundation from providing grants to Black women. We disagree,” attorney for the Fearless Foundation Jason C. Schwartz, partner at law firm Gibson Dunn & Crutcher wrote to The NonProfit Times. “As the dissenting judge pointed out, the discrimination in access to funding that Fearless Foundation seeks to address is long-standing and irrefutable. This is the first court decision in the 150+ year history of the post-Civil War civil rights law that has halted private charitable support for any racial or ethnic group. The dissenting judge, the district court and other courts have agreed with us that these types of claims should not prevail. This is not the final outcome in this case; it is a preliminary ruling without a full factual record. We are evaluating all of our options.”

The decision from the three-judge panel was not unanimous. In a dissent from the position held by judges Newsom and Robert Luck, Judge Robin Rosenbaum wrote about the three anonymous potential contest entrants, “…not one has established that she is, in fact, able and ready to enter the Contest and would do so in the upcoming period if the Contest were open to non-Black women. So American Alliance’s alleged injuries don’t show “a real controversy with real impact on real persons” among its membership… Rather, they reflect an attempt to manufacture an ‘injury’ to allow American Alliance to challenge the Contest. That is not enough for standing.”

Asked for comment, AAER President Edward Blum referred to a press statement which said, in part, “The American Alliance for Equal Rights is grateful that the court has ruled that the Fearless Fund’s racially exclusive grant competition is illegal. Our nation’s civil rights laws do not permit racial distinctions because some groups are overrepresented in various endeavors, while others are under-represented.

“Programs that exclude certain individuals because of their race such as the ones the Fearless Fund has designed and implemented are unjust and polarizing,” the statement continued. “Significant majorities of all Americans believe that an individual’s race should not be a factor in our nation’s public policies.”

The message the judges sent is that diversity in Corporate America, education, or anywhere else should not exist, according to Arian Simone, CEO and Founding Partner of Fearless Fund and Founder of the Fearless Foundation. “If this was truly about exercising free speech with your dollars — an American tradition as old as this nation itself  —  the results would have been different. Instead, these judges bought what a small group of white men were selling,” she said via a statement. “They countered the rulings of other courts sued on similar grounds. America is supposed to be a nation where one has the freedom to achieve, the freedom to earn, and the freedom to prosper. Yet, when we have attempted to level the playing field for underrepresented groups, our freedoms were stifled.”

“Let’s be clear about a few things,” Simone continued in her statement. “We are still open for business. The Fearless Fund has worked tirelessly with what resources we have to support underrepresented communities. Our grants are essential for some companies. Women of color continue to lead the entrepreneurial pack and need support.”

For the calendar year ended December 31, 2022, Fearless Foundation reported total revenue of almost $4.2 million and total expenses of just under $4 million, according to the most recent Form 990 on file with GuideStar. The organization also reported slightly more than $2.4 million in Grant Expense. The organization’s filings did not contain details regarding either funders or grant recipients.

Reaction to the ruling was swift from both the Council on Foundations and Independent Sector. Via a joint statement, the organizations expressed disappointment in then ruling and warned of its broader implications.

“Philanthropy comes from the heart, because giving is about supporting the causes and people we care about most,” said Council on Foundations President and CEO Kathleen Enright via a statement. “It’s different for all of us, and that’s a strength. The last thing we want to see is a legal environment that further restricts how private resources can be dedicated to the public good. That’s why we’ll continue to stand for the First Amendment protected right to give charitably according to our values. At the end of the day, we want to make it easier to give – not harder.”

Said Independent Sector President and CEO Dr. Akilah Watkins: “The court’s decision threatens the right of the charitable sector to address urgent, unmet needs and to strengthen communities nationwide in a diversity of ways. … In undercutting philanthropy’s basic First Amendment protection, this ruling makes it harder to support historically marginalized groups and jeopardizes our work to promote equity and justice. Now, more than ever, our sector is called upon to advocate for equitable policies and systems that help us build a nation where all people thrive.”

More than 200 nonprofits joined with the Council on Foundations and Independent Sector.