This post discusses one recent challenge to the use of race-based criteria in grantmaking by a nonprofit 501(c)(3) organization, the Fearless Foundation, by the American Alliance for Equal Rights (AAER). AAER is a membership nonprofit that has filed several similar lawsuits against other organizations. It is led by Edward Blum, who also leads Students for Fair Admissions (SFA). SFA’s lawsuits against Harvard University and the University of North Carolina resulted in a 2023 Supreme Court decision that the admissions policies of both schools, including considering applicants’ racial backgrounds, among other factors in making admissions decisions, violated the Equal Protection Clause of the Fourteenth Amendment. 

The Fearless Foundation Litigation and Settlement
The Fearless Foundation is the nonprofit 501(c)(3) affiliate of Fearless Fund, an Atlanta-based hedge fund that invests in businesses owned by under-resourced entrepreneurs, including women of color. Fearless Foundation’s charitable programs included a competitive grant program (the Fearless Strivers Grant Contest) through which eligible Black women business owners could apply for and receive mentorship, tools to assist with business growth, and grants of $20,000. In 2023, AAER sued Fearless Foundation and Fearless Fund on behalf of three unnamed AAER members, alleging that the Fearless Strivers Grant Contest violated section 1981 of the Civil Rights of 1866 (“Section 1981”).  42 U.S.C. § 1981. Section 1981 is a federal law that prohibits racial discrimination in contracting. 

On appeal, the 11th Circuit Court granted AAER’s request for a preliminary injunction of the Fearless Strivers Grant Contest, finding it probable that the program: (1) created a contractual relationship between the parties within the meaning of Section 1981; and (2) was “racially exclusionary” and therefore potentially violative of federal law. After further litigation, the parties settled the matter in September 2024, with the Foundation agreeing to shut down the grant program instead of broadening its eligibility criteria. 

Insights from the Fearless Foundation Case
Litigation raised significant concerns and confusion among grantmakers nationwide. Here are some key takeaways.

• While the 11th Circuit Court’s ruling was not a final decision on the merits of the case, it did signal the likely outcome of such a decision if the parties had continued litigating instead of settling. 
• The direct legal impact of the Fearless Foundation ruling is limited to the 11th Circuit, which covers the federal courts in Alabama, Georgia, and Florida. The ruling does not apply to organizations outside of the 11th Circuit’s jurisdiction.  Were a similar case brought in a court in another judicial circuit, it’s unclear what the outcomes would be. A federal circuit decision is a binding precedent on all federal district courts within that circuit, but it is not binding on federal courts in other circuits. Other federal courts outside of the 11th Circuit might be persuaded to follow the logic of the Fearless Foundation ruling, or they might not. 
• The Fearless Foundation litigation illustrates the increased possibility of legal risk for funders whose grant programs use race-based eligibility criteria. Section 1981 is a federal law that was enacted as part of the 1866 Civil Rights Act to ensure that all persons have the same rights to make and enforce contracts “as enjoyed by white citizens.” 42 U.S.C. §1981(a). Although the intention of Section 1981 was to protect formerly enslaved persons, activists have utilized the law to successfully challenge programs intended to remediate the impacts of racial discrimination on Black people and other populations of color.  In granting AAER’s request for a preliminary injunction of the Fearless Strivers Grant Contest, the 11th Circuit Court held that the language of Section 1981 “prohibits intentional race discrimination” in the making of contracts. It, therefore, found that the Fearless Strivers Grant Contest likely violated Section 1981 because non-Black applicants were ineligible for the program. 
• The applicability of Section 1981 hinged on the 11th Circuit Court’s finding that the grant program likely created a contractual relationship between the Foundation and its grantees. The Court pointed to various components of the program in support of this finding, including the original contest rules, and found a “bargained-for exchange” in which grantees agreed to certain terms as part of their acceptance of the grant award from the Foundation.  In the wake of the Fearless Foundation litigation, some funders are reviewing and, in some instances, revising the terms of their grant programs or exploring alternative trust-based grantmaking models to address this risk. 

In the current environment, many nonprofit grantmakers are thinking about their strategies to advance racial equity and assessing what impact, if any, these legal developments may have on their programs.  We encourage any nonprofit considering these issues to consult legal counsel as part of that process.

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