FAQ: AAER v. Fearless Fund Settlement
- What is Section 1981?
- Does the outcome of this case set a new standard for grants that are race-based or race-conscious? If so, why?
- How will this settlement impact a foundation’s ongoing commitment to DEI within their grantmaking?
- Will the settlement impact foundations collection of demographic information including from their grantees?
- How does the charitable sector avoid a potential chilling effect from lawsuits such as that against Fearless Foundation?
- How can foundations differentiate between grant agreements that create a contract and those that do not?
- Is it legally necessary to remove language indicating that a grant is intended to serve a historically marginalized community, such as Black-led nonprofit organizations?
- How will this outcome impact grantmakers who fund issue or identify-specific work, like LGBTQ funds, etc.?
- How are scholarship programs that aim to support minority students impacted? And what about HBCUs (Historically Black Colleges and Universities) and organizations like UNCF (United Negro College Fund)?
What is Section 1981?
Section 1981 of the Civil Rights Act of 1866 is a federal law that prohibits racial discrimination in contracting. While the statute was intended to provide legal protections for Black people who were facing widespread discrimination in the wake of emancipation, it has since been interpreted by the courts as protecting people of all races from discrimination in contract formation or enforcement. Section 1981 is the law American Alliance for Equal Rights (AAER) sued Fearless Fund under. The existence of a contract is a necessary element of a successful Section 1981 claim.
Does the outcome of this case set a new standard for grants that are race-based or race-conscious? If so, why?
The settlement of this case does not establish any new binding precedent in most of the country.
The parties settled the case which ceased any further proceedings, meaning that there will be no final decision on the merits and no possibility of a Supreme Court appeal that would have nationwide precedential effect. Even if the case had proceeded on the merits, the decision would have only been binding states in the 11th Circuit (Alabama, Florida, and Georgia).
However, in light of the ruling by a three-judge panel of the 11th Circuit in June that found Fearless Fund’s grant program likely violated Section 1981—which is considered binding precedent within the 11th Circuit—grantmakers operating in those three states (Alabama, Florida, and Georgia) should be very careful in the way they frame grant programs that consider racial criteria. That ruling suggests that courts in the 11th Circuit will likely find grant programs that consider the race or ethnicity of applicants to be in violation of Section 1981, especially those that impose outright racial limitations on eligibility. Courts in other circuits—especially more conservative-leaning jurisdictions—will potentially look to the 11th Circuit’s ruling as persuasive on similar questions of law, even though that ruling is not binding on courts outside of the 11th Circuit. Of course, if grantmakers can show there is no contractual relationship between the foundation and grantee then any challenges under Section 1981 would fail.
How will this settlement impact a foundation’s ongoing commitment to DEI within their grantmaking?
The settlement in this case does not mean that foundations must cease all DEI goals or practices that inform their grantmaking or other activities. However, grantmakers working in the 11th Circuit will need to carefully frame how they relate DEI goals to their grant procedures if the nature of their activities suggests the existence of a contractual relationship with grantees. Foundations working outside of the 11th Circuit are not directly affected, but they should take steps to assess their tolerance for risk given the prevalence of legal challenges in this area over the past year and a half.
Will the settlement impact foundations collection of demographic information including from their grantees?
In general, foundation may still collect demographic information from their grantees, both before and after giving, especially if they can show that this data is not directly considered when determining eligibility. However, foundations operating in the 11th Circuit—and those outside of the 11th Circuit that are risk averse—should take additional steps to separate the grant selection process from demographic information pertaining to an applicant’s race or ethnicity, unless they are confident that the grant program does not create a contractual relationship. Those foundations that are particularly sensitive to the risk of litigation may wish to collect demographics only after grantees have been selected and to work with a third party to hold that information on their behalf.
How does the charitable sector avoid a potential chilling effect from lawsuits such as that against Fearless Foundation?
It is important to understand that this settlement does not invalidate all efforts by foundations to address racial equity through their grantmaking and other activities. The case has no direct precedential impact on most grantmakers operating outside of the 11th Circuit states of Alabama, Florida, and Georgia. While the 11th Circuit’s decision in June 2024 that found Fearless Foundation’s grant program likely violated Section 1981 has precedential effect in those three states—meaning that it is binding on courts in the 11th Circuit when considering future challenges of race-conscious grantmaking under Section 1981—the law on this issue remains unresolved nationally. Even within the 11th Circuit, grantmakers should be mindful of the requirement that a contract must exist for a plaintiff to successfully sue under Section 1981. For grantmakers in any jurisdiction who are looking to avoid the possibility of a successful Section 1981 challenge, one option is to ensure that the language in your grant letters and other communications with grantees indicate that the grant should be properly construed as a gift rather than a contract.
How can foundations differentiate between grant agreements that create a contract and those that do not?
Unfortunately, there is no simple answer to the question of whether certain terms in a grant agreement will cause a court to interpret it as a contract. With no federal law on contracts, courts will ultimately look to the standards applied under the law of the state in which the court is located. We recommend that foundations engage local counsel to review grant agreements and letters to offer an opinion as to whether language used in those documents is likely to create a contractual relationship between the foundation and grantees under the law of that jurisdiction.
In general, contract-like language that suggests an exchange of value between the parties, or typical contract clauses like an arbitration agreement or an indemnification clause would be more likely to be interpreted as indicative of a contract rather than a pure gift. Some recommendations to avoid characterization as a contract include:
- Referring to these documents as grant letters rather than grant agreements,
- Framing any grant reports as voluntary on the part of the grantee, and
- Affirmatively stating that the letter and related correspondence are not intended to create a contractual relationship between the parties and that the foundation does not expect anything of value in return from the grantee as a condition of making the grant.
Is it legally necessary to remove language indicating that a grant is intended to serve a historically marginalized community, such as Black-led nonprofit organizations?
For most grantmakers operating outside of the 11th Circuit, it is likely not legally necessary to have grantees remove references to their work with a historically marginalized community, such as serving Black-led nonprofit organizations. However, each organization’s tolerance for risk is different and some grantmakers will feel more comfortable continuing to fund these organizations without explicit reference to race in grant proposals.
There may be situations where it is possible to achieve substantially similar outcomes without specifically mentioning race in a grant proposal — for example, when granting to an organization whose very mission involves serving communities of color, the grant will likely have the same impact even without explicitly referencing race in a grant proposal. In other situations, however, it might be necessary to frame the proposal in such a way to ensure the intended outcomes. In those cases where including race in the proposal is unavoidable without lessening the impact of the grant, grantors and grantees may wish to take steps to frame the emphasis on race in terms of the grant’s outcomes rather than as a barrier to eligibility or access to services.
How will this outcome impact grantmakers who fund issue or identify-specific work, like LGBTQ funds, etc.?
This specific case has no impact on issue-specific or identity-specific work that is not related to race. Fearless Fund was brought under Section 1981 of the Civil Rights Act which prohibits discrimination on the basis of race or ethnicity in contracting but does not apply more broadly to other identity categories.
How are scholarship programs that aim to support minority students impacted? And what about HBCUs (Historically Black Colleges and Universities) and organizations like UNCF (United Negro College Fund)?
Scholarship programs aimed at supporting minority students are not necessarily impacted by this settlement, although the case may have a potential chilling effect. As with all grant programs that consider race, however, grantmakers — especially those in the 11th Circuit — should take steps to determine whether the terms of their scholarship programs appear to create a contractual relationship between the grantmaker and grantee.
There is no direct impact on HBCUs or organizations like the UNCF.
