Michigan Labor & Employment Law Blog

Recommendations for DEI Programs in the Wake of Recent Federal Court Decision Findings on Diversity Initiatives

On June 3rd, 2024, the 11th Circuit Court of Appeals issued a decision, American Alliance for Equal Rights v. Fearless Fund Management Fund, LLC, et al, that impacts considerations for how diversity, equity and inclusion (“DEI”) programs will be analyzed under federal law. In short, the rules are complicated, and that fact should not be ignored if employers want to safely navigate and maintain DEI programs.

The defendant in the recent 11th Circuit Court case, Fearless Fund Management, is a “venture capital fund that invests in women of color-led businesses.” Its stated mission is to “bridge the gap in venture capital funding for women of color founders: building scalable, growth aggressive companies.” Pursuit of that mission, Fearless supplies grants to businesses under its “Foundation” arm. Fearless makes those grants on the basis of a competitive application process, including the “Fearless Strivers Grant Contest”. The Grant Contest is an entrepreneurship funding competition open to businesses owned by black women.

The Court held the program violates 42 U.S.C. § 1981, which prohibits private parties from discriminating on the basis of race when making or enforcing contracts, because the contest rules (which all applicants had to agree to) constitute a contract covered by Section 1981, and that the Contest did not qualify for a “remedial program” exception, sometimes recognized as a defense to Section 1981 claims, since the restrictions to entry to the program were an “absolute bar to non-black applicants.” The law Fearless Fund is accused of breaking, Section 1981, was derived from Section 1 of the Civil Rights Act of 1866, which was promulgated as part of sweeping post-Civil War era laws Congress enacted to stop southern businesses and individuals from refusing to enter into contracts with black citizens. It is now being used to target minority advancement programs.

Importantly, the Court also decided that the Plaintiffs suing American Alliance members proved that they were “able and ready” to enter the Fearless Fund contest grant program, that their exclusion from the contest was discriminatory under Section 1981, and that they were damaged as a result of the exclusion. However, an important decision of this court was whether the American Alliance had to disclose the names of the people on whose behalf they were suing. The Court held there was no such requirement to name the individuals. While they must state facts to establish a concrete injury, pointing to how they were harmed to have a standing to sue, they did not have to disclose their names.    

Fearless Fund claimed that the Contest grant program was “expressive conduct” protected as free speech under the First Amendment. That defense was rejected based on U.S. Supreme Court decisions that “recognize and enforce the critical distinction between advocating race discrimination and practicing it.” While the Court found that the First Amendment protects Fearless Fund’s right to advocate for black women-owned businesses, it does not protect a wholesale exclusion of non-Black business owners from applying for the Contest grant program.

While Fearless Fund was not based upon an employment contract, or the more well known and specific civil rights protections enacted as part of Title VII of the Civil Rights Act of 1964, it was based on a contract and stands for the principle that this area of the law has a number of critically dynamic areas to review before drafting and enacting programs so they can achieve their goals. Therefore, employers and business who wish to devise appropriate programs to advance diversity must understand and be advised that how the programs are worded and designed have a significant impact on whether they will be deemed legal or unlawful.   

 Recommendations Regarding DEI Programs

The final 11th Circuit decision in American Alliance confirms the need for companies to review their DEI programs, policies, and communications, to assure that they avoid opening the door to claims like those pursued against Fearless Fund and still promote company DEI business objectives.  

• In the wake of the decision, companies should carefully review their DEI programs and policies to determine if the terms of such programs and policies could establish a contract with participants or potential participants. If so, changing the terms to avoid the creation of a contract is a reasonable step to avoid Section 1981 claims.
• As also noted in a previous article, review of DEI programs and policies should assure that they avoid using race, gender or other protected categories as sole factors in hiring, promotion and other employment decisions.  

Foster Swift is monitoring the American Alliance case and other similar cases challenging DEI programs in other courts and stands ready to assist your company to assure the continuing viability of its DEI efforts. If you have questions about these recent developments, please contact Cliff Hammond (517.371.8135) at chammond@fosterswift.com or Ray Littleton (248.539.9903) at rlittleton@fosterswift.com.

Categories: Employee Handbook, Employment, Lawsuit, Legislative Updates