Litigation Update: AAER v. Fearless Fund

Marco J. Lloyd: Hello everyone and welcome to this Federal Society Virtual Event. My name is Marco Lloyd and I'm an Assistant Director of Practice Groups for the Federalist Society. Today we're excited to host a litigation update on the American Alliance for Equal Rights v. Fearless Fund, featuring Ilya Shapiro. Mr. Shapiro is a Senior Fellow and Director of Constitutional Studies at the Manhattan Institute. He has previously served as Executive Director and Senior Lecturer at the Georgetown Center for the Constitution, as well as the Vice President of the Cato Institute Director and its Robert A. Levy Center for Constitutional Studies, is a member of the Board of Fellows of the Jewish Policy Center, was an Inaugural Washington Fellow at the National Review Institute, and has been an adjunct professor at George Washington University and the University of Mississippi. He has testified before Congress on numerous occasions and has authored more than 500 amicus briefs in the Supreme Court.

He's been an active lecturer at the Federalist Society and his work has appeared in a number of academic, popular and professional publications. If you'd like to learn more about today's speaker, his full bio can be viewed on our website fedsoc.org. After our speaker gives his remarks, we'll turn to you, the audience, for questions. If you have a question, please enter it into the Q&A function at the bottom of your Zoom window and we'll do our best to answer as many as we can. Finally, I'll note that as always, the Federalist Society takes no position on particular legal or public policy issues and all expressions of opinion are those of the speaker. With that, Mr. Shapiro, thank you for joining us and the floor is yours.

Ilya Shapiro: Great, Marco. Thanks very much, and thanks to all of you for being here. The rare discussion of a case that's not a Supreme Court opinion this time of year, the Civil Rights Practice Group, on whose executive committee I sit, decided that it would be useful to have this. The ruling came out just over a month ago in early June, and I think heralds one of the next stages of civil rights litigation that should interest people widely. The post-SFFA - Students For Fair Admission - decision, the use of race in contracting in this case, also in employment and other areas. So what is this case about? The Fearless Fund ran, which is a venture fund, ran what's called the Strivers Grant Contest, which awards $20,000 and other benefits "only to black females." So it wants to give business grants and limits it to black females. Last year, the American Alliance for Equal Rights, which is headed up by Ed Blum, who also headed up the SFFA initiative lawsuits that ended up as the Shelby County case on voting rights and others.

So the AAER sued Fearless claiming that its racially discriminatory contest violated 42 USC section 1981, which prohibits private parties from discriminating on the basis of race when making or enforcing contracts. So not employment, not education, not anything else. This is about contracts. Fearless raised several arguments in reply, for example, that the Alliance doesn't have standing, it's sued as an association. I'll get into exactly how the standing worked here, and that the contest was a valid Affirmative Action program, but it also raised a First Amendment defense. According to the Fearless Fund, its contest was really an act of expressive association, although the Supreme Court rejected that argument when segregationists made it - the idea that to hire or associate with people of one race or another is First Amendment-protected expressive association. In 1976, the Supreme Court rejected that of course in Runyon versus McCrary, but Fearless won on that argument in the District Court in Georgia.

The Alliance then sought an injunction pending appeal, which a split motion panel of the 11th Circuit granted, that court concluded that the Alliance had clearly shown the existence of a contractual regime, so that brought the case within the realm of Section 1981. It then rejected Fearless' First Amendment argument emphasizing that the Constitution does not give Fearless the right to exclude persons from a contractual regime based on race. So that was on the injunction. And then on the merits, the 11th Circuit, like I said just over a month ago, reversed the District Court with instructions to enter a preliminary injunction against the Fearless Fund holding that, first, the Alliance had standing and second, that injunctive relief is appropriate because the contest is substantially likely to violate Section 1981. It is unlikely to enjoy First Amendment protection and inflicts irreparable injury. And I should note that the Manhattan Institute, my organization, joined the American Civil Rights Project and the Buckeye Institute on an amicus brief supporting the Alliance in arguing that Section 1981 bars racially discriminatory contracting and that there is no applicable affirmative action defense.

Okay, let's get into the opinion. This was a panel with Judges Rosenbaum Newsom and Luck - Judge Kevin Newsom wrote the majority opinion. There was a dissent by Judge Rosenbaum. So first of course they had to get to standing, and there was in this recently concluded Supreme Court term of course, significant cases involving standing, both Murthy v. Missouri, the jawboning case, the tech government collusion case, and the mifepristone abortion drug challenge. Both of those, the Court found that there was no standing here. I think it's different - what sort of hung up those challengers before the Supreme Court was the causal link between the government's actions and the injury suffered - here, there wasn't a question of the government doing something, of course it's a private party engaged in a contest and the whole battle was over associational standing. So the court - Judge Newsom's majority opinion - recited the standard for organizational standing most recently updated by the Supreme Court in the Students For Fair Admissions case.

First, an organization's members would otherwise have standing to sue in their own right. Second, the interests the organization seeks to protect are germane to its purpose, and third, neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit. Here, there were several business owners who otherwise qualified for the Fearless Funds contest, satisfied every business entity hurdle, and what have you, they just were not run by black females. That was the only thing that they failed on. And so the court here says that they alleged enough that they were able and ready to participate in the contest - to use the money they asserted in the appendix of the opinion - their affidavits were included about what they wanted to use the money for - improving their web, digital marketing, marketing in one case, other very relevant central to a business sorts of things.

And so, Judge Newsom - going through half the opinion was about - was on standing, in the end, found that there was standing and before moving on to the merits, he says, I'll quote a few sentences of this, "One word in response to our dissenting colleagues' repeated accusation that the Alliances' members here are flopping"- There was a soccer analogy, you know we're all watching soccer right now with the Euro and the Coppa America. But anyway, there's a soccer analogy in the dissent, flopping is disingenuously faking injuries for their own strategic advantage. "Let us not forget, we're talking about real live flesh and blood individuals who were excluded from the opportunity to compete in Fearless' contest solely on account of the color of their skin. Respectfully, victims of race discrimination, whether white, black or brown, are not floppers." So we found standing. Now moving on to the merits, of course, you have the regular factors for a preliminary injunction, whether the plaintiff has a substantial likelihood of success on the merits.

Second, whether the plaintiff will suffer irreparable harm in the absence of relief. Third, the balance of the equities, and fourth, the public interest. As a lot of scholarly writing has detailed, that likelihood of success tends to be the whole ballgame in these things, and so Judge Newsom analyzes first of all that section 1981 does indeed cover Fearless' contest that this is a contract. They later tried to amend the terms of the contest to remove the word contract, but otherwise it functioned exactly the same way. So Judge Newsom said this is clearly covered by 1981, the lower court, the District Court didn't disagree with that ruling against the Fearless Fund on that point as well. But the real point of disagreement with the district court and with the dissenting judge here was over the freedom of speech issue, free association, and this affirmative action defense. And here Judge Newsom brings up that 1976 case, Runyon v. McCrary, concluding that while the line between pure speech that arguably entitles discriminatory sentiments, citing 303 Creative, there was that discussion about the Supreme Court case last term where the website designer could not be - the Court ruled - compelled to communicate a message she disagreed with in that case celebrating a same-sex wedding.

But here it's the very active discrimination itself that's at issue. Judge Newsom discusses. Quote, "To be sure Fearless characterizes its contest as reflecting its commitment to the black women-owned business community. The fact remains though that Fearless simply and flatly refuses to entertain applications from business owners who aren't black females. If that refusal were deemed sufficiently expressive to warrant protection under the Free Speech Clause, then so would be every act of race discrimination, no matter at whom it was directed. And on Fearless' theory, the more blatant and rampant the discrimination, the clearer the message. To take just one particularly offensive example, surely a business owner who summarily fires all his black employees while retaining all the white ones has at the very least telegraphed his perspective on racial equality. For better or worse, the First Amendment protects the owner's right to harbor bigoted views, but it does not protect his mass firing. Fearless' position risks sowing the seeds of anti-discrimination laws' demise."

So that was essentially all she wrote. Fearless Fund is now considering petitioning for an en banc review. I doubt it would get very far in the 11th Circuit. I don't know if strategically it would be wise for it to then petition for cert, might be better just to "let sleeping dogs lie", at least for such a blatantly racially discriminatory program. And before I open to questions, just one correction, I just realized I misspoke. The dissent here did not disagree on the merits, that dissent was purely on standing relating to that flopping - being disingenuous about the injury, manufacturing the case wasn't really suffering harm, et cetera - anyway, that is how the case went down. A relatively concise 24-page majority opinion about half of which was on standing. And with that, I'm happy to open it up for questions or discussion.

Marco J. Lloyd: Sure. We will now turn to audience questions. If you have a question, please enter it into the Q&A function at the bottom of your screen. And to kick us off, how significant of a ruling is this? Will it change the way companies conduct business in the 11th Circuit and will this be looked to as a precedent for other cases going forward?

Ilya Shapiro: Well, the real question is, is this just saying that if you have a smoking gun saying, okay, only this race, only this gender need apply - that's clearly unconstitutional - but what if you're using some sort of pretext, or it's less of a smoking gun, as it were? That'll have to be litigated, I guess, in the future. And there are cases pending in the employment and the government contracting spaces. But certainly, I don't think you are going to be able to have those blatant restrictions any more than you can in university admissions.

Marco J. Lloyd: Sure, absolutely. And I guess a follow-up to that would be are there ways Fearless Fund could have conducted a similar contest that would be valid and legal as an affirmative action program, or is it just wrong from the get-go?

Ilya Shapiro: Well, it depends on what you mean - how to define Affirmative Action, so if it's making sure that small businesses are aware of it, even in underprivileged communities, I suppose a marketing campaign - or they could set their rules by saying that it's only for relatively new businesses and set other criteria that are meant to help struggling undercapitalized entrepreneurs as opposed to simply any black female owned business - they could be savvier in that regard, so just like the parallel in the educational context would be to make sure you're not just recruiting from the same high schools that you're sending your admissions officers to places to find those "diamonds in the rough" that haven't been applied to your school. Things like that. It's more of an outreach effort, making sure that the opportunities are well-known to people who might not otherwise have access to them.

Marco J. Lloyd: Great. Clifford Snyder asked, "Could Fearless get its way by bestowing gifts or grants?"

Ilya Shapiro: I mean, I'm not sure whether 1981 would necessarily cover it. Most gifts or grants have some sort of contractual nature associated with them, whether it's as simple as you can't disparage the grantmaker or something like that. I'd have to look further into the jurisprudence of what constitutes a contract. And surely there are other civil rights laws that might cover that. If it's an actual contest, if it's open to the public except for this racial gender description, then that's probably not allowed. But if it just kind of identifies by itself the same way that you might identify your nieces and nephews to give a gift to, if it does something like that, that's a little different than having this generally applicable contest that's then restricted by these illegal categories.

Marco J. Lloyd: Rod Sullivan asks, "Association standing appears to be under fire in the Supreme Court if fearless fund petitions for cert. Do you believe the plaintiff is going to survive with a standing challenge?"

Ilya Shapiro: I'm not sure that associational standing is under fire because remember in the mifepristone case, it was that the doctors who alleged harm, that was too speculative. They themselves were not, the link wasn't established, their affidavits weren't detailed enough. That was the problem in that one. And in Murthy, it was that there wasn't a link between the harm that the tech companies were alleged to have done to the individuals who were shadow-banned and what have you, to what the government was doing. So at least in this term, associational standing wasn't under fire, and SFFA last term was an associational standing case recall. So while standing is in a period of flux, I'm not sure associational standing is really under fire, so I doubt the Supreme Court would even grant cert here.

Marco J. Lloyd: Is this decision likely to affect the legality of scholarships restricted to members of a particular race or religion?

Ilya Shapiro: Well, if the scholarship is tied to a university, then I think SFFA might even cover it, but if it's a separate organization, then I don't think there's much of a difference between a business grant contest and a scholarship grant contest. It would still be covered by 1981 and possibly other aspects of education law.

Marco J. Lloyd: Norman Means asks, "Did the court characterize the Fearless Fund contract as a unilateral contract?"

Ilya Shapiro: I don't think so. That phrase does not, I didn't do a Control/F. You can do so, but I don't remember that being an aspect of this.

Marco J. Lloyd: Another attendee asks, "Bank of America has a no-down-payment mortgage program for Blacks and Hispanics to buy their first home. Would this case impact programs like that?"

Ilya Shapiro: I think so. I think so. If there are income thresholds that disproportionately affect or benefit members of certain racial minority groups, that's one thing, but if you explicitly say that this kind of contract - and a mortgage of course is a contract - I don't see how you can restrict it. So this would be directly on point.

Marco J. Lloyd: Looking at this case in the context of students for fair admissions, is the tide shifting on affirmative action in the legal system or is this just a minor chink in the armor?

Ilya Shapiro: Well, that's a broader question than just Fearless. Fearless is one of many kinds of litigation, as I mentioned in government contracting, employment, and otherwise where the use of racial categories or restrictions based on race are under fire. I do think we are seeing a shift. There's massive resistance to it, of course, because of the "diversity industrial complex" that we're living under, but as a matter of law - separating the issue of culture and politics -discovery-intensive but as a matter of law, I think the logic of SFFA is inextricable. It only applies in the educational admissions context, but the same logic applies under these other civil rights protections. So courts are starting to get that message.

Marco J. Lloyd: Does this decision present any other unanswered questions?

Ilya Shapiro: Well, like I said, if it's not a smoking gun saying this is only available to Black females or Hispanic males or whatever the case might be, people really do want to have a racially disparate or racially preferential regime, and they do a better job of hiding it by using various protective things. Chief Justice Roberts and SFFA say that you can't do that in admissions if you're using these other devices to accomplish the same racial balancing or quotas or what have you, you can't do that. But the devil is always going to be in the details. So if someone is smarter than the Fearless Fund, and lawyers this a bit better, then it would take a kind of discovery-intensive process to get to the bottom of it.

Marco J. Lloyd: John Scheller asks, "If no further appeals occur, is the case right for summary judgment on the merits in the trial court?"

Ilya Shapiro: I would think so. I would think so. This preliminary injunction is effectively a full injunction. It's a pretty thorough evaluation of the claims that are made.

Marco J. Lloyd: Great. Well, that's all the questions we have in the chat at the moment. Are there any other final thoughts, parting words, or anything else people should take away from this case?

Ilya Shapiro: Look, I wasn't expecting this program to go more than half an hour. I think it's a straightforward case. We haven't had something that's blatant to get to the Supreme Court. Like I said, there's going to be harder cases around the edges and government contracting is going to be a big deal because that's big money. You don't have that many of these Fearless Funds targeting small business things. But there is the Small Business Association, which has various kinds of preferences for women and minorities and otherwise, and that's all going to have to be litigated in coming years. So thanks for having me, Marco, and the Federalist Society. Thanks everyone for joining this presentation.

Marco J. Lloyd: Absolutely. Yeah. And on behalf of the Federalist Society, I would like to thank Ilya Shapiro for the benefit of this expertise today. Thank you also to our audience for joining us. We greatly appreciate your participation. Please check out our website at fedsoc.org or follow us on all major social media platforms @fedsoc to stay up to date with announcements and upcoming webinars. Thank you once more for tuning in and we are adjourned.