Fearless Fund Ruling Could Challenge Business As Usual For Foundations

Fearless Fund Ruling Could Challenge Business As Usual For Foundations

The United States Court of Appeals for the 11th Circuit last week delivered a blow to philanthropic efforts to advance racial equity when it ruled that a grant program to support small businesses owned by Black women is likely illegal because it relies on race to determine eligibility.

Legal observers and nonprofits believe the closely watched ruling in the Fearless Fund case poses a threat to a wide range of initiatives tailored to support communities of color.

The ruling could go further and disrupt fundamental elements of how philanthropy gets done – particularly by private and community foundations that distribute billions of dollars each year – if other courts agree with the conclusions.

A pivotal legal question raised by the case: Are philanthropic grants a constitutionally-protected form of free speech? Or are they contracts subject to the same legal scrutiny as other types of commercial or governmental contracts?

“Many foundations are looking for guidance to help them better understand how this ruling might affect their grantmaking, particularly around the question of whether their grant agreements might create contractual relationships with their grantees,” said Ben McDearmon, director, legal resources, for the Council on Foundations.

Assessing the Fearless Fund grant program, which provides $20,000 and mentorship opportunities to businesses owned by Black women, the 11th Circuit reached a clear conclusion.

“Fearless isn’t simply donating money; it’s orchestrating a bargained-for exchange in which both parties obtain valuable benefits and undertake meaningful obligations,” according to the ruling.

The “valuable benefits” that grant recipients provide to the Fearless Fund are “permission to use (their) idea, name, image, and likeness for promotional purposes and (agreement) to indemnify Fearless to arbitrate any disputes that might arise.”

“By any measure,” the opinion concludes, “that is a bargained-for exchange supported by good and sufficient consideration. It is, in other words, a contract.”

Post-Civil War Contract Law

By extension, the 11th Circuit ruling agrees with plaintiffs, the American Alliance for Equal Rights, that the Fearless Fund program is subject to a Reconstruction-era civil-rights law, known as Section 1981, that prohibits racial discrimination in contracts.

Section 1981 was part of the Civil Rights Act of 1866 and was put in place to prevent discrimination against formerly enslaved people after the Civil War. Edward Blum, the leader of the American Alliance for Equal Rights, has argued that means that race can’t be considered at all in contractual relationships.

Rose Chan-Loui, the founding executive director of the Lowell Milken Center for Philanthropy and Nonprofits at UCLA Law, said the Fearless Fund did not help itself by referring to its grant program as a “contract” in its own documents when it invited small businesses to apply for funding.

Still, Chan-Loui said, the ruling’s application of commercial contract law to grant agreements is “simplistic” and ill-suited to the mission-driven nature of the charitable sector.

“I don’t think the drafters of Section 1981 were thinking about contracts in the nonprofit context” when they wrote the law in 1866, Chan said.

There is not much case law to clearly delineate between charitable donations and grant agreements that place stipulations on grantees — for instance, expectations that recipients will reach certain milestones in terms of, say, populations served, social justice goals advanced, or educational levels attained.

Charitable Contribution, or Equitable Exchange?

But, Chan added, accountants have explored this ground in determining how to differentiate “contributions” to nonprofits from “exchanges” of assets. The difference hinges on the notion of “commensurate value,” Chan said.

“There has to be commensurate value received by the funder” for a mutually beneficial contract to exist, Chan said.

In the case of the Fearless Fund, the promotional privileges and indemnification that it receives in exchange for the grants and mentorship opportunities do not meet that definition, in Chan’s mind.

“They’re not getting $20,000 worth of value” in return, Chan said.

McDearmon of the Council on Foundations advises donors to keep in mind that the Fearless Fund lawsuit is still being litigated and the issues it has raised are far from resolved.

While the ruling by the 11th Circuit paved the way for an injunction to temporarily halt the Fearless Fund grant program, the case will continue to make its way through federal court in Georgia where it was originally filed.

For now, he says, foundations and nonprofits in Alabama, Florida, and Georgia, the three states that comprise the 11th Circuit, “should work with their legal counsel to determine whether their grant agreements and other related documents create a contractual relationship with grantees under the laws of their jurisdiction.”

Regardless of the ultimate legal outcome, however, Chan-Loui is concerned that the 11th Circuit ruling is already having significant impacts on the grantmaking plans of many donors across the country.

“Even while the outcome is uncertain,” Chan-Loui said, “foundations are already re-writing their grants and re-thinking their programs,” particularly if they are intended to advance racial equity.

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