A Closer Look at American Alliance for Equal Rights v. Founders First
The recent decision in American Alliance for Equal Rights v. Founders First Community Development Corporation by the United States District Court for the Northern District of Texas is not an outlier but rather a predictable outcome in light of the Supreme Court's ruling in Students for Fair Admissions (SFFA) v. Harvard. This case further solidifies the trend towards a race-neutral interpretation of anti-discrimination laws, particularly under Section 1981 of the Civil Rights Act.
Case Background
In this case, the American Alliance for Equal Rights (the "Alliance") challenge the race-based eligibility requirements of Founders First Community Development Corporation's Texas Job Creators Grant. This grant program, intended to support small businesses in Texas, stipulated that applicants must belong to certain demographic groups, including Latinx, Black, Asian, Women, LGBTQIA+, Military Veterans, or residents of low to moderate-income areas.
The Alliance, representing a member who did not meet these demographic criteria, argued that the grant's eligibility requirements were racially discriminatory and violated 42 U.S.C. § 1981. Section 1981 ensures that all individuals, regardless of race, have the same right to make and enforce contracts.
The SFFA v. Harvard Connection
The decision in American Alliance for Equal Rights v. Founders First is a direct extension of the principles established in SFFA v. Harvard, where the Supreme Court ruled against the use of race-conscious admissions policies in higher education. The Court's reasoning in SFFA v. Harvard emphasized the necessity of race-neutral approaches in situations where race is used as a factor in decision-making processes, which has far-reaching implications beyond the educational context.
In SFFA v. Harvard, the Supreme Court held that any consideration of race must meet the high standards of strict scrutiny and that race-neutral alternatives should be pursued wherever possible. This legal reasoning has now been applied to private sector activities, such as contract-making, where racial preferences in eligibility criteria are being scrutinized under the similarly stringent standards.
Court's Analysis in American Alliance for Equal Rights
In granting the request for a preliminary injunction for the Alliance, the court applied the race-neutral logic from SFFA v. Harvard to evaluate the legality of the Texas Job Creators Grant's eligibility requirements under Section 1981. The court found that:
Section 1981's Guarantee: “Section 1981 guarantees "[a]ll persons ... the same right ... to make and enforce contracts," 42 U.S.C. § 1981(a), as such, it prohibits the "discrimination in the making or enforcement of contracts against, or in favor of, any race." Gratz v. Bollinger, 539 U.S. 244, 276 n.23, 123 S. Ct. 2411, 156 L. Ed. 2d 257 (2003). Section 1981 covers contracts between government, nongovernmental, and private parties, such as Founders, and "provid[es] a cause of action for public or private discrimination based on race." Jett v. Dall. Indep. Sch. Dist., 798 F.2d 748, 762 (5th Cir. 1986); accord Johnson v. Ry. Express Agency, Inc., 421 U.S. 454, 459-60, 95 S. Ct. 1716, 44 L. Ed. 2d 295 (1975). Section 1981 authorizes "both equitable and legal relief," including "damages." Johnson, 421 U.S. at 460.” Am. All. for Equal Rights v. Founders First Cmty. Dev. Corp., 2024 U.S. Dist. LEXIS 136220, *6 (N.D. Tex July 31, 2024).
Race-Neutral Argument: The Defendants argue that they did not discriminate on the basis of race and provided affirmations to this effect.
Overwhelming Evidence of Using Race as a Determinative Factor: The court found that the claims made in the affirmations were “not supported by any policy, webpage, email, or other Founders document.” Am. All. for Equal Rights v. Founders First Cmty. Dev. Corp., at *8. The court also viewed the Defendants requirement for the disclosure of demographic data in the application, including a headshot and a video, without specifying a legimate reason for needing this information before the winners were selected. Id. at *8.
The Court Granted a Preliminary Injunction: This is not the end of the road for Founders, but this is about as bad as a start as there is for a defendant facing Section 1981 litigation. The likelihood of the plaintiffs prevailing and Founders being forced to pay for the plaintiff’s attorney’s fees is high in such a situation.
Implications for Businesses and Nonprofits
The American Alliance for Equal Rights decision serves as a reminder that the principles established in SFFA v. Harvard are not confined to academia but are broadly applicable to all areas where race-based decision-making impacts the making of contracts. For businesses and nonprofits, this means that any program or initiative involving eligibility criteria based on race or demographic characteristics must be carefully scrutinized to ensure compliance with Section 1981 and other anti-discrimination laws.
Organizations should consider adopting race-neutral criteria that achieve their diversity and inclusion goals without violating federal laws. This approach not only aligns with the current legal landscape but also promotes broader inclusivity and fairness in the selection process.
Conclusion
The ruling in American Alliance for Equal Rights v. Founders First illustrates the inevitable application of SFFA v. Harvard's race-neutral mandate to broader contexts, including private and public contracts. As courts continue to enforce Section 1981 with this rigorous scrutiny, organizations must adapt by ensuring their programs are both legally compliant and aligned with the race-neutral principles that are increasingly central to the enforcement of equal rights in the United States.
