Jun 6, 2024 - Business

Corporate diversity programs could be headed toward the Supreme Court

Illustration of a series of white pens followed by a black pen and a gavel

Illustration: Sarah Grillo/Axios

The legal fight over diversity efforts in the business world advanced this week, as an appeals court decision halted a venture capital firm's grant program for Black women entrepreneurs.

Why it matters: The case was filed by the same group that got the Supreme Court to overturn affirmative action in higher education last year, and with this decision corporate programs inched closer to a similar fate.

Catch up fast: Edward Blum's American Alliance for Equal Rights filed a case against Fearless Fund last year, claiming the VC firm's grant program for Black women entrepreneurs is discriminatory because it leaves out other groups.

  • Blum's group sought to stop the program while the case proceeded, but a district court judge denied the request.

State of play: On Monday, a panel of three judges — including two former President Trump appointees — overturned that ruling in the U.S. Court of Appeals for the 11th Circuit. The judge appointed by former President Obama penned a fiery dissent.

  • The court stopped the program from operating while the case proceeds. It ruled that Blum's group "is likely to succeed on the merits" of its claim that the Fearless program violates a Reconstruction-era civil rights law meant to protect formerly enslaved people from discrimination.

Friction point: With this decision, there is now a "circuit split" on these kinds of cases, raising the possibility that they'll wind up at the Supreme Court.

  • A similar case filed against Pfizer, over its fellowship program for college seniors who are Black, Hispanic or Native American, went in a different direction at the U.S. Court of Appeals for the Second Circuit in March.
  • In that case, the appeals court ruled that the plaintiffs — a group called Do No Harm — lacked standing to sue because they were anonymous.
  • In the Fearless decision, the court ruled that the plaintiffs, also anonymous, did have standing. According to the suit, they are three business owners who would have applied for the Fearless program but aren't Black women.

What's next: There's been a series of legal attacks on diversity, equity and inclusion (DEI) programs at companies and universities this year, and more cases will likely wind up in appeals courts — including a lawsuit that was dismissed last week against insurer Progressive and fintech company Hello Alice.

  • "We are going to see some pro-DEI outcomes in liberal circuits and anti-DEI outcomes in conservative circuits," David Glasgow, executive director of the Meltzer Center for Diversity, Inclusion, and Belonging at New York University's School of Law, told the Associated Press.

The bottom line: This disagreement will likely play out in the courts until there's some kind of definitive ruling from the high court, observers said.

  • With SCOTUS as currently constituted, it's more likely than not that race-based investment efforts will be banned or significantly curtailed.

Ultimately, the fellowship and grant programs targeted by anti-DEI groups aim to make the business world a more diverse place by giving people in underrepresented groups a leg up.

Why it matters: There are few Black and women CEOs on the Fortune 500 list. And the pipelines leading to the C-suite become progressively less diverse as workers advance up the ladder.

Black entrepreneurs are also at a disadvantage when it comes to securing funding for new businesses.

  • In 2022, Black founders raised just 1% of all funding, according to data from Crunchbase.

Zoom in: Rosalind Chow, a Carnegie Mellon business school professor who studies diversity and inequality, says those $20,000 Fearless Fund grants are meaningful in light of access issues facing many entrepreneurs of color.

  • Programs like the Fearless Fund "are meant to act as a bridge so that entrepreneurs can have a little more time to build those networks so that they can get access to more funding."

Our thought bubble: The Fearless Fund now has reason to be scared. And so do any other firms whose mission is to invest in companies founded by members of underrepresented racial groups.

What to watch: The Fearless decision has also put the nonprofit world on notice — they're wondering if any programs structured similarly to the Fearless grant would be subject to a legal challenge.

  • "I have clients who are involved in charitable giving looking closely at this," says Lauren Hartz, a partner at Jenner & Block.

What they're saying: "The message these judges sent today is that diversity in Corporate America, education, or anywhere else should not exist," Fearless Fund CEO Arian Simone said in a statement to AP.

The other side: The groups filing these suits argue that it's inherently unfair to favor one demographic group over another.

  • "Our nation's civil rights laws do not permit racial distinctions because some groups are overrepresented in various endeavors, while others are under-represented," said Blum, of the American Alliance for Equal Rights, according to CNN.

The bottom line: If these cases succeed, they could worsen the gender and racial imbalances in the business sector.

Go deeper