Nonprofits must be aware of and compliant with applicable anti-discrimination laws. In an earlier post, we discussed Title VII of the Civil Rights Act of 1964. This post focuses on Section 1981 of the Civil Rights Act of 1866, codified in Title 42 of the U.S. Code.

Contrast to Title VII

Like Title VII, Section 1981 protects against discrimination but with seven key differences:

1. Section 1981 covers only race/ethnicity-based discrimination.
2. Section 1981 covers the making and enforcing of contracts, including outside of an employment context.
3. Section 1981 has a significantly longer statute of limitations (4 years vs. less than 1 year).
4. Section 1981 has no cap on compensatory damages.
5. Section 1981 does not require filing a charge with the Equal Employment Opportunity Commission (EEOC).
6. Section 1981 applies to private organizations (including nonprofits), no matter how many employees they have.
7. Section 1981 allows for claims by independent contractors.

Key Provisions

All persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts, to sue, be parties, give evidence, and to the full and equal benefit of all laws and proceedings for the security of persons and property as is enjoyed by white citizens, and shall be subject to like punishment, pains, penalties, taxes, licenses, and exactions of every kind, and to no other.

42 U.S.C. §1981(a).

For purposes of this section, the term “make and enforce contracts” includes the making, performance, modification, and termination of contracts, and the enjoyment of all benefits, privileges, terms, and conditions of the contractual relationship.

42 U.S.C. §1981(b).

Applicability

To prevail in a lawsuit alleging a defendant’s violation of Section 1981, a plaintiff must initially plead and ultimately prove that, but for race, it would not have suffered the loss of a legally protected right. Comcast Corp. v. National Association of African American-Owned Media (U.S. Supreme Court, 2020). This “but for” causation standard is more difficult to prove than a “motivating factor” standard. A bill was introduced in 2021 to lower the standard, but many analysts have given it a very low probability of passage. See Economic Inclusion Civil Rights Act of 2021.

Section 1981 was intended to prohibit discrimination in the making or enforcement of contracts against, or in favor of, any race. A nonprofit can be in violation of Section 1981 by, among other things, making a particular race a condition of entering into a contract with the nonprofit. Accordingly, it may be unlawful for a nonprofit to state that it will only enter into a particular contract if it’s with (1) a person of a specific race or (2) an organization led by a person of a specific race.

Grant Agreements

With the growing movement for racial equity, more grantmaking organizations have focused their support on (1) persons who identify as Black and/or BIPOC or (2) Black- or BIPOC-led charities. This has raised the question of whether it’s lawful to restrict a grantmaker’s grants to members of a particular race or to charities led by an individual of a particular race.

Section 1981 applies to the making and enforcing of contracts. The issue then Is whether a grant agreement is a contract. The answer depends on how the grant agreement is drafted.

The basic elements required for an enforceable contract are: offer and acceptance, mutual assent, consideration (value), capacity, and legality. A typical grant agreement will likely have all of these elements with the possible exception of consideration from the grantee to the grantmaker.

If the grant is in the form of a pure gift, even if there are specific purposes for which the grant is to be used, there is no legal consideration from the grantee in return. This would likely also mean that the grant agreement is not a legally enforceable contract. Accordingly, if the grant is misused, the grantmaker’s recourse may be to report a diversion of charitable assets to the state charity regulator and possibly the IRS. Additionally, in some states like California, the grantmaker may be able to receive relator status from the state charity regulator to pursue a claim against the grantee. The prospect of such actions may be sufficient to compel compliance by the grantee.

If, however, the grant is offered as consideration in return for some performance by the grantee, even if to benefit some other party or parties, the grant agreement may be considered an enforceable contract. This would then trigger Section 1981. Offering such grant agreements only to members of a particular race and/or excluding members of a particular race from eligibility to enter into such agreements with the grantmaker may be a violation of Section 1981.

Expenditure responsibility (ER) grant agreements, in particular, need to be carefully drafted if made with racial preferences or exclusions. Due to the requirements of ER, private foundations may find it most protective to draft ER grant agreements as enforceable contracts. But that may trigger Section 1981 exposure.

Alternatives to Race Restrictions

One grantmaking strategy for pursuing racial equity goals without potentially violating Section 1981 is to avoid race-based eligibility requirements and instead use alternative eligibility requirements that are aimed at advancing the racial equity goals. For example, relevant lived experiences that make a prospective grantee more likely to belong to an underrepresented group, without requiring that such prospective grantee belong to such group, may reduce the risks of an aggressive plaintiff from asserting a violation of Section 1981.

Several esteemed lawyers advise nonprofits to reduce the risk of a lawsuit based on a Section 1981 violation by adopting alternative grantee criteria rather than strict race-based qualifications. Even if a grant agreement is ultimately held not to be a contract, a nonprofit may find defense of such a lawsuit to be administratively and emotionally overwhelming and the cost of a settlement very high. Further, if there is a ‘bad’ case that sets precedent for the sector, racial equity advocates could find the movement significantly harmed. On the other hand, some argue that the fear and cost of a lawsuit may be worth maintaining explicit race restrictions in grantmaking if the grants are designed to remedy some clear racial inequity or imbalance.

Affirmative Action Plans

A valid affirmative action plan serves as a defense to a Section 1981 claim. You can read more about affirmative action plans with a remedial purpose on our follow-up post: Affirmative Action Plans—A Potentially Important Safeguard for Race-Based Grantmaking.

Updates and Cases to Follow (updated 8/19/23)

Conservative activist behind US affirmative action cases sues venture capital fund (8/2/23, Reuters)

Five Things to Know Regarding American Alliance for Equal Rights v. Fearless Fund (8/10/23, Foley & Lardner)

The Legal Assault on Corporate Diversity Efforts Has Begun (8/8/23, Wall Street Journal)

Companies have long relied on rationales similar to those buttressing affirmative action at universities—that there are benefits to diversity. By dismissing that rationale, the high court [in its June 29 decision on affirmative action] weakened the justification for other programs that promote it. … Civil-rights lawyers say conservative activists’ arguments distort the original purpose of laws designed to protect groups that, historically, have had fewer labor-market opportunities or difficulty cracking corporate ceilings. …

“Employers still have obligations to comply with civil rights statutes,” said Charles McLaurin, senior counsel with the NAACP Legal Defense and Educational Fund. Rolling back DEI programs designed to expand workplace opportunities, he added, “has the potential of creating a hostile environment for certain marginalized groups. Companies would still face exposure.”