Thought Experiment: Post-Fearless Fund, A World of Philanthropy Without Grant Contracts

During the months leading up to June 2023’s Supreme Court decisions finding race-conscious college admissions to violate the Equal Protection Clause of the Fourteenth Amendment, some in establishment philanthropy forward-lookingly began to realistically think about what those decisions’ ramifications might be for similarly race-conscious grantmaking.

After the decisions, Edward Blum, the leader of the nonprofit Students for Fair Admissions group that secured legal representation for the successful plaintiffs in the cases, told us at The Giving Review last September that “I’m not out here trying to drum up business for the American legal profession, but the landscape has changed. Private foundations should have a good long meeting” and “ask for a memorandum in light of the Students for Fair Admissions cases. Is there something that we need to be aware of [in] how we hire, how we make grants?”

According to a Center for Effective Philanthropy (CEP) survey of 280 foundations between last September and November, the results of which were released last month, still only “[a]pproximately 3 out of 10 foundations have consulted legal counsel about the implications of the Supreme Court rulings in their work.” Moreover, “The majority of foundations are not making changes to their ongoing work as a result of internal discussions” about the rulings, the survey finds.

Also in the wake and on the basis of the rulings, another group headed by Blum—the American Alliance for Equal Rights (AAER)—filed a lawsuit against the Fearless Fund and other defendants, arguing that the Fund’s race-based grants violate §1981 of the Civil Rights Act of 1866. The Fund runs a grant-award contest for which only women of color are eligible to apply. Their small businesses can win $20,000 grants. One of the other defendants is the Fearless Foundation, which is categorized as a tax-exempt, §501(c)(3) charitable nonprofit under the Internal Revenue Code.

If realistically looking even further forward—as some are, but more should be, doing—there needs to be serious thinking about the potential ramifications of the outcome of the Fearless Fund case for philanthropy.

Just Sign Here

Specifically, the Fearless Fund’s grant program, according to AAER’s Fearless Fund complaint, violates the post-Civil War §1981, which says “All persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts ….,” defined to include “the making, performance, modification, and termination of contracts, and the enjoyment of all benefits, privileges, terms, and conditions of the contractual relationship.”

Interestingly, AAER’s complaint does not allege—as it perhaps could have, alternatively or additionally—that the program violates the Civil Rights Act of 1964’s Title VI, which says “No person in the United States shall, on the ground of race, color, or national origin, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving federal financial assistance.”

Basing the action only on §1981 and not Title VI cleanly prevents it from becoming entangled in the issue(s) surrounding whether and, if so, what conditions can be attached to “federal financial assistance” and whether tax-exemption is one of them or not. The Fearless Foundation defendant, recall, has tax-exempt status. The issue of whether exemption constitutes “federal financial assistance” is central to other pending cases—the ramifications of which should be contemplated, and for which there should be some planning, as well.

In the §1981, contract-based Fearless Fund case, AAER’s complaint notes that to apply for a Fearless Fund grant as part of the program, an applicant must “agree” to the “official rules, which are a contract.” The contract “includes indemnities” for the Fund, and “a limitation of [the] rights and remedies” of the applicant.” It lists several specific requirements and conditions.

Upon the awarding of a grant, foundations generally use grant agreements—the terms of which are, well, agreed upon by both the grantmaker and the grant recipient. They usually obligate the grantmaker to pay a certain amount, within a specified time period, for a designated purpose—be it general operations or a named project. Usually, the grantee also promises to do things—including satisfying the specific purpose of the grant; doing everything necessary for the grantor to remain in good, charitable tax-status stead with the Internal Revenue Service (IRS); providing whatever the grantor requires as part of any grant-reporting and -evaluating process it may have, whenever it wants/“needs” it; and basically meeting whatever other conditions the grantor may want to attach to receipt of the grant money. They provide a basis for legal recourse to one party if the other party doesn’t meet their terms, though such recourse is rarely pursued.

Grant agreements are pretty much always written by the grantor, of course, and they’re usually given to the grantees-to-be with or just after the well-received notification that the grant money on its way—after the grantee-to-be signs and returns the document.

On The Other Hand, Maybe Let’s Not Sign Anything

If AAER makes legal headway with its argument in Fearless Fund that race-based contracts violate §1981, practical advice provided to philanthropies and grant recipients alike that want to use grant money to further race-based purposes would likely include several options—from linguistically just avoiding any explicit reference to race in grant agreements to, more protectively from the standpoint of cautious attorneys, avoiding grant contracts altogether. Establishment philanthropy could perhaps urge Congress to somehow handle the problem legislatively, as well, it’s plausible to think—not unlike in proposed legislation to clarify that tax-exemption cannot be considered “federal financial assistance” to which conditions can attach.

There is, and may be more, warranted ethical skittishness about merely euphemistically finessing philanthropy’s way around the problem. Given the actual grantor and grantee intent, it would approach and sometimes cross the line into being outright deceptive, in fact—but be perfectly legal, of course. Grants could be made without stating, in any agreed-upon writing, the conditions that the grantor means to attach. They could be made just for the recipient group’s “general operations.” Extra- or non-contractually, everybody would just “know” what the grant money is for. Wink wink. Not a new human phenomenon, but …

Not good for grantmaking, above and beyond what it does to those who feel like they “have to” and do essentially lie, if even only by omission.

There is, and may be more, warrantedness in doing grantmaking without any agreement or contract at all. Consult legal counsel, but this is possible, either in the particular context of race-conscious giving or more generally. It would incur risk, though, perhaps moreso for the grantor, by preventing all the benefits of contractual obligations and promises—again, including required satisfaction by the grantee of the specific purpose of the grant; all that which the grantor wants/needs the grantee to do, and not do, to remain in good stead with the IRS; all that which the grantor requires as part of any grant-reporting and -evaluating processes it may have; and the grantee from having to meet whatever other conditions the grantor may want to impose. These benefits, as probably with most in grant contracts, accrue to the grantor.

Interestingly, the thought experiment as sketched out here might have the effect of moving towards the kind of “trust-based philanthropy” being urged by a growing number of grassroot progressive grant recipients of establishment philanthropies and those who speak for them. Risking oversimplification in describing the position: Drop the overbearingly top-down, ridiculously too-specific reporting, evaluation, and other requirements expertly drafted by the well-credentialed and data-driven. Take your self-beneficial grant-contract encumbrances, and please just let us figure out “on the ground” how we want to, and what we need to do to, effectuate our shared mission. We know what we’re doing. No winks.

Not a new human instinct, either, in its bottom-up anti-elitism. Good for grantmaking? Maybe, actually.

This article first appeared in the Giving Review on March 13, 2024.