Supplier Diversity Programs Face Increased Scrutiny and Risk as the Spotlight Brightens on Corporate DEI Initiatives

Seyfarth Synopsis: While the potential impact on private companies’ employee-focused DEI efforts has received much attention in the wake of the recent Supreme Court higher education affirmative action cases, another strategic area of focus in many organizations’ DEI efforts is supplier diversity initiatives. Those programs have faced increased legal challenges and also pose substantial risk, due to the uncertainty surrounding the application of the Supreme Court’s pronouncements on affirmative action in the context of supplier diversity initiatives.

As we reported, the recent Supreme Court cases Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, and SFFA v. University of North Carolina et al. (“SFFA”) have caused a flurry of activity surrounding workplace DEI initiatives. However, because the frameworks used to analyze “affirmative action” in higher education and “affirmative action” in employment are distinguishable, the practical impact of the SFFA cases is the increased scrutiny and potential future challenges to these programs. The same is true for another pillar of many corporate DEI programs: efforts to diversify supply chains.

Supplier diversity programs are susceptible to serious challenge in a post-SFFA environment. Plaintiffs seeking to challenge supplier diversity initiatives typically bring such claims under Section 1981 of the Civil Rights Act of 1866 (“Section 1981”), which prohibits race discrimination in the making and enforcing of contracts. The Supreme Court has ruled that  Section 1981 “offers relief when racial discrimination blocks the creation of a contractual relationship, as well as when racial discrimination impairs an existing contractual relationship, so long as the plaintiff has or would have rights under the existing or proposed contractual relationship.” Domino’s Pizza, Inc. v. McDonald, 546 U.S. 470 (2006). Therefore, a prospective supplier that is not awarded a contract or financial benefit based either on a preference for the race of the successful bidder, or due to their race as an unsuccessful bidder, may bring a claim under Section 1981.

Title VII, Section 1981, and “Affirmative Action”

There is a long history of litigants using Section 1981 in employment discrimination cases. As a result, Section 1981 jurisprudence in the employment context has developed in parallel to Title VII. Courts, for example, have borrowed the Title VII analytical framework and applied it to Section 1981 claims in employment discrimination cases. Courts have similarly applied Title VII’s voluntary affirmative action standard—announced in Johnson v. Santa Clara Transportation Agency, 480 U.S. 616 (1987) and Steelworkers v. Weber, 443 U.S. 193 (1979)—in the context of employment and education-related Section 1981 cases. See Setser v. Novack Investment Co., 657 F.2d 962 (8th Cir. 1981) (concluding that § 1981 does not bar affirmative action programs in an employment case); Doe v. Kamehameha Sch./Bernice Pauahi Bishop Est., 470 F.3d 827 (9th Cir. 2006) (applying Title VII affirmative action principles to a private educational institution in a Section 1981 case). The standard, borrowed from Johnson and Weber in these Section 1981 cases, is that voluntary affirmative action programs must seek to correct a “manifest imbalance”; be temporary and remedial in their intent; and not “unnecessarily trammel” the rights of those in the majority.  

However, there is no guarantee a court would apply these voluntary affirmative action principles in every type of Section 1981 case. Section 1981 has distinct historical roots, and its general reference to contracting broadens its application beyond employment discrimination into other arenas such as race discrimination in housing, franchising, social club membership, and commercial transactions. Thus, some courts may be less inclined to extend the rationale used in Johnson/Weber—both employment law cases—to Section 1981 cases outside of the employment and education contexts. Such uncertainty, coupled with the recent increased attention to affirmative action generally, places corporate programs seeking to enhance the racial diversity of corporate suppliers at greater risk.

“Reverse” Discrimination in Section 1981 Contracting Cases

Challenges to race-based set-asides in the private business contracting space are not new, but the SFFA cases have brought this discussion to the forefront. On August 2, 2023, the American Alliance for Equal Rights (“AAER”) filed a lawsuit against Fearless Fund Management LLC in the Northern District of Georgia, seemingly to test the impact of SFFA on affirmative action in the context of private contracting. The defendants operate a program that provides grants and other perks of value to small businesses, and allegedly offers those benefits only to Black women.  The Complaint asserts, “The first eligibility requirement listed in the Official Rules is that the program ‘is open only to black females.’” The plaintiffs in the case (self-described as a “non-profit, membership organization dedicated to challenging distinctions and preferences made on the basis of race and ethnicity”) claim that they have members who are “ready and able” to apply for the program, but are ineligible because they are not black women. The plaintiffs go on to state that “Section 1981 prohibits intentional race discrimination in the making and enforcement of public and private contracts,” and contend that the program therefore discriminates against non-black entrants to the program on the basis of their race.

It is difficult to forecast what a court might do in a “reverse” Section 1981 discrimination case concerning contracting such as Fearless Fund. Courts will need to address whether Section 1981 allows for voluntary affirmative action plans in commercial contracting; is race-conscious decision-making in awarding contracts pursuant to a valid voluntary affirmative action plan “intentional” race discrimination as contemplated by Section 1981? As stated above, there is some precedent that such programs are permissible under Section 1981 in the employment and education contracting spaces, but Section 1981’s broad applicability to the contracting realm could allow enough room for a court to conclude that voluntary affirmative action principles do not apply to diverse supplier contracting or similar minority-owned business preferential programs. 

Public-Sector Race-Conscious Contracting Programs May Provide a Window Into How Courts Will View Private Company Supplier Diversity Programs

Corporate supplier diversity programs may also be vulnerable to challenge based on rulings that apply to similar diversity initiatives in the public sector. Courts have long analyzed public-sector programs that provide set-asides for contracts with minority-owned businesses under the Equal Protection Clause using strict scrutiny. See City of Richmond v. J.A. Croson Co., 488 U.S. 469 (1989) (affirming strict scrutiny should be applied to racially preferential set-asides in government contracting, requiring that such a program be “narrowly tailored” to satisfy a “compelling governmental interest”). After SFFA, courts may be more willing to apply a similar standard to private sector supplier diversity programs.

For example, in the weeks after SFFA, the court in Ultima Servs. Corp. v. United States Dep’t. of Agriculture, No. 2:20-CV-00041 (E.D. Tenn.) struck down a government program providing preferences to minority-owned businesses under the Small Business Act. In an opinion that heavily cites to SFFA, the court concluded that the government’s challenged minority-owned business program violated the Equal Protection Clause with regard its methodology for applying a “rebuttable presumption of social disadvantage” to individuals of certain minority groups. While this case does not apply to a private company’s use of racial preferences in awarding contracts, it illustrates in an analogous context, reasoning a court might use to conclude that private sector race conscious supplier contracting programs violate Section 1981—especially given the ties between Section 1981 and the Equal Protection Clause. See e.g., Anderson v. City of Boston, 375 F.3d 71, 78 n.7 (1st Cir. 2004) (“purposeful discrimination that violates the Equal Protection Clause also will violate § 1981.”).

Conclusion

Overall, supplier diversity programs may present greater risks after SFFA. Although affirmative action plans are clearly permissible under Section 1981 in some circumstances (e.g., employment and education), there is no guarantee courts will follow that same approach the supplier contracting context. Moreover, courts’ long history of scrutinizing such programs in the public sector may now bleed over into Section 1981 challenges to private entities’ supplier diversity initiatives.

We are closely monitoring the evolution of this area of law. For now, organizations should continue to evaluate their supplier diversity programs and consider the impact of potential shifts in the legal landscape on this issue.