Nila Kartika Wati
The American legal landscape is currently witnessing a transformative and highly contentious struggle over the future of race-conscious programs, as a nineteenth-century civil rights statute is being utilized to challenge modern diversity initiatives. In December 2025, the American Alliance for Equal Rights (AAER) filed a significant lawsuit against the Hispanic Scholarship Fund (HSF) in the United States District Court for the District of Columbia. This litigation represents the latest and perhaps most consequential front in a broader legal campaign aimed at dismantling programs that provide targeted support to specific racial and ethnic groups. At the heart of the dispute is Section 1981 of the Civil Rights Act of 1866, a law originally enacted to protect the rights of formerly enslaved African Americans, which is now being interpreted by plaintiffs as a tool to prohibit any race-based distinctions in private contracts, including those involving charitable scholarships.
The Historical Genesis of Section 1981
To understand the gravity of the current lawsuit, it is essential to examine the historical context of the law being cited. Following the conclusion of the American Civil War in 1865, several Southern states enacted "Black Codes." These were a series of restrictive laws designed to suppress the freedom of formerly enslaved people and compel them to work in a labor economy based on low wages or debt. For instance, Mississippi passed legislation in 1865 that empowered local authorities to arrest and forcibly return "any freedman, free negro, or mulatto" to their employer if they quit their job without what the state deemed a valid reason.
In response to these systemic attempts to perpetuate the conditions of slavery, the United States Congress passed the Civil Rights Act of 1866. A central component of this act, now codified as 42 U.S.C. § 1981, mandates that "all persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts… as is enjoyed by white citizens." For over a century, this statute served as a shield against racial discrimination in employment, housing, and business. However, in the wake of recent Supreme Court rulings, legal activists have begun using Section 1981 as a sword to challenge programs intended to remedy historical and systemic inequities.
A Chronology of the Legal Campaign Against Affirmative Action
The lawsuit against the Hispanic Scholarship Fund does not exist in a vacuum; it is part of a deliberate, multi-year legal strategy spearheaded by Edward Blum, the founder of AAER. Blum was the primary architect behind the landmark 2023 Supreme Court case, Students for Fair Admissions v. Harvard, which effectively ended race-conscious admissions policies in higher education by invoking the Equal Protection Clause of the Fourteenth Amendment.
Following that victory, the focus of anti-affirmative action advocates shifted toward the private and nonprofit sectors. In 2023, AAER sued the Fearless Fund, a venture capital firm led by Black women that provided grants specifically to businesses owned by Black women. The plaintiffs argued that the grant program constituted a contract that excluded non-Black applicants, thereby violating Section 1981. Despite significant support from civil rights organizations, the Fearless Fund ultimately settled the case in 2024, agreeing to shutter the specific grant program in question.
The current case against the Hispanic Scholarship Fund, filed in late 2025, follows this blueprint. HSF, founded in 1975, has provided over $700 million in scholarships to more than 65,000 students of Hispanic heritage. The AAER lawsuit alleges that by restricting eligibility to students of Hispanic ancestry, the fund is engaging in illegal racial discrimination.
The Novel Legal Theory of Contractual Charity
The central legal question in the HSF case revolves around whether a charitable scholarship constitutes a "contract" under Section 1981. Historically, pure gifts or charitable donations have not been viewed as contracts because they lack the "consideration" or mutual exchange required by contract law. However, AAER has introduced a novel and potentially far-reaching theory.
In its complaint, AAER argues that HSF enters into a contractual relationship with every student who applies for a scholarship. The group points out that in exchange for the opportunity to compete for funding, applicants must agree to several terms: they must license their name, image, and likeness to the organization; hand over sensitive personal data; and agree to a class-action waiver. AAER contends that this exchange of personal rights and data for the "shot" at a scholarship transforms the charitable act into a commercial contract.
Legal experts within the nonprofit sector have expressed deep concern over this interpretation. Ben McDearmon, the director of Legal Resources at the Council on Foundations (CoF), noted that if merely interacting with a website or agreeing to a privacy policy creates a binding contract under Section 1981, the implications for the entire nonprofit sector are staggering. This theory could potentially subject any organization that targets its services—whether to specific religious groups, genders, or ethnicities—to litigation if they use digital applications or data collection.
Supporting Data: The Persistence of the "Juan Crow" Legacy
The defense of the Hispanic Scholarship Fund is built largely on the argument that race-targeted programs remain necessary to address persistent socioeconomic disparities rooted in a history of institutionalized discrimination. In an amicus brief filed in support of HSF, the Lawyers’ Committee for Civil Rights Under Law detailed the history of "Juan Crow" laws—the Hispanic equivalent of the Jim Crow South.
The brief highlights that in the early twentieth century, zoning laws and state policies in California and Texas were used to institutionalize the segregation of Mexican-American students. By 1940, over 80 percent of Mexican-American students in California were relegated to "Mexican-only" schools, which were frequently underfunded and poorly equipped. In Texas, segregation was even more rigid; by 1956, 80 percent of the state’s school districts remained segregated for Hispanic students.
This history has had a compounding effect on the economic standing of Hispanic families today. According to data cited by the Lawyers’ Committee, while Hispanic families have some of the highest workforce participation rates in the United States, they are significantly more likely to live in poverty and possess lower median wealth compared to their white counterparts.
Educational data further illustrates this gap. Research from the advocacy group UnidosUS reveals that only 52 percent of Latino students complete their college degrees within four years, compared to 65 percent of white students. This disparity is often attributed to financial pressure; approximately 80 percent of Latino students report working while enrolled in higher education to cover costs, as they often lack the family savings or generational wealth that their peers may rely on.
Official Responses and the "Chilling Effect" on Nonprofits
The response from the civil rights community has been one of urgent alarm. Sabrina Talukder, senior counsel with the Lawyers’ Committee, argues that the lawsuit seeks to invert the purpose of civil rights laws. She stated that using statutes meant to dispel the "badges and incidents of slavery" to attack programs aiding marginalized groups re-entrenches inequality rather than advancing fairness.
The Council on Foundations and other nonprofit advocacy groups have joined the fray, filing amicus briefs that emphasize the First Amendment rights of private organizations. They argue that nonprofits have a constitutional right to associate and to express their values through the causes they choose to support. If the court rules against HSF, advocates fear a "chilling effect" that will lead foundations to preemptively abandon equity-focused work to avoid the ruinous costs of litigation.
Since December 2024, more than 30 lawsuits leveraging Section 1981 against diversity-oriented programs have been filed across the United States. This surge in litigation suggests a coordinated effort to reshape the legal boundaries of private philanthropy and corporate diversity, equity, and inclusion (DEI) initiatives.
Implications for the Future of Private Philanthropy
The outcome of the HSF case, which currently awaits a ruling on a motion to dismiss, will have profound implications for the $1.5 trillion nonprofit sector in the United States. If the court accepts AAER’s argument that scholarship applications are contracts, it could effectively outlaw any race-exclusive or race-preferred scholarship program in the country.
Beyond scholarships, the ruling could impact mentorship programs, professional development fellowships, and even targeted healthcare initiatives. Organizations such as the United Negro College Fund, the Hebrew Immigrant Aid Society, and various tribal organizations could find their foundational missions under legal scrutiny.
Critics of the lawsuit argue that it ignores the fundamental distinction between state-mandated discrimination and private efforts to expand opportunity. Eric Rodriguez, senior vice president of policy and advocacy at UnidosUS, emphasized that the Hispanic Scholarship Fund exists precisely to resolve the economic barriers created by a legacy of discrimination.
As the judge weighs the merits of the case, the nonprofit world remains in a state of high tension. The decision will likely determine whether private organizations still have the autonomy to address specific societal gaps or if the legal definition of "contract" will become the primary vehicle for enforcing a colorblind standard across all facets of American civil society. For now, the Hispanic Scholarship Fund continues its operations, but the legal shadow cast by Section 1981 grows longer, threatening to redefine the limits of charitable work in the twenty-first century.
