Efforts by the Trump administration, anti-DEI activists, and private plaintiffs to target companies that continue to maintain DEI programs are receiving a lot of attention, but if companies think that the only risk they face is failing to unwind these programs as quickly as possible, a recent Bloomberg Law article says they need to think again.  According to SMU Law Prof. Carliss Chatman, companies that roll back these programs may put themselves in legal jeopardy for that decision as well. 

As she explains in the article, the issue arises under a Reconstruction Era civil rights statute, 42 USC §1981, which prohibits racial discrimination in making and enforcing contracts:

Section 1981 was enacted after the Civil War to guarantee all persons in the US the same right to make and enforce contracts “as is enjoyed by white citizens.” While the statute is often overlooked in corporate compliance discussions, it remains a potent tool for challenging race-based interference with commercial relationships.

Recent DEI pullbacks—especially those terminating or reducing contracts with Black vendors—may expose companies to Section 1981 litigation. Even in the wake of the Supreme Court decision Comcast Corp. v. NAAAOM, which imposed a but-for causation standard, companies are vulnerable if plaintiffs can show that race was a motivating factor in the decision to alter or end a contractual relationship.

This risk isn’t hypothetical. As companies such as Target and McDonald’s face public scrutiny for reversing course on supplier diversity, Black-owned businesses are left with fewer procurement opportunities and diminished access to markets that briefly opened during the post-George Floyd DEI wave.

If those opportunities didn’t evaporate because of objective performance metrics, but due to external political pressure or discomfort with racial equity branding, that may be enough to support a Section 1981 claim.

The article also points out that, if companies have previously highlighted their DEI policies as being a material component of their business strategy, sudden changes to those policies may trigger disclosure obligations under Regulation S-K and expose those companies to disclosure-based shareholder claims.

– John Jenkins