Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Corporate DEI Policies Face Scrutiny Following SCOTUS Affirmative Action Decision

Skadden Insights – September 2023

Lara A. Flath David E. Schwartz Amy Van Gelder

Key Points

  • The U.S. Supreme Court struck down race-based affirmative action in higher education in June 2023, effectively foreclosing the consideration of race in and of itself in that context.
  • Although the Court’s decision was limited to higher education, private sector DEI initiatives have already come under fire, as litigants attempt to apply the Court’s reasoning to other contexts.
  • Soundly conceived and properly implemented DEI policies remain lawful, but careful review of related statements, goals and strategies is advisable in the face of heightened focus on these policies.

The U.S. Supreme Court’s historic ruling on affirmative action is limited to college admissions and not directly applicable to private employers. But the June 29, 2023, decision has already emboldened those who are seeking to challenge private sector diversity, equity and inclusion (DEI) initiatives.

This article highlights some of the ways the opinion has already been invoked, to assist companies in understanding the still-evolving landscape and potential risks.

Background

In Students for Fair Admissions, Inc. v. President and Fellows of Harvard College and Students for Fair Admissions, Inc. v. University of North Carolina, the Supreme Court held that the universities’ consideration of race in admissions systems — “however well intentioned and implemented in good faith” — violated the equal protection clause of the 14th Amendment and Title VI of the Civil Rights Act of 1964.1

The Court offered several rationales:

  • The universities’ proffered interests to support their consideration of race, while commendable, were not sufficiently measurable because courts cannot determine when the claimed benefits — such as fostering innovation and enhancing cross-racial understanding — have been reached.
  • Contrary to prior precedent expressly permitting the use of race as a “plus” factor, the Court focused on the “zero-sum” nature of the admissions decision outcome and found that a benefit provided to some applicants but not others is necessarily discriminatory. Similarly, race-conscious decisions inherently engage in stereotyping.
  • The consideration of race lacked a logical or defined end point.

Impact on DEI Initiatives

SFFA does not interpret or address Title VII of the Civil Rights Act or 42 U.S.C. Section 1981. Indeed, it was already the law that race generally cannot be a factor in making employment decisions. But a federal district court opinion issued shortly after the SFFA decision applied the Supreme Court’s reasoning to hold that certain racial preferences in government contracting violated constitutional guarantees of equal protection.

Private litigation challenges invoking SFFA have already begun and are expected to continue.

Allegations of individual discrimination. The most straightforward challenges have included individual discrimination lawsuits alleging that adverse employment actions were the result of DEI policies.

Lawsuits initiated by nonprofit organizations. Membership and nonprofit organizations have also recently challenged various programs.

Even before SFFA, corporate DEI programs were facing scrutiny. America First Legal, a national nonprofit organization, has in the last few years filed complaints, including with the Equal Employment Opportunity Commission alleging that various companies engaged in race- and sex-based discrimination.

Since SFFA, these organizations have continued to challenge DEI initiatives and have threatened to bring suit, including through a public warning stating “all DEI programs, and all ‘balancing’ in employment, training, scholarships, and promotions, based on race, national origin, or sex are illegal” and by establishing a tips hotline.

Activist investors have similarly initiated demands against Fortune 500 companies, insisting that they retract policies adopted in the name of DEI initiatives or face litigation. Such demands are likely to continue, but the recent dismissal of one such complaint demonstrates that such activists may face hurdles meeting the legal standard to bring derivative litigation, including establishing that they fairly and adequately represent the interests of all shareholders (as opposed to their own private interests).

Considerations Going Forward

Keeping these trends and potential challenges in mind, employment law has not changed, and companies can choose to continue to implement DEI policies designed to eliminate bias, cultivate a diverse pipeline of talent and promote equal opportunity in hiring, promotion and procurement.

Companies that value diversity should regularly review DEI initiatives and employment policies to ensure full compliance with the law. In the wake of SFFA and increased scrutiny, companies may want to consider reviewing DEI initiatives with the following types of questions in mind:

  • Are DEI objectives clear and connected to specific business goals?
  • Are DEI initiatives and programs distinct from and able to succeed without the use of impermissible racial quotas?
  • Are DEI initiatives and programs open to all?
  • Do any DEI policies potentially provide a zero-sum advantage on account of race?
  • Do company statements accurately describe DEI initiatives and policies?

Through the exercise of informed business judgment, companies should consider how such policies advance the mission and operations of their business. If they do, the threat of increased scrutiny need not compel companies to abandon lawfully implemented programs.

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1 Lara Flath and Amy Van Gelder were counsel to the University of North Carolina at Chapel Hill in the SFFA litigation.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

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