On June 25, 2015, in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., the U.S. Supreme Court affirmed the viability of disparate-impact claims under the Fair Housing Act (FHA). This issue has long been in dispute. Indeed, the Court granted petitions for certiorari in two prior matters, which settled before a ruling could issue. In Texas Department of Housing, the Court finally had the chance to speak.

The Decision

While the Court considered various factors in its analysis, the decision turns largely on statutory construction. On its face, the FHA imposes liability for intentional conduct (e.g., "refus[ing] to sell or rent," "refus[ing] to negotiate" and "deny[ing] a dwelling" based on "race, color, religion, sex, familial status, or national origin"). But, under the FHA, it also is unlawful to "otherwise make [a dwelling] unavailable" on those bases (emphasis added). Certain federal statutes have been construed to allow for disparate-impact claims, such as Title VII of the Civil Rights Act of 1964 (Title VII), where an employer “limit[s] . . . his employees in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee (emphasis added)."

The Court stated that Title VII, along with the Age Discrimination in Employment Act (ADEA) and decisions involving these statutes (i.e., Griggs v. Duke Power Co. (under Title VII) and Smith v. City of Jackson (under the ADEA)) provided "essential background and instruction" on the construction of the FHA. Thus, the Court found it appropriate to analogize the phrase "otherwise make unavailable" in the FHA to the phrase "otherwise adversely affect" in Title VII and the ADEA. The Court then concluded that the phrase in the FHA is "results-oriented language," which "refers to the consequences of an action rather than the actor’s intent (emphasis added)." Accordingly, based on Texas Department of Housing, disparate-impact claims under the FHA remain available.

Scope of the Decision

The decision is in no way a broad endorsement of disparate-impact claims. To the contrary, the Court was careful to explain the significant concerns raised by such claims and to emphasize safeguards and limitations built into an appropriate analysis.

• Sufficient Threshold Showing: Disparate-impact claims proceed under a burden shifting test, and plaintiff must first show "that a challenged practice caused or predictably will cause a discriminatory effect." The Court noted that, "[w]ithout adequate safeguards at the prima facie stage, disparate-impact liability might cause race to be used and considered in a pervasive way" and lead defendants to use "numerical quotas," arising in serious constitutional questions. Accordingly, the Court directed lower courts to "examine with care" the claims presented at the pleadings stage, stating that "racial imbalance does not, without more, establish a prima facie case of disparate impact."
• Recognition of Legitimate Business Practices: If a plaintiff meets the initial burden, the defendant then must "prov[e] that the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests." Here, the Court emphasized that disparate-impact claims should not impede legitimate business practices and, instead, such claims should be limited to allow businesses to make "profit-related decisions that sustain a vibrant and dynamic free-enterprise system." The Court explained that "policies are not contrary to the disparate-impact requirement unless they are artificial, arbitrary and unnecessary barriers." Defendants should be given "leeway to state and explain the valid interest served by their policies." If those policies are "necessary to achieve a valid interest," defendants should be protected from disparate-impact liability.
• Causation Requirement: The Court emphasized that a disparate-impact claim premised merely on a "statistical disparity" should fail. Rather, a plaintiff must establish a "robust" causal link between a defendant's policy and a disparity. The Court observed that a robust causation requirement protects a defendant from liability for racial disparities that it "did not create."
• Application to Other Federal Statutes: The decision leaves unresolved the viability of disparate-impact claims under other federal statutes, and particularly the Equal Credit Opportunity Act (ECOA). A future examination of the ECOA, or other statutes, likely will turn on the precise language at issue.

Practical Steps to Consider Now

Against the background of the Court's decision, you should consider whether, if litigated, your company's policies would be perceived as "necessary to achieve a valid interest" or as "artificial, arbitrary, and unnecessary barriers," and what statistical analyses might be generated about those policies. In connection with these questions, you should undertake a self-assessment. Most importantly, you should determine whether your institution is an outlier relative to a realistic peer group. To the extent your institution lags behind members of its peer group in loans to minorities, a self-assessment will allow you to take appropriate action. Obviously, a self-assessment program is intended to identify problem areas before a civil action or a regulatory proceeding is filed, and to allow for self-correction. However, self-assessment and self-correction are also considered mitigating factors by regulators in determining the type and intensity of required corrective actions and can be useful in the defense of civil actions¹. Nonetheless, you should take measures to protect the confidentiality of any self-assessment. There is no better way of providing such protection than through the use of the attorney-client and attorney work product privileges.

For more information about the decision in Texas Department of Housing, or how to benefit from a self-assessment program, contact Daniel C. McKay, II at dmckay@vedderprice.com, James M. Kane at jkane@vedderprice.com, Lisa M. Simonetti at lsimonetti@vedderprice.com or your Vedder Price attorney.