This case arose from a dispute regarding where housing for low-income persons should be constructed in Dallas, Texas—that is, whether low-income housing projects that received government tax credits should be built in the predominantly white suburbs or the predominantly minority-represented inner city. The case was founded on a disparate impact theory of liability. In contrast to a disparate treatment theory, where a plaintiff must establish that the defendant employed a discriminatory intent or motive, a disparate impact claim challenges practices that have a disproportionately adverse effect on minorities and are otherwise unjustified by a legitimate rationale. The issue before the Court was whether a disparate impact claim was cognizable under the Fair Housing Act (the “FHA”). The federal government provides low-income housing tax credits that are distributed to developers through designated state agencies. Congress has directed the States to develop plans identifying various selection criteria for distributing such tax credits. Although States are granted flexibility when constructing these plans, such plans must include certain criteria as prescribed by the federal government, which favor the distribution of tax credits for the development of housing in low income areas.

Here, the Inclusive Communities Project, Inc. (“ICP”), a Texas-based nonprofit, brought a disparate impact claim against the Texas Department of Housing and Communities Affairs (the “Department”) under §§804(a) and 805(a) of the FHA. The Department is the designated agency for Texas that handles the distribution of low income housing tax credits. ICP alleged that the Department had caused continued segregated housing patterns through its disproportionate allocation of low income tax credits. In other words, ICP alleged the Department granted too many credits for housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods. The ICP called for the Department to modify the selection criteria used in distributing low-income tax credits in order to encourage the construction of low income housing in suburban communities.

The District Court for the Northern District of Texas found that ICP established a prima facie case based on a disparate impact theory. The burden then shifted to the Department to rebut ICP’s prima facie case by showing that the Department’s proffered interests were legitimate. To rebut, the District Court held that the Department would need to prove that there were no less discriminatory alternatives to advancing their proffered interests. However, the Department failed to meet this burden and the District Court ruled for ICP and ordered the Department to include new selection criteria for the low-income tax credits. On appeal, the Court of Appeals for the Fifth Circuit held that disparate impact claims are cognizable under the FHA, but it reversed and remanded the case on the merits in light of a regulation that was issued by the Department of Housing and Urban Development during the appeal. This new regulation altered the burden-shifting framework for adjudicating disparate impact claims. Following the Fifth Circuit’s decision, the Department filed a petition for a writ of certiorari on the issue of whether disparate impact claims are cognizable under the FHA.

Before the Court discussed the FHA, it considered two other antidiscrimination statutes that proceeded it; §703(a) of Title VII of the Civil Rights Act of 1964 and §4(a)(2) of the Age Discrimination in Employment Act of 1967 (the “ADEA”). Under Griggs v. Duke Power Co., 401 U.S. 424 (analyzing a similar antidiscrimination statute under §703(a) of Title VII) and Smith v. City of Jackson, 544 U.S. 228 (analyzing a similar antidiscrimination statute under ADEA), the Court explained that these two cases held “that antidiscrimination laws must be constructed to encompass disparate-impact claims when their text refers to the consequences of actions and not just to the mindset of actors, and where that interpretation is consistent with statutory purpose.” However, “[t]hese cases also teach that disparate impact liability must be limited so employers and other regulated entities are able to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.” Thus, before a business justification or governmental public interest is rejected, a court must determine that a plaintiff has shown that there is an available alternative practice that has less disparate impact and serves the entity’s legitimate needs.

The Court applied the logic of Griggs and Smith to these facts and concluded that the FHA encompasses disparate impact claims for a number of reasons. First, the Court embarked on a lengthy statutory interpretation and found that the results oriented phrases of “otherwise make unavailable” in §804(a) referred to the consequences of an action rather than the actor’s intent. See 42 U.S.C. §3604(a). Second, the Court stated that disparate impact liability is supported by amendments to the FHA that Congress enacted in 1988 because by that time, Congress was aware that nine Courts of Appeals had addressed this issue and each had concluded that the FHA encompassed disparate impact claims. Thus, by providing for three exemptions in the 1988 amendments, it would have been superfluous for Congress to assume that disparate impact liability did not exist under the FHA. Third, the Court noted that recognition of disparate impact claims is also consistent with the central purpose of the FHA—to eradicate discriminatory practices within housing development. Specifically, recognizing disparate impact claims plays an important role in uncovering discriminatory intent because “it permits plaintiffs to counteract unconscious prejudices and disguised animus that escapes easy classification as disparate treatment.”

However, the Court noted key constitutional limitations to disparate impact liability. Specifically, the Court stated “Disparate-impact liability mandates the removal of artificial, arbitrary, and unnecessary barriers, not the displacement of valid governmental policies.” The Court further explained that one important means of ensuring that disparate impact liability is properly limited is to give housing authorities and private developers leeway to state and explain the valid interest served by their policies. The Court explained, “[j]ust as an employer may maintain a workplace requirement that causes a disparate impact if that requirement is a reasonable measurement of job performance, so too must housing authorities and private developers be allowed to maintain a policy if they can prove it is necessary to achieve a valid interest.

Moreover, the Court highlighted the importance of the causation element when asserting a disparate impact claim, and held that such a claim must fail if the plaintiff cannot point to a defendant’s policy causing that disparity. For example, a plaintiff challenging the decision of a private developer to construct a new building in one location rather than another will not easily be able to show it is a policy that is causing a disparate impact because such a one-time development decision may not be a policy at all. Furthermore, causation may be difficult to establish because of the multitude of factors that go into investment decisions regarding where to construct or renovate housing units. Therefore, when facing disparate impact claims brought under the FHA, courts must examine with care whether a plaintiff has even made out a prima facie case of disparate impact and even when a court finds liability under a disparate impact theory, its remedial order should concentrate on the elimination of the offending practice and not a racial target or quota.