On June 27, 2016, the U.S. Court of Appeals for the Fifth Circuit handed a victory to the State of Texas in Texas v. EEOC , No. 14-10949 (5th Cir. June 27, 2016), by remanding back to the district court the case it dismissed in 2014. Notably, Fifth Circuit held that the State of Texas has standing to challenge the EEOC’s “Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Under Title VII” (“Guidance”), and that the Guidance was a final agency rule subject to court challenge.

As a quick recap, the EEOC issued the Guidance in April 2012, urging businesses to avoid blanket rules against hiring individuals with criminal convictions, reasoning that such a hiring check could violate Title VII if they create a disparate impact on particular races or national origins, and calling for a multi-factor individualized assessment of an applicant’s criminal history.

In an unprecedented and novel action, the State of Texas filed suit against the Commission in November, 2013 seeking to enjoin the enforcement of the Guidance (which Texas nicknamed the “Felon Hiring Rule”) because it conflicted with Texas law that prohibited hiring felons for certain jobs. On August 20, 2014, Judge Sam R. Cummings of the U.S. District Court for the Northern District of Texas dismissed the case under Federal Rule 12(b)(1) (which we reported here), finding that Texas lacked standing to maintain its suit because no enforcement action had been taken against it pursuant to the Guidance. Texas, however, was not about to be messed with, and promptly appealed to the Fifth Circuit in November, 2014 (reported here).

Fifth Circuit Reverses And Remands

The Fifth Circuit’s decision is a stunner.

It found that Texas, in fact, has standing to challenge the Guidance because it presented “(1) an actual or imminent injury that is concrete and particularized, (2) fairly traceable to the defendant’s conduct, and redressable by a judgment in [Texas’s] favor.” Id. at 5. The Fifth Circuit pointed out that Texas, in its capacity as an employer, was an “object” of the Guidance because the Guidance was directed at all employers, including state agencies. As an object of the Guidance, Texas did not need an enforcement action to establish a concrete injury. Instead, it could establish two concrete injuries for purposes of Article III. First, Texas pointed to the increased regulatory burden on it as an employer because of the hiring policies that the Guidance required. Id. at 7-8. Thus, the increased regulatory burden itself constituted a concrete injury. Second, the Guidance forced Texas to “undergo an analysis, agency by agency, regarding whether the certainty of EEOC investigations stemming from the [] Guidance’s standards overrides the State’s interest in not hiring felons for certain jobs.” Thus, “being pressured to change state law” constituted a concrete injury. Id. at 8-9. Therefore, regardless that there was no enforcement action, the Fifth Circuit concluded that Texas was deemed to have standing to challenge the Guidance.

The Fifth Circuit next determined that the Guidance was “final agency action” that is subject to challenge, finding that the Guidance was the “consummation of the agency’s decision-making process” “from which legal consequences would flow.” Id.The challenge before the Fifth Circuit focused on whether the Guidance had any “legal consequences.” The Fifth Circuit pointed out an important distinction for its analysis: Texas challenged the Guidance itself, not the prospect of investigation. Rejecting the EEOC’s argument that it has no ability to enforce the Guidance and instead can only do so by referring a case to the U.S. Attorney General for prosecution (as it would have to with respect to a public entity), the Fifth Circuit found that the “legal consequence” of the Guidance is that the EEOC has committed itself to applying the Guidance to “virtually all public and private employers.” Id. The EEOC’s staff is therefore bound by it to follow a certain course of action, and the only way to avoid a potential prosecution is by abiding by one of the two “safe harbor” provisions contained in the Guidance. If Texas (or any other employer) does not fall into one of these safe harbor provisions — that is, it does not do what the EEOC says — it risks an enforcement action and potential liability, and thus the Guidance has a “legal consequence,” making it an final agency action that can be challenged in court. Id.

The Dissent

Circuit Judge Patrick E. Higginbotham disagreed with the majority of the Fifth Circuit panel. First, he opined that the Guidance was a mere expression of the EEOC’s view of what the law requires, which the EEOC has no authority to enforce without the Attorney General taking the case. Judge Higginbotham also opined that the issue identified by Texas was not ripe for adjudication. Because Texas presented no factual dispute, in the judge’s view the dispute was theoretical since any potential adverse effect identified by Texas was too remote and abstract. In additional to disagreeing with the majority’s constitutional analysis, Judge Higginbotham opined that the Guidance also lacked a legal consequence because, again, it was an expression of the EEOC’s view of the law, and thus had no specific consequence for any specific party.

Implications For Employers

This case continues to be flagged as “one to watch,” especially now that the case is remanded to the district court, where the State of Texas is anticipated to challenge the “Felon Hiring Rule” created by the EEOC’s Guidance. Likewise, the EEOC is anticipated to continue its staunch defense, positioning the parties for future clashes. The EEOC’s positions, which thus far have included admissions that the Guidance is not “legally binding” and does not carry any “legal consequences,” stand to provide employers with additional defenses when faced with the EEOC’s own investigations or prosecutions relating to criminal background checks. As this case continues in the district court, we will be continue our coverage of this important case.