On June 25, 2015, the U.S. Supreme Court issued a 5 to 4 ruling in Texas Dep’t of Housing & Community Affairs v. Inclusive Communities Project, Inc., No. 13-1371 (2015).  Now that the dust has settled from the Supreme Court’s recent term, what does this decision mean for employers?

In Texas Dep’t of Housing & Community Affairs v. Inclusive Communities Project, Inc., the Supreme Court held that companies and government agencies can be liable for discrimination under a disparate impact theory for violations of the Fair Housing Act (“FHA”).  In coming to this conclusion, the Supreme Court emphasized the importance of placing limitations on the ability of potential plaintiffs to bring and successfully prosecute disparate impact lawsuits.

As is well known by employers, a disparate impact claim is based on what is sometimes called unintentional or adverse impact discrimination. The fundamental allegation is that a policy or practice, which is non-discriminatory on its face, is unlawful if it has a disparate impact on a legally protected group and does not serve a substantial legitimate non-discriminatory interest, or that interest is otherwise attainable with lesser adverse impact. Claims based on disparate impact are typically grounded in statistics. The far more common discrimination theory is disparate treatment, which requires proof of intentional discrimination.

The Supreme Court first approved the disparate impact theory in 1971, in employment discrimination cases under Title VII of the 1964 Civil Rights Act. Every federal appellate court that has decided the issue since then has held that disparate impact claims also are permitted in housing discrimination cases under the FHA, a part of the 1968 Civil Rights Act.

While it is not a workplace class action decision, the Supreme Court’s cautionary language in Texas Dep’t of Housing & Community Affairs v. Inclusive Communities Project, Inc. – especially about the limitations needed to prevent abusive disparate impact lawsuits – will no doubt assist employers in their defense of disparate impact class actions, and may create new, more employer-friendly burdens in such litigation. For this reason alone, Texas Dep’t of Housing & Community Affairs is a must read on the beach this summer for corporate counsel and HR professionals.

Case Background

The plaintiffs brought suit against the Texas Department of Housing and Community Affairs (the “Department”), claiming that the way the Department allocated tax credits to develop low-income housing violated the FHA.  Specifically, the plaintiffs claimed that the Department’s policies caused it to issue credits for developments in areas with significant minority populations while rarely issuing such credits for developments in areas with significant Caucasian majorities.  The plaintiffs claimed that this created segregated housing and claimed the Department thus violated the FHA under a disparate impact theory.

The District Court determined that the plaintiffs could bring FHA suits on a disparate impact theory, and found that the plaintiffs had succeeded in proving violations of the FHA under a disparate impact theory.  The U.S. Court of Appeals for the Fifth Circuit agreed that FHA suits could be brought under a disparate impact theory, but reversed the District Court’s finding that the Department had violated the FHA because it concluded the District Court applied the wrong legal standard.  The Department subsequently appealed the Fifth Circuit’s finding that an FHA action could be brought under a disparate impact theory.

The Supreme Court’s Decision

The Supreme Court began its analysis by considering why it construed Title VII to allow for a disparate impact cause of action in Griggs v. Duke Power Co., 401 U. S. 424 (1971).  Specifically, it observed that Griggs found that Title VII prohibited not just practices that are discriminatory in intent, but also practices that are discriminatory in operation.  Texas Dep’t of Housing & Community Affairs, No. 13-1371, at 8.  The Supreme Court observed that even in creating the disparate impact cause of action, however, Griggs put “important limits” on disparate impact liability, by way of the “business necessity” defense and finding that Title VII did not prohibit hiring criteria that had a disparate impact on protected minorities if those criteria had “a ‘manifest relationship’ to job performance.”  Id. at 8-9 (quoting Griggs, 401 U.S. at 432).

After then considering the fact that in Smith v. City of Jackson, 544 U.S. 228 (2005), the Supreme Court allowed disparate impact claims to proceed under the Age Discrimination In Employment Act for similar reasons, the Supreme Court reasoned – particularly in language favorable to employers – that Griggs and Smith “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.  And before rejecting a business justification . . . . a court must determine that a plaintiff has shown that there is an available alternative employment practice that has less disparate impact and serves the entity’s legitimate needs.”  Texas Dep’t of Housing & Community Affairs, No. 13-1371, at 9-10 (citations omitted).

As a result, the Supreme Court concluded that disparate impact claims are permitted under the FHA, finding that the FHA was “results-oriented” and thus that allowing disparate impact liability would best meet the objectives of the FHA.  Id. at 11, 17.  It then went on to place important limitations on the ability of future plaintiffs to bring and succeed in such cases.

The first such limitation the Supreme Court discussed was that developers needed to be given “leeway to state and explain the valid interest served by their policies.”  Id. at 18.  Stating that this was “analogous” to the business necessity defense in Title VII litigation, the Supreme Court pointed out that, in the Title VII context, “an entity could be liable for disparate impact discrimination only if the challenged practices were not job-related and consistent with business necessity,” and that “an employer may maintain a workplace requirement that causes a disparate impact if that requirement is a reasonable measurement of job performance.”  Id. at 19 (citations omitted).

The Supreme Court also determined that “a disparate impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.”  Id. at 19-20.  It described this causality requirement as “robust” and stated that it needed to be robust to “protect[] defendants from being held liable for racial disparities they did not create.”  Id. at 20.

The Supreme Court observed that these limitations were important because, without such limitations, companies might adopt racial quotas, which would raise another set of “serious constitutional questions” and “serious constitutional concerns.”  Id.  Echoing its earlier comments about the free enterprise system, the Supreme Court further held that limitations preventing “abusive disparate impact claims” were needed because such claims would “undermine[]” the purpose of the FHA “as well as the free-market system.”  Id. at 21.  Finally, it  emphasized that “[w]ere standards for proceeding with disparate impact suits not to incorporate at least the safeguards discussed here, then disparate impact liability might displace valid governmental and private priorities, rather than solely removing artificial, arbitrary, and unnecessary barriers.”  Id. at 21 (citation omitted).

Implications For Employers

While not a workplace class action, Texas Dep’t of Housing & Community Affairs will be of significant use to employers defending against disparate impact class actions.  The Supreme Court’s employer-friendly language and warnings about the consequences of allowing abusive disparate impact class actions to proceed will help employers defeat such claims.

Moreover, the Supreme Court’s holding that “before rejecting a business justification . . . . a court must determine that a plaintiff has shown that there is an available alternative employment practice that has less disparate impact and serves the entity’s legitimate needs” arguably places a new burden on disparate impact plaintiffs to prove three things – (1) an available alternative practice; (2) with less of a disparate impact; (3) that serves the employer’s legitimate needs – to defeat a business necessity defense.  Further, this language and the Supreme Court’s several references to the need to protect the free-enterprise system may suggest that courts should apply a low standard, such as something akin to the business judgment rule, when evaluating an employer’s claim that a requirement was related to job performance and/or that certain factors are in fact an aspect of job performance.