In a 5-4 decision yesterday, the U.S. Supreme Court held that disparate impact claims are cognizable under the federal Fair Housing Act (FHA), but put in place various limits and safeguards.

A copy of the opinion is available at: Link to Opinion.

The underlying lawsuit involved a dispute between a Texas-based nonprofit that assists low-income families with finding affordable housing and a Texas state department that distributes tax credits to developers.

The nonprofit sued the department under a disparate impact theory, claiming that the department violated the FHA because it had allocated too many tax credits to housing in predominantly minority inner-city areas, and too few in predominately white suburbs.

In its initial lawsuit in the U.S. District Court for the Northern District of Texas, the nonprofit plaintiff provided statistical evidence showing that, from 1999-2008, the department had approved tax credits for 49.7 percent of proposed affordable housing units in areas where less than 10 percent of the population was white, and approved only 37.4 percent of that same type of tax credit in areas where greater than 90 percent of the population was white. Additionally, the statistics showed that in the City of Dallas, 92.29 percent of low-income housing tax credits were awarded in census tracts where less than 50 percent of the population was white.

On that basis, the District Court held that the nonprofit had made a prima facie showing of disparate impact discrimination in violation of the FHA.  Moreover, after hearing evidence from the department, the trial court held that the department had failed to meet its burden “of proving that there are no less discriminatory alternatives.”  Accordingly, the District Court issued a remedial order, directing the department to follow an additional set of criteria when awarding tax credits.

While the trial court’s ruling was on appeal to the U.S. Court of Appeals for the Fifth Circuit, the Secretary of Housing and Urban Development issued a regulation that explicitly incorporated disparate impact claims into the FHA.  The HUD regulation also established a framework for courts to follow when adjudicating FHA disparate impact discrimination claims.

In that regulation HUD stated that plaintiffs filing FHA disparate impact discrimination claims must first show that the challenged practice at issue has “caused or predictably will cause a discriminatory effect.”  Notably, if a statistical discrepancy is “caused by factors other than the defendant’s policy,” the disparate impact claim fails on its face.  However, if a plaintiff establishes a prima facie case, then the burden shifts to the defendant to prove that “the challenged practice is necessary to achieve one or more substantial, legitimate, non-discriminatory purposes.”

Given these regulations and consistent with its own precedent, the Fifth Circuit affirmed the District Court in part, and reversed in part.  The Fifth Circuit held that disparate impact discrimination claims were available under the FHA, but reversed the District Court on the merits.  It held that, under the HUD regulations, the District Court should “reexamine whether the non-profit had made a prima facie disparate-impact case” and should allow the department to attempt to prove there were no “less discriminatory alternatives.”

The department subsequently appealed to the Supreme Court on the question of whether the FHA even allows disparate impact claims. A disparate impact discrimination claim does not require a plaintiff to plead or show discriminatory intent; rather it only requires a showing of discriminatory result.

The Supreme Court traced the history of disparate-impact claims under similar anti-discriminatory laws and listed several reasons why in the view of the majority of Supreme Court justices such claims must also be cognizable under the FHA.

The Court likened the FHA and statutory language in the FHA to similar language in Title VII of the Civil Rights Act, and the Age Discrimination in Employment Act (ADEA) because those, like the FHA, are anti-discrimination laws.

In particular, the Court focused on the use of language in the statutory text that “refers to the consequences of actions and not just to the mindset of actors.”

The Supreme Court focused on language used in Section 804(a) of the FHA that provides it is unlawful to “refuse to sell or rent after the making of a bona fide offer…or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin.”  Additionally, the Court pointed to language in Section 805(a) that states it is unlawful to “discriminate against any person in making available” a real estate transaction.

The Supreme Court held that the phrase “otherwise make unavailable” and repeated use of the verb “to make” refers to the “consequences of an action, rather than the intent.”  Moreover, it held that the use of the word “otherwise” signals a shift in emphasis “from an actor’s intent to the consequences of its actions.”

Next, the Court held that the statutory history of the FHA shows that Congress intended for the FHA to encompass disparate impact claims.  In 1988 Congress amended the FHA at a time where all nine Circuit Courts had concluded disparate impact claims were viable.  The Court noted that Congress could have amended the FHA to exempt disparate impact claims, but it did not.  Instead, Congress added addition language that only made sense if the FHA in fact allowed disparate impact claims. The Court held that this meant Congress approved of the prior Circuit Court holdings that interpreted the FHA to include disparate impact claims.

Still the Court held that there are limits to how disparate impact claims can be asserted under the FHA.  For example, the Court held that exemptions in the FHA plainly permit housing discrimination against persons who have been convicted of drug crimes, as long as that discrimination is not based on race, religion, color, sex, or familial status (even if such discrimination has a “disparate impact”).

Moreover, the Court held that a FHA disparate impact claim includes a required element of causation in the plaintiff’s prima facie case.  The Court held that disparate impact claims that rely on “a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.”

It held that a “robust causality requirement” protects public and private defendants from liability for racial disparities that their policies and practices did not create.

Mostly consistent with the prior HUD regulations, the Court then provided guidance on how lower courts should treat FHA disparate impact claims and the safeguards that must be in place to protect private developers and related entities.

It held that lower courts must “examine with care” whether a plaintiff has pleaded a prima facie case, and that cases where a plaintiff fails at the pleading stage to “produce statistical evidence demonstrating a causal connection” must be immediately dismissed.  Accordingly the Court held that a plaintiff challenging a private developer’s decision to build a new building in one place rather than another “will not easily be able to show this is a policy causing disparate-impact because such a one-time decision may not be a policy at all.”

Additionally, putting in place another safeguard, the Court held that if, in the case at issue the nonprofit could not show a “causal connection between the [Texas] department’s policy and disparate-impact…because federal law substantially limits the department’s discretion” then the case must be dismissed.

Finally, the Court held that even when courts find liability under a disparate impact theory, their remedial orders should be carefully crafted.  The Court held the lower courts should be careful to ensure that their orders are consistent with the Constitution, and should “concentrate on the elimination of the offending practice” that had resulted in arbitrary discrimination.

In sum, although the Court held that disparate impact claims are cognizable under the FHA, it placed some limits on the reach of those claims and put some useful safeguards in place.

Indeed, the Court held certain limitations were necessary to protect businesses and public entities.  It held that if “the specter of disparate-impact litigation causes private developers to no longer construct or renovate housing units for low-income individuals, then the FHA would have undermined its own purpose as well as the free-market system.”