Seyfarth Synopsis: In the latest battle of the multi-year showdown between the State of Texas and the EEOC – whereby Texas asserted that the EEOC’s 2012 “Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII” (“Guidance”) interfered with its authority to limit the hiring of felons – the U.S. Court of Appeals for the Fifth Circuit affirmed most parts of an injunction that the U.S. District Court for the Northern District of Texas entered in favor of Texas, which blocked the EEOC and the U.S. Department of Justice (“Defendants”) from enforcing the Guidance. State of Texas v. EEOC et al., No. 18-10638, 2019 U.S. App. LEXIS 23498 (5th Cir. Aug. 6, 2019).

This ruling serves as a major roadblock for the EEOC in circumstances where the Commission attempts to infringe upon states’ rights by issuing an administrative guidance, and can further be considered a game-changer in the criminal background check litigation landscape.

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Case Background

As we have blogged about extensively in the past (here, here, here, and here), in April 2012 the EEOC issued the Guidance citing data which suggested that blanket bans on hiring individuals with criminal records disproportionately impacted minorities. Id. at *2. Texas brought two causes of action against the EEOC after an individual who had been rejected for a State job filed a complaint with EEOC, challenging Texas’s no-felon hiring policy as having a disparate impact in violation of Title VII. In the first cause of action, brought under the Declaratory Judgment Act (“DJA”), Texas asked for “a declaration of its right to maintain and enforce its laws and policies that absolutely bar convicted felons (or particular categories of convicted felons)” from specified jobs. Id. at *7. Texas also asked for an injunction that EEOC and the Attorney General “cannot enforce the interpretation of Title VII that appears in its Felon-Hiring Rule, nor . . . issue right-to-sue letters pursuant to that rule.” Id. In the second cause of action, brought under the Administrative Procedures Act (“APA”), Texas sought to set aside the Guidance, arguing that it exceeded the EEOC’s power under Title VII; was promulgated without notice and comment in violation of the APA; and was substantively unreasonable.

After the District Court dismissed the case for want of subject matter jurisdiction, a divided Fifth Circuit panel reversed, holding that Texas had Article III standing to challenge the Guidance, and that the Guidance was a final agency action eligible for judicial review under the APA. Id. at *7-8. However, the Fifth Circuit later withdrew its opinion, vacated the judgment, and remanded, noting that the District Court did not have a chance to apply the U.S. Supreme Court’s decision in United States Army Corps of Engineers v. Hawkes Co., 136 S. Ct. 1807 (2016), which held that the issuance of judicial determinations produced “legal consequences.” Id. at *12.

On remand, the District Court denied the EEOC’s renewed motion to dismiss for lack of jurisdiction, and following cross-motions for summary judgment, the District Court dismissed Texas’s DJA claim, “declin[ing] to declare that Texas has a right to maintain and enforce its laws and policies that absolutely bar convicted felons (or certain categories of convicted felons) from serving in any job the State and its Legislature deems appropriate.” Id. at *8-9. The District Court also declined to enjoin the EEOC from issuing right-to-sue letters. Regarding the APA claim, the District Court granted Texas’s motion for summary judgment in part and denied the EEOC’s motion, holding “that the Guidance . . . is a substantive rule issued without notice and the opportunity for comment.” Id. As such, the District Court enjoined both the EEOC and the Attorney General from enforcing the EEOC’s interpretation of the Guidance against the State of Texas until the EEOC complied with the notice and comment requirements under the APA for promulgating an enforceable substantive rule. The District Court did not reach the questions of whether the EEOC has the power to promulgate a substantive rule interpreting Title VII, or whether the Guidance was substantively unreasonable. The EEOC appealed, and Texas cross-appealed.

The Fifth Circuit’s Decision

In its recent ruling, the Fifth Circuit affirmed the District Court’s injunction, and vacated and dismissed Texas’s DJA claim. Id. at *32. First, the Fifth Circuit noted that it must decide two jurisdictional issues, including: (1) whether the Guidance was a final agency action subject to review; and (2) and whether Texas had standing to challenge the Guidance. Id. at *9. Regarding whether the Guidance was a final agency action, the Fifth Circuit noted that whether an action binds the agency is evident “if it either appears on its face to be binding[] or is applied by the agency in a way that indicates it is binding,” and further, that courts have looked for mandatory language to determine whether an agency’s action binds it and accordingly gives rise to legal consequences. Id. at *11 (citation omitted).

After conceding that the Guidance binds the EEOC staff to an analytical method in conducting Title VII investigations and directs their decisions about which employers to refer for enforcement actions, Defendants argued that legal consequences did not flow from the Guidance for three reasons. First, Defendants argued that because EEOC had no power to bring a Title VII enforcement action against Texas, its Guidance has no legal consequences for the State. Citing Hawkes, the Fifth Circuit rejected this argument, noting that legal consequences may flow from an “agency action even if “no administrative or criminal proceeding can be brought for failure to conform” to the action. Id. at *16 (citation omitted). Second, the EEOC argued that any legal consequences flow from Title VII, not the Guidance, because the Guidance’s interpretation of Title VII disparate impact liability has force of law only if a court presiding over an enforcement action agrees with the Guidance. The Fifth Circuit rejected this argument, holding whether the agency action binds the agency indicates whether legal consequences flow from that action. d. at *18. Third, Defendants argued that the Guidance does not, and could not, create a safe harbor guaranteeing that the Attorney General will not sue an employee. The Fifth Circuit also rejected this contention, explaining that whether the Guidance is final agency action does not hinge on whether a private or public employer challenges it, and that such an approach “would flout the Supreme Court’s repeated instruction to approach finality flexibly and pragmatically.” Id. at *19. The Fifth Circuit thus held that the Guidance was a final agency action that it had jurisdiction to review.

Next, the Fifth Circuit addressed whether Texas had standing to sue the EEOC and the Attorney General to challenge the legality of the Guidance. As the party invoking federal jurisdiction, the Fifth Circuit opined that Texas must establish Article III standing by showing that it has suffered an injury that is “concrete, particularized, and actual or imminent; fairly traceable to the challenged action; and redressable by a favorable ruling.” Id. at *20. The Fifth Circuit held that because it was the object of the Guidance and had suffered multiple injuries as a result, Texas had constitutional standing. In reaching this conclusion, the Fifth Circuit held that the Guidance deemed unlawful the hiring practices of multiple Texas agencies by rejecting across-the-board felon hiring screens, and it faced the possibility of investigation by EEOC and referral to the Attorney General for enforcement proceedings if it failed to align its laws and policies with the Guidance. Id. at *21-22.

After finding that it had jurisdiction, the Fifth Circuit further addressed Defendants’ challenges to the scope and phrasing of the injunction. Texas contended that the EEOC lacked power to promulgate the Guidance at all, and that instead of barring enforcement until the Guidance goes through notice and comment rulemaking, the District Court should have enjoined Defendants from treating the Guidance as binding. Id. at *28-29. The Fifth Circuit agreed that the Guidance was a substantive rule subject to the APA’s notice-and-comment requirement and that EEOC thus overstepped its statutory authority in issuing the Guidance, a conclusion that “follow[ed] naturally from its holding that the Guidance is a final agency action.” Id. at *29-30. However, the Fifth Circuit noted that the notice-and-comment aspect implied that the Guidance would stand if it went through that rulemaking process, which is used to promulgate substantive rules. Accordingly, because the Guidance was a substantive rule, and the text of Title VII and precedent confirm that EEOC lacks authority to promulgate substantive rules implementing Title VII, the Fifth Circuit modified the injunction by striking the clause “until the EEOC has complied with the notice and comment requirements under the APA for promulgating an enforceable substantive rule.” Id. at *30.

Finally, the Fifth Circuit clarified that because an injunction must be framed so that those enjoined will know what conduct the court has prohibited, “to avoid any confusion,” it modified, “the injunction to clarify that EEOC and the Attorney General may not treat the Guidance as binding in any respect.” Id. at *31. In addition, the Fifth Circuit declined to consider the merits of Texas’s DJA claim since it affirmed the injunction.

Implications For Employers

This victory is a feather in the cap for state employers relative to the EEOC’s attempt to use an administrative guidance as a means to challenge state law. Although many of the legal battles in this showdown between the State of Texas and the EEOC have involved heavy doses of procedure, this ruling provides an excellent blueprint for how to attack the EEOC when it promulgates substantive rules implementing Title VII, and those rules condemn state law.