Texas Department of Housing & Community Affairs v. Inclusive Communities Project, Inc.: Fair Housing Act Disparate-Impact Liability

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1 Texas Department of Housing & Community Affairs v. Inclusive Communities Project, Inc.: Fair Housing U.S. Supreme Court Holds That Disparate-Impact Claims Are Cognizable Under the Fair Housing Act in Certain Limited Circumstances SUMMARY Today in Texas Department of Housing & Community Affairs v. Inclusive Communities Project, Inc., No , the Supreme Court held that the Fair Housing Act permits challenges to housing practices or policies on the ground that they disparately impact minorities. The Court emphasized, however, that disparate-impact liability is subject to important limits because it only mandates the removal of artificial, arbitrary, and unnecessary barriers and does not displace legitimate business and governmental policies. 1 Lower courts must allow defendants to show that their challenged policies serve valid interests; examine with care whether plaintiffs have made a prima facie case that the challenged policy caused a disparate impact on minorities; and craft any remedial order to focus on eliminating the arbitrary practice and to address any additional measures through race-neutral means. Today s decision does not address whether disparate-impact claims are cognizable under differently worded antidiscrimination laws, such as the Equal Credit Opportunity Act. BACKGROUND The Low-Income Housing Tax Credit Program (LIHTC) offers federal tax credits through the States to developers who build qualified low-income housing projects. 2 In allocating those credits, States must comply with the Fair Housing Act (FHA), which makes it unlawful for entities [t]o refuse to sell or rent... or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin. 3 The FHA also makes it unlawful for any person or other entity whose New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction... because of race, color, religion, sex, handicap, familial status, or national origin. 4 In 2008, the Inclusive Communities Project, Inc. (ICP) brought suit against the Texas Department of Housing and Community Affairs (TDHCA), claiming that the TDHCA had violated the Fair Housing Act by allocating federal low-income housing credits disproportionately to projects in minority-populated areas. ICP is a nonprofit organization that uses such tax credits to develop low-income housing in Dallas s affluent and predominately white neighborhoods. The district court held that ICP had failed to show intentional discrimination, but the court found in favor of ICP s disparate-impact claim based on the statistical disparity between Texas s allocations of tax credits to predominately Caucasian neighborhoods and predominately minority neighborhoods. The district court ruled that TDHCA had failed to meet [its] burden of proving that there are no less discriminatory alternatives. 5 Shortly thereafter, the U.S. Department of Housing and Urban Development (HUD) promulgated a regulation that established standards for proving disparate-impact claims under the FHA. 6 The Fifth Circuit affirmed the district court s holding that the FHA provides for disparate-impact liability, but remanded for the district court to apply the new HUD standards for determining when a housing practice has a discriminatory effect. 7 Having previously agreed to hear the same issue in two other cases that were settled before argument, 8 the Supreme Court granted review in this case once again to determine whether the FHA authorizes disparate-impact claims. THE SUPREME COURT S DECISION In today s decision, the Supreme Court held that disparate-impact claims are cognizable under the Fair Housing Act, but only in certain limited circumstances. The Court interpreted its previous decisions in Griggs v. Duke Power Co., 401 U.S. 424 (1971), and Smith v. City of Jackson, 544 U.S. 228 (2005), to mean that antidiscrimination laws must be construed 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. 9 The Court explained, however, 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. 10 Applying those principles to this case, the Court noted that the FHA makes it unlawful [t]o refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin. 11 In the Court s view, the statutory phrase otherwise make unavailable refers to the -2-

3 consequences of an action rather than the actor s intent, and thus provides strong support for the conclusion that the FHA encompasses disparate-impact claims. 12 The Court also relied on Congress s 1988 amendments to the FHA. By that time, several courts of appeals had held that the FHA authorizes disparate-impact claims. The Court reasoned that Congress s decision in 1988 to amend the FHA while still adhering to the operative language in [the Act] is convincing support for the conclusion that Congress accepted and ratified the unanimous holdings of the courts of appeals finding disparate-impact liability. 13 In addition, the Court noted, the 1988 amendments included three exemptions from liability that assume the existence of disparate-impact claims. 14 The Court further reasoned that [r]ecognition of disparate-impact claims is consistent with the FHA s central purpose, which is to eradicate discriminatory practices within the Nation s housing sector. 15 Court gave as examples zoning laws and other housing restrictions that function unfairly to exclude minorities from certain neighborhoods without any sufficient justification. In the Court s view, [s]uits targeting such practices reside at the heartland of disparate-impact liability The The Court observed that the [r]ecognition of disparate-impact liability under the FHA also plays a role in uncovering discriminatory intent: It permits plaintiffs to counteract unconscious prejudices and disguised animus that escape easy classification as disparate treatment. 17 Having held that the FHA permits disparate-impact liability, the Court proceeded to emphasize that such liability has always been properly limited in key respects that avoid the serious constitutional questions that might arise under the FHA, for instance, if such liability were imposed based solely on a showing of a statistical disparity. 18 The Court explained that [d]isparate-impact liability mandates the removal of artificial, arbitrary, and unnecessary barriers, not the displacement of valid business and governmental policies. 19 The Supreme Court outlined a number of specific limits on disparate-impact liability. First, courts must give housing authorities and private developers leeway to state and explain the valid interest served by their policies. 20 This step of the analysis, the Court pointed out, is analogous to the business necessity standard under Title VII [of the Civil Rights Act of 1964] and provides a defense against disparate-impact liability. 21 The Court stressed that housing authorities and private developers [must] be allowed to maintain a policy if they can prove it is necessary to achieve a valid interest. 22 The Court noted that before courts reject a defendant s business justification for a practice that disparately impacts minorities, a plaintiff must show that there is an available alternative... practice that has less disparate impact and serves the [entity s] legitimate needs. 23 Second, the Court endorsed [a] robust causality requirement for disparate-impact claims at the prima facie stage. 24 Specifically, 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. 25 The Court emphasized

4 that [r]acial imbalance... does not, without more, establish a prima facie case of disparate impact and defendants may not be held liable for racial disparities they did not create. 26 As a result, the Court cautioned, lower courts must examine with care whether a plaintiff has made out a prima facie case of disparate impact and prompt resolution of these cases is important. A plaintiff who fails to allege facts at the pleading stage or produce statistical evidence demonstrating a causal connection cannot make out a prima facie case of disparate impact. 27 Third, the Court noted that, even when courts do find liability under a disparate-impact theory, their remedial orders must be consistent with the Constitution. 28 Such orders should concentrate on the elimination of the offending practice that arbitrarily discriminates on the basis of race. 29 If the orders adopt additional measures, courts should strive to design them to eliminate racial disparities through race-neutral means, because impos[ing] racial targets or quotas might raise more difficult constitutional questions. 30 Justice Alito, joined by the Chief Justice, Justice Scalia, and Justice Thomas, dissented on the ground that the text of the Fair Housing Act does not create disparate-impact liability and recognizing such liability will have unfortunate consequences for local government, private enterprise, and those living in poverty. 31 Justice Thomas also dissented from the Court s reliance on Griggs, arguing that Title VII does not authorize disparate-impact liability and the Court should not import[] its disparate-impact scheme into yet another statute. 32 IMPLICATIONS Today s decision allows, but only on a limited basis, disparate-impact liability under the Fair Housing Act. The Court emphasized that disparate-impact liability only mandates the removal of artificial, arbitrary, and unnecessary barriers that discriminate on the basis of race. 33 As a result, courts must allow housing authorities and private developers to show that their challenged policies serve valid interests, and courts may not reject a business justification unless the plaintiff shows that there is an available alternative... practice that has less disparate impact and serves the [entity s] legitimate needs. 34 Courts also must examine with care whether a plaintiff has made out a prima facie case that the challenged policy has caused a disparate impact on minorities. 35 Statistical disparity alone is not enough: A plaintiff who fails to allege facts at the pleading stage or produce statistical evidence demonstrating a causal connection cannot make out a prima facie case of disparate impact. 36 Finally, even when courts find liability under a disparate-impact theory, their remedial orders should focus on eliminat[ing] the offending practice and should strive to design [any additional measures] to eliminate racial disparities through race-neutral means. 37 Today s decision only addresses whether disparate-impact liability is authorized by the Fair Housing Act. It does not address whether other differently worded antidiscrimination statutes, such as the Equal Credit -4-

5 Opportunity Act, recognize disparate-impact liability. 38 In recent years, the Consumer Financial Protection Bureau and the Civil Rights Division of the Department of Justice have relied on a disparate-impact theory in charging auto lenders with violations of ECOA based on racial or national-origin disparities arising from discretionary pricing policies of individual dealers. 39 But the language of ECOA is different from the language of the FHA. ECOA makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of a protected characteristic such as race or national origin. 40 ECOA does not contain the statutory phrase, otherwise make unavailable, on which the Court relied in today s decision, nor does it contain other comparable language that focuses on the consequences of creditors actions rather than their intent. * * * Copyright Sullivan & Cromwell LLP

6 ENDNOTES Texas Dep t Hous. & Cmty. Affairs v. Inclusive Communities Project, Inc., 576 U.S., No , slip op. 22 () (quoting Griggs v. Duke Power Co., 401 U.S. 424, 431 (1971)). 26 U.S.C. 42(g)(1). 42 U.S.C. 3604(a). 42 U.S.C. 3605(a). Inclusive Communities Project, Inc. v. Tex. Dep t. Hous. & Cmty. Affairs, 860 F. Supp. 2d 312, 330 (N.D. Tex. 2012). See Implementation of the Fair Housing Act s Discriminatory Effects Standard, 78 Fed. Reg. 11,460 (Feb. 15, 2013) (to be codified at 24 C.F.R. pt. 100). The district court for the District of Columbia subsequently struck down the HUD disparate-impact regulation because the FHA unambiguously prohibits only intentional discrimination. See Am. Ins. Ass n v. U.S. Dep t of Hous. & Urban Dev., No. CV (RJL), 2014 WL , at *1, *7 (D.D.C. Nov. 7, 2014). Inclusive Communities Project, Inc. v. Tex. Dep t. Hous. & Cmty. Affairs, 747 F.3d 275, (5th Cir. 2014). See Twp. of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., 134 S. Ct. 636 (2013) (mem.); Magner v. Gallagher, 132 S. Ct (2012) (mem.). Texas Dep t Hous. & Cmty. Affairs v. Inclusive Communities Project, Inc., 576 U.S., No , slip op. 10 (). at 11 (quoting 42 U.S.C. 3604(a)) (emphasis added). at 14. at 17 (citing Smith v. City of Jackson, 544 U.S. 228, 235 (2005); and Griggs v. Duke Power Co., 401 U.S. 424, 432 (1971)). at 18. (citing Griggs, 401 U.S. at 431). (citing Implementation of the Fair Housing Act s Discriminatory Effects Standard, 78 Fed. Reg. 11,470 (Feb. 15, 2013)). at 10 (quoting Ricci v. DeStefano, 557 U.S. 557, 578 (2009)) (alteration in original). at 20. (quoting Wards Cove Packing Co. v. Atonio, 490 U.S. 642, 653 (1989), superseded by statute on other grounds, 42 U.S.C. 2000e-2(k)) (alteration in original). -6-

7 at 22. (citing Richmond v. J.A. Croson Co., 488 U.S. 469, 510 (1989) (plurality opinion)). at 2 (Alito, J., dissenting). at 1 (Thomas, J., dissenting). at 22 (majority opinion) (quoting Griggs v. Duke Power Co., 401 U.S. 424, 431 (1971)). at 10 (quoting Ricci v. DeStefano, 557 U.S. 557, 578 (2009)) (alteration in original). at 20. at 22 (citing Richmond v. J.A. Croson Co., 488 U.S. 469, 510 (1989) (plurality opinion)). See 15 U.S.C. 1691(a) (declaring it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction... on the basis of race, color, religion, national origin, sex or marital status, or age ). See CFPB Bulletin (April 18, 2012) (reaffirming that the legal doctrine of disparate impact remains applicable as the CFPB exercises its supervision and enforcement authority to enforce compliance with ECOA and Regulation B), accessible at: 15 U.S.C. 1691(a). -7-

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