In a much-anticipated decision, the U.S. Supreme Court held in Texas Department of Housing and Community Affairs v. Inclusive Communities Project (“Inclusive Communities”) that claims of disparate impact discrimination are cognizable under the Fair Housing Act (“FHA”). In the case, the Inclusive Communities Project (“ICP”) accused the Texas state housing agency of violating the FHA by causing continued segregated housing patterns through disproportionately allocating low-income housing tax credits. ICP alleged that Texas granting too many tax credits for developments in predominantly African American inner-city neighborhoods and too few in predominantly Caucasian suburban neighborhoods in the Dallas area resulted in a disparate impact based on race in violation of the FHA.

While Inclusive Communities has some housing advocates cheering, it imposes limitations that mitigate its effects. The Court held that a racial imbalance, without more, does not establish a prima facie case of discrimination, and directed lower courts to “examine with care” the claims presented at the pleading stage.¹ The Court further directed that remedial orders in disparate impact cases must “concentrate on the elimination of the offending practice” and employ “race-neutral [remedial] means.”² The Court found these limitations necessary to “avoid serious constitutional questions that might arise”³ and “to protect potential defendants against abusive disparate-impact claims.”⁴

“Disparate impact” is one of the ways that courts have permitted plaintiffs to prove fair housing and fair lending violations. As the Court explained, “In contrast to a disparate-treatment case, where a ‘plaintiff must establish that the defendant had a discriminatory intent or motive,’ a plaintiff bringing a disparate-impact claim challenges practices that have a ‘disproportionately adverse effect on minorities’ and are otherwise unjustified by a legitimate rationale.”⁵ Importantly, the Court’s interpretation of the FHA raises new questions regarding the decision’s impact, including whether “disparate impact” claims are permitted under a similar statute that prohibits discrimination in lending, the Equal Credit Opportunity Act (ECOA).

Like Title VII and the Age Discrimination in Employment Act, the FHA permits ‘disparate impact’ claims In the 5-4 majority opinion, the liberals on the court were joined by the frequent swing justice, Justice Anthony M. Kennedy, who authored the majority opinion. There were spirited dissents from Justices Alito and Thomas, suggesting that the disparate impact theory would have been severely curtailed under the FHA – with implications for other statutes – if Kennedy had voted the other way. In reaching its decision, the Court considered two antidiscrimination statutes that preceded the FHA, section 703(a)(2) of Title VII of the Civil Rights Act and section 4(a)(2) of the Age Discrimination in Employment Act of 1967 (ADEA). Using the cases affirming disparate impact claims under those two statutes, Griggs v. Duke Power Co.,⁶ and Smith v. City of Jackson,⁷ respectively, the Court held that antidiscrimination laws should be interpreted to encompass disparate impact claims when their text refers to the results of a policy and not just to the intent that motivated its adoption.

The Court also relied heavily on legislative history to conclude that disparate impact theory is consistent with the statute’s purpose: “[I]t is of crucial importance that the existence of disparate-impact liability is supported by amendments to the FHA that Congress enacted in 1988. By that time, all nine Courts of Appeals to have addressed the question had concluded the Fair Housing Act encompassed disparate-impact claims. . . . When it amended the FHA, Congress was well aware of this unanimous precedent”⁸ and in enacting the amendments with the same language, it effectively ratified disparate impact analysis. The Court also noted that “Congress rejected a proposed amendment that would have eliminated disparate-impact liability for certain zoning decisions.” ⁹

The Court focused on the FHA’s catch-all ‘otherwise make unavailable’ – but there is no analogous language in ECOA The Court relied on a plain meaning interpretation of FHA section 804(a)’s phrase, “otherwise make unavailable,” which the Court said refers to the consequences of an action rather than the actor’s intent.¹⁰ The Court explained that the phrase is equivalent in function and purpose to Title VII and the ADEA’s language, “otherwise adversely affect.” ¹¹

In relying on the “otherwise make unavailable” language, the Court left open the question of whether “disparate impact” claims are cognizable under ECOA. Unlike the FHA and Title VII, ECOA contains no such catch-all. ECOA’s prohibition uses the phrase “discriminate,” and courts have traditionally read “discriminate” to require intent: “It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction—(1) on the basis of race, color, religion, national origin, sex or marital status, or age.”¹²

However, the Court offered some support to the CFPB and others who advocate reading “disparate impact” into ECOA when Justice Kennedy addressed section 805(a) of FHA, which like ECOA simply uses the term “discriminate,” citing a decades-old case: “The Court has construed statutory language similar to §805(a) to include disparate-impact liability. See, e.g., Board of Ed. of City School Dist. of New York v. Harris, 444 U. S. 130, 140–141 (1979) (holding the term ‘discriminat[e]’ encompassed disparate-impact liability in the context of a statute’s text, history, purpose, and structure).” For this reason, it is difficult to predict how Justice Kennedy (who likely would be the swing vote again) would vote if the Court were to consider the use of disparate impact theory under ECOA.

Justice Kennedy’s focus on the phrase “otherwise make available,” is in contrast to that of Justice Alito, who authored the primary dissent. In his dissent, Justice Alito noted: “§805(a) prohibits any party ‘whose business includes engaging in residential real estate-related transactions’ from ‘discriminating against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.’”14 Justice Alito continued: “Under a statute like the FHA that prohibits actions taken ‘because of’ protected characteristics, intent makes all the difference.”¹⁴

But statistics alone do not make a prima facie case – plaintiffs must show causality The Supreme Court affirmed the Fifth Circuit’s reversal of the District Court, finding that the plaintiff had failed to satisfy the “robust causality” requirement to make a prima facie case under the FHA: “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.”¹⁵ The Court said disparate impact analysis, “[w]ithout adequate safeguards at the prima facie stage . . . might cause race to be used and considered in a pervasive way and ‘would almost inexorably lead’ governmental or private entities to use ‘numerical quotas,’ and serious constitutional questions then could arise.”¹⁶

The Court held that “disparate impact” liability must be limited so that employers and other regulated entities are able to make practical business choices and profit-related decisions that sustain free-enterprise. The Court wrote, “before rejecting a business justification—or, in the case of a governmental entity, an analogous public interest—a court must determine that a plaintiff has shown that there is ‘an available alternative . . . practice that has less disparate impact and serves the [entity’s] legitimate needs.’”¹⁷

While the decision affirms that disparate impact liability under the FHA remains the law of the land, the Court’s forceful reminder that a “robust causality requirement” must be met leaves many questions unanswered for the housing and finance industries and the civil rights advocacy community.

Housing authorities and the financial industry must examine their policies and prepare for additional litigation now that ‘disparate impact’ has been affirmed In the housing context, there are many cases based on disparate impact pending against developers, agencies, lenders, and insurance companies. These entities should expect more litigation now that any doubt has been removed about the viability of disparate impact liability under the FHA. Relying largely on statistical analyses, these cases will be time consuming, expensive and present reputational risk even if the challenged policy ultimately is vindicated. Some states may have to reexamine their Qualified Allocation Plans and tax credit allocation processes.

Members of Reed Smith’s Financial Industry Group are available to provide a thorough analysis of your particular situation. Please contact us to discuss other implications of this important decision.
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1. Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., 576 U.S. ____ (June 25, 2015) (slip op., at 20).
2. 576 U.S. ____ (slip op., at 22).
3. 576 U.S. ____ (slip op., at 20).
4. 576 U.S. ____ (slip op., at 22).
5. 576 U.S. ____ (slip op., at 1).
6. 401 U.S. 424 (1971).
7. 554 U.S. 228 (2005).
8. 576 U.S. ____ (slip op., at 13).
9. 576 U.S. ____ (slip op., at 14).
10. 576 U.S. ____ (slip op., at 11).
11. 576 U.S. ____ (slip op., at 12).
12. 15 U.S.C. § 1691(a).
13. 12 576 U.S. ____ (slip op., at 3) (Alito, J., dissenting) (emphasis in original).
14. 13 576 U.S. ____ (slip op., at 5) (Alito, J., dissenting).
15. 576 U.S. ____ (slip op., at 20)(citing 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)).
16. 576 U.S. ____ (slip op., at 20).
17. 576 U.S. ____ (slip op., at 10).

Client Alert 2015-178