More Uncertainty around the Future of the Disparate Impact Theory of Liability
Last week, a pair of fair housing organizations got their wish when a federal judge in Massachusetts granted their request for a preliminary injunction and stay of the effective date of the Department of Housing and Urban Development’s (HUD) new disparate impact rule (the “2020 Rule”), discussed in our recent fair lending newsletter. Plaintiffs Massachusetts Fair Housing Center and Housing Works, Inc. filed a motion in the U.S. District Court for the District of Massachusetts seeking to vacate HUD’s 2020 Rule under the Administrative Procedure Act (APA), on the grounds that it is “contrary to law,” “arbitrary and capricious,” and that certain of its provisions violate the APA’s notice and comment requirements. The court only addressed the plaintiffs’ second argument—that the 2020 Rule is arbitrary and capricious—which it found was likely meritorious.
The court compared the disparate impact rule HUD had issued in 2013 (“2013 Rule”) to the 2020 Rule. Both versions of the rule state the general premise that liability may be established under the Fair Housing Act based on a practice’s discriminatory effect, if the practice was not motivated by a discriminatory intent. But as the court noted, the 2020 Rule significantly altered the 2013 Rule’s standards. The court found that the changes HUD had made constituted a “massive overhaul” of HUD’s disparate impact standards, by introducing onerous pleading requirements on plaintiffs while simultaneously easing the burden on defendants and arming them with broad new defenses.
Below is a side-by-side comparison of the key elements of the two different versions of the rule:
| 2013 Rule | 2020 Rule | |
| General liability relates to… | A practice’s discriminatory effect | A “specific, identifiable” policy’s or practice’s discriminatory effect |
| A discriminatory effect is one that… | Actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin | Is not defined in the rule, but the plaintiff or charging party must sufficiently plead facts to support that the challenged policy or practice:
1. is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective 2. has a disproportionately adverse effect on members of a protected class 3. has a robust causal link to the adverse effect (i.e., is its direct cause) and 4. the disparity is significant and 5. there is a direct relation between the conduct and the injury |
| The plaintiff or charging party must prove… | That the challenged practice caused or predictably will cause a discriminatory effect | Each element in (2) through (5) above, by the preponderance of the evidence |
| The defendant or responding party may then rebut by… | Proving that the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent/defendant
(step 1 in determining whether a “legally sufficient justification” exists) |
Producing evidence that the challenged policy or practice advances a valid interest(s) and is therefore not arbitrary, artificial, and unnecessary |
| If the defendant/respondent satisfies this burden, then the charging party may only prevail if it proves… | That the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect
(step 2 in determining whether a “legally sufficient justification” exists)
|
By the preponderance of the evidence either that the interest(s) advanced by the defendant are not valid or that a less discriminatory policy or practice exists that would serve the defendant’s identified interest(s) in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant |
| A legally sufficient justification… | The 2013 Rule said that a practice may still be lawful if supported by a legally sufficient justification, which exists where the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests, and could not be served by another practice that has a less discriminatory effect. A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative. | Is not a concept in the 2020 Rule |
| Defenses… | Are not identified as part of the 2013 Rule | Include, at the pleading stage, showing that the policy or practice was reasonably necessary to comply with a third-party requirement. After the pleading stage, additional defenses are available to a defendant, including by demonstrating that the plaintiff has failed to establish that the policy or practice has a discriminatory effect; or by demonstrating that the policy or practice is intended to predict an occurrence of an outcome, the prediction represents a valid interest, and the outcome predicted does not or would not have a disparate impact on protected classes |
| Remedies… | Are not identified as part of the 2013 Rule | Should be concentrated on eliminating or reforming the discriminatory practice to eliminate disparities. In HUD administrative proceedings, will include:
Equitable remedies; Compensatory damages or restitution, only where pecuniary damage is proved; and Civil money penalties, only where the defendant has been adjudged within the last five years to have committed unlawful housing discrimination |
HUD’s justification for these changes are (1) that they bring the disparate impact standards into alignment with the Supreme Court’s 2015 decision in Inclusive Communities, and (2) that they provide greater clarity to the public. In Inclusive Communities, the Supreme Court held that disparate impact is a viable theory of liability under the Fair Housing Act, but that “adequate safeguards” must be implemented to protect against “abusive” disparate impact litigation.
Although much of the language from the 2020 Rule clearly does come directly from Inclusive Communities (including the “arbitrary, artificial, and unnecessary” language), certain provisions cannot be traced directly back to the Supreme Court’s ruling, the plaintiffs allege, such as the reference to “materially greater costs” in the third step of the burden-shifting framework. Such significant alterations, the court mused, appear inadequately justified. Moreover, the court did not give much weight to HUD’s explanation that it was providing clarity, since the 2020 Rule contains new and undefined terminology and “perplexing” defenses.
Just one day before the 2020 Rule was set to go into effect, the court granted the plaintiffs’ motion for a preliminary injunction to postpone the effective date of the 2020 Rule. Pending entry of a final judgment on the APA claims, the 2020 Rule is stayed in its entirety and HUD is enjoined from enforcing the rule. Of course, the outcome of this one case is not the only thing influencing the future of disparate impact enforcement. As we previously noted in our fair lending newsletter, the outcome of the Presidential election could have its own impact.
