The U.S. Department of Housing and Urban Development (HUD) recently issued a final rule reinstating the 2013 version of its disparate impact rule under the Fair Housing Act (Act) to replace a version of the rule adopted by HUD during the Trump Administration in 2020 that never became effective. The final rule is effective 30 days after publication in the Federal Register. As the final rule mainly reinstates the 2013 rule, we refer to the final rule as the 2013 rule.
The 2013 rule sets forth a three-step burden shifting approach for disparate impact claims under the Act. The party challenging a practice has the burden of proving that that the practice caused or predictably will cause a discriminatory effect. If the party is successful in doing so, the party defending the practice has the burden of proving that the practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative. If the party defending the practice is successful in doing so, the party challenging the practice may still prevail upon proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.
Shortly after HUD issued the 2013 rule, two insurance industry trade associations sued HUD in the District of Columbia federal district court challenging the rule on various grounds particular to the insurance industry, but also making a central assertion that a disparate impact claim may not be brought under the Act. However, in the case Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., the U.S. Supreme Court held in 2015 that disparate impact claims may be brought under the Act. The trade associations then amended their complaint to remove the assertion that a disparate impact claim may not be brought under the Act, and added assertions that the 2013 rule was inconsistent with the Court’s decision in Inclusive Communities. Only one of the trade associations remains as a plaintiff. The case has been stayed based on the HUD disparate impact rulemaking. Presumably, the case will now proceed.
As noted above, in 2020 the HUD adopted a revised version of the disparate impact rule, claiming that the revisions were consistent with the decision in the Inclusive Communities case. The 2020 version of the rule soon faced legal challenges, and before the rule could become effective a Massachusetts federal district court in the case Massachusetts Fair Hous. Ctr., et al. v. HUD issued a preliminary injunction staying and postponing the effective date of the rule. The court determined that the plaintiffs had shown a substantial likelihood of success on the merits of their claim that that the 2020 rule is arbitrary and capricious in violation of the Administrative Procedure Act.
In the preamble to the reinstated 2013 rule, HUD extensively addresses comments raising issues specific to the insurance industry, including a comment “to exempt homeowners’ insurance—in whole or in part, as well as risk-based pricing and underwriting in particular—from liability for any unjustified discriminatory effects…” In responding to this comment, statements from HUD include the following: “HUD declines to provide an exemption for the insurance industry in whole or in part. . . . [A]s a threshold matter, HUD lacks the authority to create exemptions that are not in the text of the Act. When Congress enacted the Act in 1968 and amended it in 1988, it established exemptions for certain practices but not for insurance. Furthermore, courts have routinely applied the Act to insurers and have found that discriminatory effects liability applies to insurers under the Act.”
HUD also responds to comments that the 2013 rule is not consistent with Inclusive Communities. Despite the Inclusive Communities decision being rendered more than two years after HUD issued the 2013 rule, HUD asserts that the rule is consistent with the decision. In addition to the existing insurance industry trade association lawsuit challenging the 2013 rule, in part, as being inconsistent with such decision, we would not be surprised if one or more other lawsuits are filed challenging the 2013 rule on such basis.
Robust Causality. The Supreme Court in the Inclusive Communities decision addressed the standard that a plaintiff must satisfy to sufficiently make a prima facie claim of disparate impact. Citing to its decision in Wards Cove Packing v. Antonio addressing a disparate impact claim under Title VII of the Civil Rights Act of 1964, the Court stated that “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. A robust causality requirement ensures that ‘[r]acial imbalance . . . does not, without more, establish a prima facie case of disparate impact’ and thus protects defendants from being held liable for racial disparities they did not create.” The Court also stated that “[w]ithout adequate safeguards at the prima facie stage, disparate-impact liability 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.”
As noted above, the 2013 rule places the initial burden on the plaintiff “of proving that a challenged practice caused or predictably will cause a discriminatory effect.” HUD made several points in response to comments that this aspect of the 2013 rule does not satisfy the robust causality standard set forth in the Inclusive Communities decision, including the following:
- The rule “contain[s] a robust causality requirement by requiring the plaintiff to prove at the first step of the framework that a challenged practice caused or predictably will cause a discriminatory effect.”
- “The Inclusive Communities Court did not announce a heightened causality requirement for disparate impact liability, a requirement which would find no support in the statutory text or case law.” “[T]he Court merely reiterated that plaintiffs must identify a causal link between the challenged practice and the alleged disparate impact that is sufficiently robust to permit that connection to be scrutinized at each stage of the case.”
- The rule does “not use the precise words ‘robust causality’ and (as explained elsewhere in this preamble) nothing in Inclusive Communities requires these words. What Inclusive Communities requires is that a court’s examination of causality be robust.”
- “As explained above, the Court in Inclusive Communities did not announce a new ‘robust causality’ requirement. Nor did it indicate any intention to exclude from liability cases that allege predictable discriminatory effects. Rather, the Court simply described the longstanding requirement that a plaintiff must establish a causal connection between the policy or practice and the discriminatory effect.”
Basically, HUD is taking the position that (1) the robust causality language in the Inclusive Communities decision did not impose a heightened causality requirement, (2) although the 2013 rule does not use the words “robust causality,” there is no requirement that the rule use such words and, (3) in any event, the rule includes a robust causality requirement.
Arbitrary, Artificial, and Unnecessary. Citing to its decision in Griggs v. Duke Power Co. addressing a disparate impact claim under Title VII of the Civil Rights Act of 1964, in its Inclusive Communities decision the Supreme Court stated that “[d]isparate-impact liability mandates the ‘removal of artificial, arbitrary, and unnecessary barriers,’ not the displacement of valid governmental policies” and that “[g]overnmental or private policies are not contrary to the disparate-impact requirement unless they are ‘artificial, arbitrary, and unnecessary barriers.’” The 2020 rule included a requirement that at the pleading stage the party challenging a policy or practice must sufficiently plead facts supporting that the policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective.
Responding to comments that HUD include in the final rule a requirement that plaintiffs plead that a challenged policy is “artificial, arbitrary, and unnecessary,” HUD stated that it “declines to add an ‘artificial, arbitrary, and unnecessary’ pleading standard or substantive element to this final rule. As previously explained, HUD does not construe Inclusive Communities to require the agency to add specific elements or pleading standards for disparate impact cases that go beyond what ‘has always’ been required. Rather, when the Inclusive Communities Court quoted Griggs’ decades-old formulation that disparate impact claims require the removal of artificial, arbitrary, and unnecessary barriers, it did so as part of restating the safeguards and requirements that it found (and HUD agrees) have always been a part of disparate impact jurisprudence. In this context, the Court quoted Griggs’ short-hand formulation for the type of policy that traditionally has been held to create an unjustified discriminatory effect at the end of the burden shifting analysis.” (Footnote omitted.)
The federal district court in Massachusetts that issued the preliminary injunction staying the 2020 rule addressed the “arbitrary, artificial, and unnecessary standard.” The court stated that “[p]laintiffs argue there is no judicial support for the 2020 Rule’s requirement, to be codified in 24 C.F.R. § 100.500(b)(1), that a plaintiff must plead, at the outset, facts showing ‘[t]hat the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law.’” But, as [HUD] point[s] out, the “arbitrary, artificial, and unnecessary” language comes directly from Inclusive Communities, 576 U.S. at 540, 543, 544. Moreover, Plaintiffs completely ignore, in their briefing, the Eighth Circuit’s decision in Ellis v. City of Minneapolis, 860 F.3d 1106, 1112 (8th Cir. 2017), which interpreted Inclusive Communities to require that plaintiffs allege in the complaint that the challenged policy is “arbitrary and unnecessary.””
Valid Interest. As noted above, under the 2013 rule, if the party challenging a practice satisfies its burden of proving that that the practice caused or predictably will cause a discriminatory effect, the party defending the practice has the burden of proving that the practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. Commenters noted that the Supreme Court in the Inclusive Communities decision referred to a “valid interest” and not a “substantial, legitimate, nondiscriminatory interest.” In the decision, the Court stated that “[a]n important and appropriate means of ensuring that disparate-impact liability is properly limited is to give housing authorities and private developers leeway to state and explain the valid interest served by their policies.”
In responding to this point, HUD stated that “[n]othing in Inclusive Communities suggests that the Court endorsed lowering the burden for defendants in step two of the discriminatory effects framework. When Inclusive Communities discussed the ability of defendants to state a “valid interest”, it referred specifically to HUD’s 2013 Rule and the second step of the burden shifting analysis which requires that defendant show that its policy is necessary to achieve a substantial, legitimate, and nondiscriminatory interest. HUD believes the Court in Inclusive Communities, like other courts and HUD itself, used “valid” as shorthand for the same concept that the 2013 Rule describes as “substantial, legitimate, and non-discriminatory.” (Footnotes omitted.) While the Supreme Court did cite to the 2013 rule in connection with the valid interest language quoted in the prior paragraph, the court added a clarification “that HUD did not use the phrase ‘business necessity’ because that ‘phrase may not be easily understood to cover the full scope of practices covered by the Fair Housing Act, which applies to individuals, businesses, nonprofit organizations, and public entities.’” The Court did not mention that it used the term “valid interest” as shorthand for a “substantial, legitimate, and nondiscriminatory interest.”
While the issuance by HUD of a final rule to reinstate the 2013 rule is the latest step in the disparate impact rulemaking, it is likely not the last step in view of the existing lawsuit challenging that rule, and the potential for additional lawsuits.