The Supreme Court held today that the Fair Housing Act (FHA) not only prohibits intentional discrimination, but also establishes liability for practices that result in a disparate impact on minority groups. Texas Department of Housing & Community Affairs v. The Inclusive Communities Project, Inc., No. 13-1371 (June 25, 2015). The 5-4 opinion dashes the hopes of many in the financial services and insurance industries for a definitive ruling against “disparate impact,” but this decision will not be the last word on the issue. The opinion also is replete with admonitions on the requirements for establishing disparate-impact liability.

The FHA provides that it is unlawful to “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” and to “discriminate 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.” 42 U.S.C. §§ 3604(a), 3605(a).

In a sharply divided decision, the Supreme Court concluded that practices that have a disproportionately adverse effect on minorities may be unlawful under the FHA. The Court therefore affirmed the Fifth Circuit’s ruling below that the FHA provides for disparate-impact liability. The Fifth Circuit had relied on a regulation by the Department of Housing and Urban Development (HUD), which interpreted the FHA as encompassing disparate-impact liability and established a burden-shifting test for resolving such claims. See 78 Fed. Reg. 11,460 (Feb. 15, 2013). (That HUD regulation was vacated last year in a separate case in the U.S. District Court for the District of Columbia. Am. Ins. Ass’n v. U.S. Dep’t of Housing & Urban Dev., No. 1:13-cv-00966 (RJL), 2014 WL 5802283 (D.D.C. Nov. 7, 2014).) The Supreme Court’s opinion did not rely on that regulation, however.

The Court’s analysis relied on case law interpreting Title VII of the Civil Rights Act of 1964 (Title VII) and the Age Discrimination in Employment Act (ADEA). The Court concluded 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.” Slip op. at 10 (citing Griggs v. Duke Power Co., 401 U.S. 424 (1971) and Smith v. City of Jackson, 544 U.S. 228 (2005)). Because the FHA contains such “results-oriented language” that is “equivalent in function and purpose” to the language of Title VII and the ADEA, the Court concluded that the FHA, like those statutes, authorizes claims for disparate-impact liability. Slip op. at 11-12. The Court supported its holding by reference to the FHA’s purpose and later amendments. Id. at 13-18.

The opinion provides solace for those concerned about the overly expansive use of disparate-impact theories. The Court prescribed that disparate-impact liability under the FHA should be “properly limited” to avoid “serious constitutional questions” and laid out some important limiting principles. A plaintiff who “fails to allege facts at the pleading stage or produce statistical evidence demonstrating a causal connection” cannot meet its burden to state a prima facie case. Slip op. at 20. At the next step of the burden-shifting framework, the defendant may have “leeway to state and explain the valid interest served by their policies”; if those policies are “necessary to achieve a valid interest,” they must be permitted to stand. Id. at 18-19. Such policies should only be stricken if they are “artificial, arbitrary, and unnecessary barriers.” Id. at 21 (quoting Griggs, 401 U.S. at 431). As Justice Alito’s dissent points out, these pronouncements by the Court mask complicated questions that are now left to the lower courts and HUD to answer. (Alito, J., dissenting, slip op. at 31-32.)

The Court also emphasized the importance of establishing causation and made clear that mere statistical disparities will not suffice to establish it. “[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.” Slip op. at 19-20. Applying its holding to the case before it, the Court noted, “It may also be difficult to establish causation because of the multiple factors that go into investment decisions about where to construct or renovate housing units. And as Judge Jones observed below, if the [plaintiff] cannot show a causal connection between the Department’s policy and a disparate impact—for instance, because federal law substantially limits the Department’s discretion—that should result in dismissal of this case.” Id. at 20-21.

The Court’s opinion leaves the financial services and insurance industries still vulnerable to disparate-impact litigation. The FHA’s anti-discrimination provisions apply to mortgage lending, homeowner’s insurance, and potentially other financial services products that accompany home buying or rentals. Under the Court’s opinion, disparate-impact claimants must allege that the allegedly discriminatory policies of companies offering these services caused the racial imbalance or disparity complained of. If they do, companies must prove that their policies are “necessary to achieve a valid interest,” or, put another way, that they are not “artificial, arbitrary, and unnecessary barriers.”

The decision leaves unresolved the availability of the disparate-impact theory under the Equal Credit Opportunity Act (ECOA). Most case law either assumes for the sake of argument or holds that an ECOA violation may be established by showing the disparate impact of a creditor’s race-neutral practice, as Regulation B itself maintains as to determinations of creditworthiness, albeit in a footnote. 12 C.F.R. § 202.6(a) n.2. Such liability is the cornerstone of the Consumer Financial Protection Bureau’s announced policy on indirect auto lending. Specifically, the Bureau’s policy attempts to hold banks and finance companies, the buyers of retail installment contracts from automobile dealers, accountable for aggregate differences in finance rates between whites and minority groups. The Bureau has been pressing this position in negotiations with major lenders, including Ally Financial, with which it reached a settlement in 2013.

Among the criticisms of the Bureau’s position are that it overlooks the fact that the banks and finance companies do not control the selling dealers; rests on a controversial race-coding methodology disclosed in a “white paper” released in 2014; treats the varying practices of thousands of dealers as a single practice for analytical purposes; and fails to control for certain race-neutral factors that account for raw rate differences. If the dissenters had won the day in Inclusive Communities, the Bureau’s legal position would have been seriously undermined. Now, the differences between the FHA and the ECOA will likely move into the spotlight. The key Title VII and FHA language relied on by the majority as the textual basis for disparate-impact availability—“otherwise adversely affect” or “otherwise make unavailable”—is not found in ECOA. And there is an important legislative difference between the two statutes: “In addition, it is of crucial importance that the existence of disparate-impact liability is supported by amendments to the FHA that Congress enacted in 1988.” Slip op. at 13.

Inclusive Communities seems likely to be cited by both sides during the forthcoming arguments about disparate-impact liability. The Court’s reference to difficulties in establishing causation when “multiple factors” are involved (as in the indirect auto finance cases) and to potential “serious constitutional questions” that could arise if rigorous attention is not given to the sufficiency of the plaintiff’s prima facie case should give defendants plenty to work with. Slip op. at 20.