Unintentional Discrimination - A Look at Disparate Impact Liability

Merle is property manager at Opry Village, a 250-unit property in Muskogee. He has been managing property for many years and recently guided the property through a massive renovation. Through the years, he has worked with the property owners to develop a resident selection policy that brings in the best tenants to the property, as well as rules and regulations that keep the property safe, orderly, and clean for all the residents. When the renovations were completed, Merle enacted a no-pet policy in order to prevent damage to the newly renovated units.

One afternoon Merle is a bit surprised to find the mailman waiting on him to sign for a certified letter. Merle sees his name on the letter, and gladly signs for it. The sender’s name on the envelope is the Muskogee-Area Human Rights Commission. Merle opens the envelope and is shocked to find that he has been named as a Defendant in a Housing Discrimination Complaint.

The complaint was filed by a husband and wife with two children who had applied for housing at Opry Village. Their applications had been accepted, but they chose not to sign a lease because of Opry Village's no-pet policy. They were now claiming that Merle's policy discriminated against families with children who own pets. Merle was outraged. “How can anyone think that a no-pet policy discriminates against them?” he asked indignantly. Merle didn’t have a discriminatory bone in his body. In fact, he made sure that his rules and selection policy only addressed conduct, not any protected class, and that he applied the rules and policies consistently to all tenants, applicants, and inquirers. Shoot, he’d evict his own mother if she didn’t follow the rules.

After he cooled down a bit, Merle contacted the owners of the property to let them know about the complaint. He assured them that the complaint was baseless because the rule in question did not address any protected class and had been consistently applied to everyone. The owner instructed Merle to contact their attorney and notify him of the lawsuit.

Merle did as he was instructed. The next day, Merle and the owners met with their attorney to review the complaint and formulate a response strategy. Merle beamed as he pointed out that his policy only addressed conduct, and therefore did not discriminate against anyone based on their membership in a protected class. Further, he told the attorney that he could produce records that the policy had been enforced consistently against all tenants, applicants, and inquirers.

“That’s great”, the attorney responded. “Unfortunately, it has no bearing on the lawsuit that’s been filed against you.” The attorney explained that the couple had not claimed that Merle or the property owners intentionally discriminated against families with children. Instead, they were claiming that the property’s no-pet policy, while not targeted or improperly applied to any particular group, had the effect of discriminating against families with children.

The couple claimed that, in Muskogee, families with children are 10 times more likely to own a pet than families without children, based on statistics provided by the state census bureau. As a result, they claimed, the no-pet policy has a disparate impact or discriminatory effect on families with children.

“Is that even allowed?” Merle asked. “Are we liable if one of our rules impacts some groups more than others?”

Discriminatory Effects Liability

Merle’s question is one that has lingered over our country for a long time. Title VIII of the Civil Rights Act, as amended by the Fair Housing Act, is clear that housing discrimination against members of protected classes is prohibited. However, the language of the law is not clear on whether only intentional discrimination is prohibited, or if policies or acts that do not intentionally discriminate, but have the effect of discriminating against protected classes are also prohibited. In July 2015, the United States Supreme Court gave us an answer: both intentional discrimination and discriminatory effects are prohibited in housing.

The question came before the United States Supreme Court in the case of Texas Department of Housing v. The Inclusive Communities Project, Inc. (2015). The facts of this case are not relevant to landlords, as they involved claims that the way in which the Texas Department of Housing (TDOH) distributed tax credits for building low-income housing. The Defendants claimed that the TDOH's policies resulted in segregated housing patterns because too many credits were given for housing to be built in predominantly black areas and too few in predominantly white areas. While the facts do not directly apply to landlords, the issue presented to the Court was significant for those in the rental industry: does the Fair Housing Act create a legal claim against housing providers who policies have a discriminatory effect on a protected class?

The Court looked at the language of the Fair Housing Act, as well as prior cases dealing with similar statutes in the employment context, and decided that the law focused on results, rather than merely intent. As a result, the Court determined that policies that cause a discriminatory effect on members of a protected class are prohibited, and individuals who are victims of such discriminatory effects have a claim under the Fair Housing Act against those who enact and carry out such policies. This is known as Disparate Impact Liability (DIL) or Discriminatory Effects Liability (DEL).

Fortunately, there is a bit more to the analysis. HUD issued a Final Rule in 2013 (before the Court had clearly validated DIL) that sets forth additional details on DIL claims, and this rule was acknowledged by the Court in its ruling. The Rule sets up a four-step analysis:

Four-Step DIL Analysis:

1. Does the policy have discriminatory effect on a protected class?
2. Is the policy necessary to achieve a substantial, legitimate, and non-discriminatory interest of the landlord?
3. Is there a less-discriminatory policy that would achieve the interest?
4. Does the policy qualify for an exemption?

Step One: Does the policy have a discriminatory effect?

A discriminatory effect occurs when a policy “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. This list would be expanded to include sexual orientation and gender identity in Lexington, Louisville, Covington, Danville, Frankfort, Morehead, Midway, and Vicco, or any other jurisdiction that has expanded the national list of protected classes.

The burden of proving the discriminatory effect is on the Plaintiff, the person who claims to have been discriminated against. This burden would be met by providing evidence (usually statistical) that the policy actually or predictably results in a disparate impact on members of a protected class. The Court’s opinion made clear that the Plaintiff would need to provide evidence that the rule caused the discriminatory effect, not merely that there was a statistical disparity. Local or state statistics are best, but often not available. In such cases, national statistics are used when there is no reason to believe that state/local statistics would be markedly different from the national statistics.

In Merle’s case, the Plaintiffs had local statistics showing that there was a disparity between dog ownership in families with children versus those without. As a result, Merle’s no-pet policy arguably has the effect of discriminating against families with children.       

Step Two: Is the policy necessary to achieve a substantial, legitimate, and non-discriminatory interest of the landlord?

Fortunately for Merle, both HUD and the Court have acknowledged that there may be a legitimate business reason for the policy, even if it has a discriminatory effect. As such, the second step of the analysis allows a landlord to explain and prove that their policy is necessary to achieve a substantial, legitimate, and non-discriminatory interest. To satisfy this requirement, the landlord must provide reliable evidence that the policy actually serves to further such an interest.

In this case, Merle and the property owner would argue that prohibiting pets serves to prevent damage to the property. I’d think that they could provide evidence that the average amount of damage to their units during the time period in which they allowed pets was significantly greater than the average amount of damage since the no-pet policy was enacted.                

Step Three: Is there a less-discriminatory policy that would achieve the interest?

Assuming the landlord provides satisfactory proof that the policy is necessary to serve a legitimate, non-discriminatory interest, the burden then shifts back to the Plaintiff to prove that there is an alternative policy that is less discriminatory that would also serve the purpose. In this case, perhaps the Plaintiff could argue that, instead of a blanket no-pet policy, the landlord should limit its policy to prohibit only those pets that are statistically shown to cause the most property damage. In order to prevail, the Plaintiff would have to provide reliable evidence that only certain types of pets cause most property damage and that such a policy would be less discriminatory against families with children.        

Step Four: Does the policy qualify for any exemption?

The Fair Housing Act exempts policies that exclude tenants (1) who have been convicted of drug manufacturing or distribution and (2) based on governmental restrictions on maximum occupancy from liability, even if such policies have a discriminatory effect. Unfortunately for Merle, neither exemption applies in this case.

Conclusion

So, the ultimate outcome of Merle’s case is not clear. Perhaps the Plaintiff will be able to convince a Court that a different policy would be less discriminatory than a blanket no-pet policy, and perhaps not. However, the lessons for landlords are clear: all rules and policies must be scrutinized to determine whether (1) they actually serve a substantial, legitimate, non-discriminatory purpose and (2) there are less-discriminatory alternatives. Otherwise, according to the Fair Housing Act, you may have engaged in accidental discrimination.