• Supreme Court 'Disparate Impact' Decision Has Implications for Financial Services Companies
  • July 8, 2005 | Authors: Stephen G. Harvey; Barak A. Bassman
  • Law Firm: Pepper Hamilton LLP - Philadelphia Office
  • Allegations that credit-granting policies, while not discriminatory on their face, result in a "disparate impact" on minority consumers in violation of the federal Equal Credit Opportunity Act (ECOA) are an increasing trend in litigation against financial services companies. Disparate impact discrimination, unlike "disparate treatment" discrimination, requires no proof of discriminatory intent, just proof that a specific policy has caused an adverse impact on minority consumers. ECOA disparate impact cases have resulted in multi-million-dollar class settlements by companies such as General Motors Acceptance Corporation and Nissan Motors Acceptance Corporation.

    Financial service companies have argued that the ECOA does not provide for disparate impact claims, but only prohibits intentional discrimination. While the Supreme Court has not addressed the issue, lower courts have held that the ECOA provides a cause of action for disparate impact discrimination. (See Osborne v. Bank of America, N.A., 234 F. Supp. 2d 804 (M.D. Tenn. 2002).)

    However, a recent Supreme Court decision may bolster the argument that the ECOA does not prohibit disparate impact discrimination.

    In Smith v. City of Jackson, 125 S.Ct. 1536 (2005), five justices of the Court held that the federal Age Discrimination in Employment Act (ADEA) provides a cause of action for disparate impact discrimination. Justice Stevens, writing for the majority, specifically noted that the ADEA, like Title VII of the Civil Rights Act of 1964, contains express language prohibiting conduct that "adversely affects" employment status on account of age. The Court found that this statutory language demonstrated Congress' intent to prohibit unintentional, disparate impact discrimination.

    The ECOA, however, contains no such language. Under the reasoning of the plurality, it can be argued that Congress did not intend for the ECOA to encompass disparate impact discrimination, or Congress would have used the same "adversely affects" language in the ECOA as it did in the ADEA and Title VII.

    Justice Scalia's concurrence in Smith, however, will likely bolster plaintiffs' arguments. Justice Scalia agreed that the ADEA's prohibitions encompassed disparate impact claims, but based his holding on the fact that the Equal Employment Opportunity Commission, the agency charged with implementing the ADEA, had interpreted the statute to permit disparate impact claims, and the agency's statutory interpretation was entitled to substantial deference. The Federal Reserve Board, the agency charged with implementing the ECOA, has maintained that the ECOA forbids disparate impact claims (See 12 C.F.R. ยง 202.6, n. 2.).

    Smith has two other notable aspects. First, the Court held that a defendant in an ADEA disparate impact case, unlike in a Title VII action, is not liable if it can show a legitimate business justification for the policy being challenged. Until 1989, the only affirmative defense in a disparate impact case was "business necessity" - that the challenged policy was necessary to the defendant's business. In Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989), however, the Court held that a defendant can defend against a disparate impact claim by merely showing a legitimate business justification for the policy in question. In 1991, Congress amended Title VII, but no other anti-discrimination statute, to reinstate the business necessity defense. Because Congress declined to amend the ADEA as well, the Court held that the Wards Cove legitimate business justification standard applies to ADEA claims instead of the business necessity standard. By analogy, if the ECOA prohibits disparate impact discrimination, defendants should be able to defend their policies with a showing of legitimate business justification.

    Second, the Court reinforced the need for disparate impact plaintiffs to prove that a specific policy causes the alleged disparate impact; plaintiffs cannot merely show that, at some bottom line, a statistical disparity exists between white and minority individuals. While the Court found that disparate impact claims may be brought under the ADEA, it still affirmed the dismissal of petitioners' claims because they failed to identify a specific policy that caused the alleged impact.

    Defendants in ECOA disparate impact cases should understand that, regardless of what statistical analyses plaintiffs' experts may devise, plaintiffs must still prove that a specific policy exists.