USDOJ Pursues Last-Minute Attempt to Kill “Adverse Impact” Discrimination Claims Against Federal Grant Recipients

On Wednesday, January 6, 2021, the United States Department of Justice (“DOJ”) has submitted to the Office of Management and Budget (“OMB”) for review a Final Rule amending DOJ’s regulations administering Title VI (Title 6) of the 1964 Civil Rights Act. The Final Rule would eliminate prosecution of “disparate impact” discrimination claims against recipients of “federal financial assistance” (otherwise colloquially known as “grants”).

This Final Rule will immediately arouse and antagonize civil rights groups nationwide since they are all emotionally tied to the adverse impact theory, regardless of its particular statutory application. Moreover, the federal government grant program is so large that many watchdogs of government contracting will decry reducing federal oversight of grant recipients. In FY2020, for example, the federal government delivered almost $750 Billion in grants (“federal financial assistance”) to private and public sector companies and agencies. That is a substantial amount of federal taxpayer money advocates will argue require the maximum legal scrutiny to make sure no employer uses federal taxpayer dollars to unlawfully discriminate. Finally, the Final Rule would work a substantial change to USDOJ’s application for almost the last fifty years of the adverse impact theory to grant recipients. You may wish to read our Blog attached to our below January 7, 2021 story regarding the USDOL Wage-Hour Division Final Rule on Independent Contractors for a discussion of the Biden Administration’s plans to stop in their tracks all such “Midnight regulations”. That blog also discusses the difficult law surrounding rescission, reconsideration and withdrawal of such Midnight Regulations published in Final form but not yet “legally effective” when the new Administration takes over control of the Executive Branch of government.

Background

Title VI of the Civil Rights Act of 1964 provides in part that “No person in the United States shall, on the ground of race, color, or national origin, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance.” 42 U.S.C. § 2000d. “Federal financial assistance” is any federal program, project, service, or activity the federal government provides that directly assists domestic governments, organizations, or individuals to carry out a public purpose of support or stimulation authorized by the United States instead of acquiring property or services for the direct benefit or use of the United States government. See generally 31 U.S.C. §§ 6304.8, 6305.

Thus, entities which or individuals who receive federal financial assistance from the federal government cannot treat persons differently because of their race, color, or national origin directly or through contractual or other arrangements. Discriminatory conduct may include denying individuals service, financial aid, or other benefits from the recipient’s program; providing service to a person that is different from service provided to others; restrict a person in any way in the enjoyment of any privilege enjoyed by others receiving the service under the program; deny an individual an opportunity to participate in recipient’s program; or discriminate in site or location selection of facilities.

If a recipient of federal assistance is found to have discriminated and the federal government is not able to obtain voluntary compliance from the recipient, the federal agency providing the assistance can either initiate fund termination proceedings or refer the matter to the DOJ for appropriate legal action. Legal action may include the filing of administrative complaints against the recipient, or individuals who are victims of the unlawful discrimination may themselves file suit for appropriate relief in federal court.

Currently, similar to discrimination law that has been developed in the context of Title VII of the Civil Rights Act, the DOJ prosecutes claims of discrimination under Title VI under two separate legal theories of discrimination: (1) “disparate treatment discrimination;” and (2) “disparate impact discrimination.”  “Disparate treatment discrimination” involves the more commonly understood interpretation of discrimination; treating an individual less favorably than others because of a protected characteristic, such as race, color, or national origin, etc. Rashdan v. Geissberger, 764 F.3d 1179, 1182 (9th Cir. 2014) (McDonnell Douglas burden shifting framework for disparate treatment discrimination claim under Title VII also applies to Title VI disparate treatment claims). “Disparate treatment discrimination” requires proof of discriminatory motive or intent. Id. at 1183.

“Disparate impact discrimination” does not require proof of a discriminatory motive on the part of the alleged discriminator; rather, “disparate impact discrimination” claims challenge a specific and particular and facially neutral policy or practice that has a disproportionate effect on a Protected Group. Wards Cove Packing Company, Inc., et al. v. Frank Atonio et al., 490 U.S. 642 (1989). “Disparate impact discrimination” in Title VI cases arise where federal financial assistance recipients have policies or practices that result in the provision of fewer services or benefits to members of a protected group. Id., 724 F. Supp. at 906; Larry P. v. Riles, 793 F.2d 969 (9^th Cir. 1984).

DOJ’s Proposed Amendment and Reasoning for Change

The DOJ’s proposed amendments to 28 CFR Part 42 would preclude “disparate impact discrimination” claims as a potential source of liability against recipients of federal financial assistance. To do so, the DOJ proposes removing language and various sections in 28 CFR Part 42 that pertain to the “effect” of neutral criteria or programs. These changes include eliminating:

• 28 CFR 42.104(b)(2), which states, “A recipient, in determining the type of disposition, services, financial aid, benefits, or facilities which will be provided under any such program, or the class of individuals to whom, or the situations in which, such will be provided under any such program, or the class of individuals to be afforded an opportunity to participate in any such program, may not, directly or through contractual or other arrangements, utilize criteria or methods of administration which have the effect of subjecting individuals to discrimination because of their race, color, or national origin, or have the effect of defeating or substantially impairing accomplishment of the objectives of the program as respects individuals of a particular race, color, or national origin.”
• The word “effect” from 28 CFR 42.104(b)(3).
• 28 CFR 42.104(b)(6)(ii), which states, “Even in the absence of such prior discrimination, a recipient in administering a program may take affirmative action to overcome the effects of conditions which resulted in limiting participation by persons of a particular race, color, or national origin.”
• 28 CFR 42.104(c)(2), which states, “In regard to Federal financial assistance which does not have providing employment as a primary objective, the provisions of paragraph (c)(1) of this section apply to the employment practices of the recipient if discrimination on the ground of race, color, or national origin in such employment practices tends, on the ground of race, color, or national origin, to exclude persons from participation in, to deny them the benefits of or to subject them to discrimination under the program receiving Federal financial assistance. In any such case, the provisions of paragraph (c)(1) of this section shall apply to the extent necessary to assure equality of opportunity to and nondiscriminatory treatment of beneficiaries.”

The DOJ’s reasoning to eliminate “disparate impact discrimination” claims rests upon its belief that Title VI was intended to prohibit only intentional acts of discrimination, i.e., “disparate treatment discrimination.” Going through the case law, the DOJ cited Supreme Court precedent which found that Congress intended Title VI to prohibit only those racial classifications that would violate the Equal Protection Clause, and that the Equal Protection Clause required proof of intentional discrimination. Thus, discriminatory “effect” or “disparate impact” alone did not constitute a violation. As such, the current regulation’s extension of prohibited conduct to include unintentional disparate impact “expands the prohibition to a vastly broader scope of conduct than the intentionally discriminatory conduct that the statute itself prohibits.” Thus, the DOJ’s proposed amendments to the regulations “address the concerns regarding the statutory authority supporting the scope of these regulations . . ., harmonize the implementing regulations’ scope with the conduct that Congress actually intended Title VI to prohibit, promote consistent enforcement among private plaintiffs and federal departments and agencies, as well as provide much needed clarity to the courts and federal funding recipients and beneficiaries.”

Hold the Phones…Litigation Will Result If the White House Enacts the Proposed Amendments

As extremely beneficial as these amendments would be to federal financial assistance grantees and recipients, the likelihood that the proposed regulatory amendments would go into effect anytime soon are infinitesimal. This has little to do with the White House not approving of the substance of the DOJ’s proposal, but rather is mostly due to the concern about the truncated manner as to which the DOJ is attempting to implement these amendments.

The Administrative Procedure Act (“APA”), 5 U.S.C. §§ 551 et seq., governs the process by which federal agencies may propose, develop, and issue regulations. As most federal contractors and subcontractors are no doubt familiar, this process traditionally involves publishing notices of proposed and final rulemaking in the Federal Register and providing opportunities for the public to comment on the proposed rules. Such “notice” and “comment” allows the public to remain informed of changes that will affect it, as well as to establish uniform standards for federal agencies to follow. Failure to properly follow the procedural requirements the APA requires could result in judicial review and a court-ordered injunction enjoining implementation of the proposed rule for failure to follow the APA’s Rulemaking requirements.  The Trump Administration has seen recent judicial decisions rely on the APA to strike down the Administration’s attempt to repeal, for example, the Deferred Action for Childhood Arrivals program (“DACA”) and to enjoin proposed changes to the joint employer standard under the Fair Labor Standards Act.

Here, rather than publish the proposed amendments for public comment, the DOJ has attempted to obtain White House approval without either “Notice” or “Comment.” USDOJ’s interpretation that the APA rulemaking process does NOT apply to this Final Rule are because the APA exempts from its Rulemaking requirements matters “relating to agency management or personnel or to public property, loans, grants, benefits, or contracts.”  5 U.S.C. § 553(a)(2).  Because the proposed amendments concern non-discrimination conditions to receive federal financial assistance, which the federal government issues in the form of “grants” or “loans,” the DOJ believes an exception to the normal APA process applies.

However, given the extraordinary impact the proposed amendments would have, federal financial assistance recipients can “bet the house” that the Biden Administration will take early action to attempt to preclude enforcement of the new Final Rule slimming down Title VI’s reach.  These efforts to freeze the Final Rule and withdraw it, if OMB does indeed approve it and publish it in Final Form, will most likely address not only the extraordinary means by which the Trump Administration would implement this amendment, but also the substantive issues resulting from the amendments as well.

First, exemptions to the APA under 5 U.S.C. § 553(a)(2) are to be narrowly read. New York v. Diamond, 379 F. Supp. 503 (S.D.N.Y. 1974). Furthermore, not only are such exemptions construed narrowly by courts, but courts have held that permitting rulemaking through such exemptions should be granted “reluctantly.” Mast Industries, Inc. v. Regan, 596 F. Supp. 1567 (Ct. Int’l. Trade 1984). Thus, courts are hesitant to permit use of the section 552(a)(2) exemption for rulemaking purposes.

Second, if federal executive agencies have previously noted in the Federal Register that procedural requirements of the APA would be applicable to rulemakings relating to “public property, loans, grants, benefits or contracts,” such notice would constitute an admission against interest that the APA applies to loan and grant Rulemakings. Thus, for example, a U.S. Department of Agriculture’s prior notice that certain restrictions pursuant to the federal food stamp program applied to the Department precluded it from later seizing upon the exception when issuing allotment regulations under the program. Accordingly, the Court held that the APA’s rulemaking procedural requirements of Notice and Comment applied to the allotment program. Rodway v. U.S. Dept. of Agriculture, 514 F.2d 809 (D.C. Cir. 1975).

Here, the Trump Administration’s DOJ may be similarly restricted if it did not review whether the DOJ under other prior administrations conceded the applicability of the Disparate Impact theory to its enforcement of Title VI. And, of course, USDOJ certainly has so conceded in every Administration since the Nixon Administration. Specifically, USDOJ has prosecuted employers under the adverse impact theory and exacted substantial financial remedies pursuant to the adverse impact theory for going on five decades. Thus, lawsuits could likely be brought contesting the procedures by which the DOJ implemented these amendments.

As to the substantive effect of the proposed amendments, civil rights groups are unlikely to sit back and allow such a major theory of discrimination law to fade into the sunset without a fight.  Most discrimination litigation these days at the EEOC (but not the OFCCP) take the form of “disparate impact” claims. This is because of the difficulty to prove up intent and the bigger concern that the USDOJ would otherwise have to prove up a long-lasting “pattern and practice” resulting in a statistical disparity which the employer could not explain away pursuant to non-discriminatory reasons for the noted statistical disparities. Thus, such a substantive effect on the trajectory of discrimination law would likely not go unchallenged.

Even outside of the potential litigation that may arise, with the advent of the new Biden Administration, recipients of the federal financial assistance can expect the new Attorney General leading the DOJ to delay and reconsider enactment of the proposed amendments.  Such delay would allow the courts to proceed with lawsuits that will be brought, or even permit the Biden Administration to either bring about its own rule overturning the amendments pursuant to the APA process, or perhaps rely upon the same exception the Trump Administration’s DOJ used to implement changes quicker.

What Federal Financial Assistance Recipients Should Do Next

Thus, federal financial assistance recipients should not expect they will be able to rely on these proposed amendments should the Trump Administration enact them in the next week.  Nonetheless, recipients of federal financial assistance under investigation should continue to assert that USDOJ lacks authority to attack any of their employment policies and/or practices pursuant to an adverse impact theory. However, it would also behoove recipients of federal financial assistance to hold off celebrating what could well end up being an illusory sense of relief from potential litigation.  Rather, recipients should watch carefully the legal events unfold around this attempted withdrawal of the adverse impact theory from USDOJ’s arsenal of discrimination tools to use against grant recipients. Depending on which approach the Biden Administration determines to take as to these “Midnight regulations,” the drama could be short-lived (next month or two). Or the drama could drag out for years through court challenges to the Final Rule should USDOJ publish the Rule in the Federal Register in Final form before the Trump Administration leaves office in nine days.

THIS COLUMN IS MEANT TO ASSIST IN A GENERAL UNDERSTANDING OF THE CURRENT LAW AND PRACTICE RELATING TO OFCCP. IT IS NOT TO BE REGARDED AS LEGAL ADVICE. COMPANIES OR INDIVIDUALS WITH PARTICULAR QUESTIONS SHOULD SEEK ADVICE OF COUNSEL.