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EEOC's Failure to Show Disparate Impact Dooms Credit Check Bias Case, Court Affirms

Friday, April 11, 2014

April 10 --A federal district court properly dismissed the Equal Employment Opportunity Commission's claims that Kaplan Higher Education Corp. violated Title VII of the 1964 Civil Rights Act by considering applicants' credit histories in hiring for select jobs because the EEOC failed to show a racially disparate impact, the U.S. Court of Appeals for the Sixth Circuit ruled April 9 (EEOC v. Kaplan Higher Educ. Corp., 6th Cir., No. 13-3408, 4/9/14).

In a decision that could affect the EEOC's pending litigation regarding criminal background checks as well, the Sixth Circuit said the district court properly excluded the EEOC's purported expert's report because his methods didn't satisfy the standards set in Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579 (1993) for admissibility of expert opinions.

Management lawyers contacted by Bloomberg BNA said the Sixth Circuit ruling could significantly affect other courts considering EEOC suits challenging employers' use of credit and criminal history screens, particularly the U.S. Court of Appeals for the Fourth Circuit in EEOC v. Freeman.

The Sixth Circuit decision continues a string of losses for the EEOC in its litigation efforts regarding potential discrimination against blacks, Hispanics and men resulting from employers' use of credit and criminal background checks in hiring, including the district court decisions in Kaplan (117 FEP Cases 348, 2013 BL 21834 (N.D. Ohio 2013); 19 DLR A-1, 1/29/13) and Freeman (119 FEP Cases 861, 2013 BL 208019 (D. Md. 2013); 154 DLR AA-1, 8/9/13).

The EEOC has been unable to leave the starting gate, as the courts have ruled the agency can't prove the threshold issue of disparate impact. The courts therefore have not yet considered whether an employer can prove its background check policies are job-related and consistent with business necessity.

The takeaway from the Sixth Circuit decision and the district court rulings in Kaplan and Freeman is “how unimpressed” the federal courts are with the EEOC's strategy of bringing systemic lawsuits against employers' use of hiring screens, said Gerald Maatman, a partner with Seyfarth Shaw in Chicago who represented Kaplan.

After receiving sharp criticism from the Sixth Circuit as well as from the district courts in Kaplan and Freeman, the EEOC must be thinking “we need to approach this issue very differently,” Maatman told Bloomberg BNA April 10.

In an April 10 statement, EEOC General Counsel David Lopez said the agency is disappointed with the Sixth Circuit decision and agency lawyers are carefully reviewing the opinion.

“However, the decision is an evidentiary ruling that does not go to the merits of the underlying discrimination allegations made by the EEOC,” Lopez said.

The EEOC remains “concerned about the impact of using credit history to screen out worthy applicants for employment,” Lopez said. The agency “will not abandon its efforts to challenge such practices for their impact on protected groups in appropriate cases,” he said.

Expert Testimony Held Inadmissible.

Since Kaplan doesn't collect racial data on its applicants, the EEOC expert used a “race rating” system to identify the race of Kaplan applicants from state driver's license photographs, the Sixth Circuit recounted. The expert had five “race raters” look at the photos and identify the individuals as white, African American, Hispanic, Asian or other. The expert included applicants in his statistical sample only if four out of five raters had agreed on an individual's race.


"The EEOC brought this case on the basis of a homemade methodology, crafted by a witness with no particular expertise to craft it, administered by persons with no particular expertise to administer it, tested by no one, and accepted only by the witness himself," the Sixth Circuit said.

In granting summary judgment, the district court said this method of visual identification of race from photos was unreliable and the sample used by the expert was not representative of Kaplan's applicant pool. The expert also subverted his own method by providing the race raters with the names of individuals whose photos they reviewed, the district court said.

The district court subsequently denied the EEOC's motion for reconsideration (118 FEP Cases 492, 2013 BL 120662 (N.D. Ohio 2013) (89 DLR A-7, 5/8/13).

Rejecting the EEOC's appeal, the Sixth Circuit said the lower court didn't abuse its discretion by excluding the expert's report and ruling the agency can't prove disparate impact.

“The EEOC brought this case on the basis of a homemade methodology, crafted by a witness with no particular expertise to craft it, administered by persons with no particular expertise to administer it, tested by no one, and accepted only by the witness himself,” Judge Raymond M. Kethledge wrote.

On appeal, the EEOC argued that the district court erred by excluding the testimony of Kevin Murphy, its purported expert who holds a doctorate in industrial and organizational psychology.

But the Sixth Circuit was no more impressed by Murphy's report and proposed testimony than the district court had been. The EEOC didn't satisfy any of the multiple factors set out in Daubert for showing the expert's methodology was sufficiently reliable to produce findings admissible under Federal Rule of Evidence 702, the appeals court said.

The district court's “meticulously reasoned opinion” showed the EEOC failed to prove Murphy's testimony was “based on sufficient facts and data” and was “the product of reliable principles and methods” such that it may be admitted under Rule 702, the Sixth Circuit said.

Judges Damon J. Keith and Deborah L. Cook joined in the decision.

Potential Impact on Other Cases Seen.

The court's opinion is “a scathing admonition to the EEOC” to bring its cases “more thoughtfully,” said Garen Dodge, a partner with Jackson Lewis in Reston, Va.

It's significant that the court emphasized that the EEOC itself uses credit checks to screen applicants for a number of agency jobs but sued an employer under Title VII for the same practice, Dodge said. That same logic applies to criminal background checks in hiring, which the EEOC and other federal government agencies also conduct but the EEOC is challenging in the private workplace, Dodge told Bloomberg BNA April 10.

The Kaplan decision, as the first circuit court ruling on the EEOC's race discrimination challenge to background checks based on disparate impact, will affect pending EEOC cases involving employers' use of applicants' criminal histories, Dodge said.

The first among those is EEOC v. Freeman (21 DLR AA-1, 1/31/14). In that case the EEOC has appealed to the Fourth Circuit the district court's grant of summary judgment to Freeman on the EEOC's claims of a racially disparate impact on blacks and men from the event-planning firm's use of credit and conviction records in hiring.

The Sixth Circuit decision will “significantly impact” Freeman as the EEOC used Murphy as its purported expert in that case too and the issue of how the EEOC tries to prove disparate impact is at issue before the Fourth Circuit, Maatman of Seyfarth Shaw said.

Indeed, attorneys representing Freeman filed a letter with the Fourth Circuit April 9 informing it about the Sixth Circuit decision and its relevance to the Freeman appeal.

The Sixth Circuit's criticism of the EEOC expert's approach in Kaplan is “directly transferable” to Freeman, not only because the EEOC used the same expert in both cases but because the agency's data and methodology are flawed, Maatman said.

So far, courts have found the EEOC has “flunked the test” regarding proof of disparate impact, Maatman said.

The Sixth Circuit decision in Kaplan is relevant in the criminal background check cases on the issues of who is an expert qualified to testify and what an expert's report must consider in order to be admissible, Dodge said.

The EEOC in Kaplan and in the criminal background check cases has looked at “raw statistics” and concluded that background screens based on credit or criminal histories must “automatically” have disparate impact based on race, Dodge said.

But the Sixth Circuit decision is a caution flag telling the EEOC “there's a lot more to litigating these cases than raw statistics,” Dodge said.

Since the EEOC issued its revised enforcement guidance on employers' use of arrest and conviction records in April 2012 (80 DLR A-1, 4/25/12), the agency has sued a BMW manufacturing plant in South Carolina and the retailer Dollar General nationwide under Title VII, alleging those companies' use of criminal background screens disproportionately excluded black workers in hiring (113 DLR A-11, 6/12/13). Those cases are pending in two federal district courts.

EEOC Also Uses Credit Checks.

Both the Sixth Circuit opinion and the district court decision in Freeman opened by noting the reasonableness of the employer policies at issue, even though that was not specifically at issue in either case.

In both Kaplan and Freeman, lawyers representing the employers obtained discovery regarding the EEOC's own background check policies in hiring for agency jobs.

“In this case, the EEOC sued the defendants for using the same type of background check policies that the EEOC itself uses,” Judge Kethledge wrote for the Sixth Circuit. The appeals court said the evidence indicated the EEOC runs credit checks for 84 of its 97 positions but that it nevertheless sued Kaplan for running credit checks based on the same concerns that led the EEOC to do so.

Kaplan made a “government estoppel” argument the EEOC should not be free to sue a private employer under Title VII for running a background check that is virtually the same as that conducted by the EEOC, Maatman said.

The court did not need to reach that argument, but Maatman said it's a lurking issue that might become relevant in a future case if the dispute becomes whether an employer can prove its background check policy is job-related and consistent with business necessity under Title VII.

Employers' Use of Checks Is Down.

A Society for Human Resource Management survey of its member organizations released in July 2012 found 34 percent of respondents used credit checks to screen applicants for specific jobs and 13 percent said their organizations used credit checks as part of the background screen for all jobs.

Those reporting use of credit checks for all jobs tended to be financial industry employers subject to government regulations requiring background screens, said Mike Aitken, SHRM vice president of government affairs in Alexandria, Va.

The numbers were down from a SHRM survey in 2010 that found 47 percent of responding organizations used credit checks for at least some jobs, Aitken told Bloomberg BNA April 10.

Employers' use of criminal background checks is more prevalent, as the 2012 SHRM survey indicated 69 percent of responding organization used criminal checks on all job candidates and 18 percent conducted criminal background checks for select jobs.

A majority of SHRM respondents who use criminal background checks or credit checks report that such checks are conducted only after a conditional job offer has been made, Aitken said.

Kate Northrup in Washington and Elizabeth E. Theran in Baltimore represented the EEOC. In addition to Maatman, Pamela Q. Devata, Matthew J. Gagnon, Jennifer A. Riley and David T. Rowland of Seyfarth Shaw in Chicago represented Kaplan.

By Kevin P. McGowan  

To contact the reporter on this story: Kevin P. McGowan in Washington at kmcgowan@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com


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