A company’s executives may know full well that their management isn’t racist or sexist. But, faced with the prospect of a lawsuit, many cave—just to avoid bad publicity and the possibility of embarrassment in court.
Although there isn’t much to cheer about on the economic front, the Supreme Court’s June ruling in a Wal-Mart case is good news for the economy. It has made it easier for companies to protect themselves against trumped up charges of discrimination. In the long run, this will free up money, which otherwise might have lined the pockets of trial lawyers, for productive use.
As the Wall Street Journal observes in a piece on “The Wal-Mart Ripple Effect:”
The Supreme Court did America's struggling economy a service in June in Wal-Mart v. Dukes, the unanimous ruling that curbed the trial bar's ability to level frivolous class-action discrimination lawsuits against employers. Now the case is rippling through the lower courts and having the same salutary effects on similar cases leveled against lenders.
The Wal-Mart suit has already had an effect on the outcome of two recent and little-noticed district court decisions. Plaintiffs in these lawsuits often present statistics claiming to show “disparate impact” of an institution's behavior or policy on a class of people. In one of these cases, U.S. District Judge Eduardo C. Robreno, presiding over a suit against a bank brought under the Fair Housing Act or the Equal Credit Opportunity Act, noted that the "disparate impact" figures did not take into consideration credit-related factors. In other words, the people “discriminated” against weren’t likely to be able to repay the loans.
Ordinarily, the bank would settle out of court. Not this time: “But Dukes created a brand new legal world.” Not only that, but the judge noticed something interesting in the proposed settlement:
In January U.S. District Judge Eduardo C. Robreno, presiding over National City, noticed the proposed settlement included $75,000 payments each to the National Council of La Raza and Neighborhood Housing Services of Chicago, and he wanted to know why. That's a good question, given that those groups weren't harmed by the alleged discriminatory lending. While he was considering the parties' responses, the Dukes decision came down.
Groups that engage in racial politics often make money from these suits, even if nobody associated with their organization was affected. It’s a kind of legal shake-down of business.
Judge Robreno cited the Wal-Mart case, as did Judge Maxine Chesney in a case against Wells Fargo Residential Mortgage Lending. In this case, too, not making the loans was good policy rather than discrimination. One man, for example, had sought a 90 percent loan, despite having bad credit.
The editorial concludes:
These decisions are a setback for the trial bar, which had much at stake in both cases. National City Bank's class of plaintiffs exceeded 153,000 people; for Wells, more than a million. Both cases featured several of the same plaintiffs firms, which hoped for a giant payday from banks across the country….
More importantly, Wells and National City Bank represent a direct challenge to the Obama Administration's Department of Justice, which founded a "fair lending" unit in January 2010 to pursue banks for discriminatory lending and other practices. The unit, headed by Special Counsel Eric Halperin, uses disparate impact theory to allege discrimination against minorities. As in the pre-Dukes world, banks have chosen to settle these cases, reaping millions of dollars for politically favored community groups.
Speaking at a National Mortgage News conference in Washington last month, Mr. Halperin said fair lending is a "top priority" for the Justice Department and pledged to bring more "enforcement actions." To do so successfully, he'll have to show that the legal reasoning underpinning Dukes, an employment case, shouldn't be applied to lending cases.
Wells and National City Bank suggest that's a hard, if not impossible, argument to make. Banks that end up on Mr. Halperin's target list have a better opportunity to win in court, rather than merely surrender to political intimidation.