Tough competitive business concept businessman wearing boxing glThe EEOC suffered a major setback on April 9th when the Sixth Circuit Court of Appeals affirmed summary judgment in the highly watched background check case of EEOC v. Kaplan Higher Education Corporation, et al.  The Sixth Circuit chastised the EEOC for using a flawed methodology to try to prove that using credit checks as a pre-employment screen had an unlawful disparate impact against Black applicants.

The Court of Appeals ruled that the EEOC’s methodology lacked any reliable scientific basis and failed every one of the Daubert factors that courts use to evaluate the admissibility of expert testimony.  The decision raises serious questions as to whether the EEOC can prevail in other background check lawsuits if defendant companies choose to stand their ground and litigate, rather than settle under pressure from the agency.

In late 2010, the EEOC sued Kaplan in federal district court in the Northern District of Ohio for using credit checks as part of the hiring process for certain positions.  The agency charged that the use of credit history in making hiring decisions violates Title VII because the practice has a disparate impact on Black applicants.  Kaplan maintained that the use of credit checks was necessary for jobs that involve access to student financial loan information.  Kaplan ran the credit checks out of concern that individuals under financial stress might be tempted to commit unlawful acts for personal financial gain.  Kaplan began the practice after learning in 2004 that certain employees had been misappropriating student payments.

During discovery, Kaplan learned that the EEOC also runs credit checks on job applicants for 84 of the agency’s 97 positions.  The EEOC’s justification for running these checks, as explained in the EEOC’s personnel handbook, was because personal “debts increase temptation to commit illegal or unethical acts as a means of gaining funds to meet financial obligations.” (Notably, the EEOC fought vigorously against disclosing its own hiring practices, arguing that they were “wholly irrelevant” and had “no remote evidentiary value.”  The district court disagreed.)

The EEOC did not appreciate the irony of suing Kaplan for using the same type of background checks that the EEOC itself uses.  The Sixth Circuit Court of Appeals did, noting the absurdity of the EEOC’s position in the opening sentence of its opinion.  (“In this case, the EEOC sued the defendants for using the same type of background check that the EEOC itself uses.”)

In mid-2012, as the district court litigation progressed, the EEOC submitted an expert report by Dr. Kevin Murphy in an attempt to support its disparate impact theory.  After Kaplan challenged the report, Murphy submitted a second report, then a third, then despite a court order that no further reports would be permitted, Murphy submitted a fourth report and then a fifth.

The EEOC’s effort to prove that Kaplan’s credit checks discriminated against Black applicants was significantly hampered by the fact that neither Kaplan nor the background company had any data as to the race of the applicants.

Undaunted, the EEOC’s expert devised his own methodology for proving that Kaplan’s race-blind consideration of credit was racist.  Murphy subpoenaed driver’s license photos from state bureaus of motor vehicles and assembled a team of five “race raters” who visually inspected the photos and assigned each individual a race.

Kaplan, in challenging the EEOC’s methodology, pointed to the FAQ published by the EEOC on its website, where it cautions employers against using visual inspection as a means of determining race.

The district court rejected Murphy’s methodology as entirely unscientific, noting that it flunked every single requirement of the Daubert test for admissibility of expert testimony.  In January 2013, the district court granted summary judgment in favor of Kaplan, holding that the EEOC had failed to demonstrate that Kaplan’s use of credit checks had an unlawful disparate impact against Black applicants.

The EEOC did not go down quietly, filing a motion for reconsideration which was stricken by the district court, then a revised motion for reconsideration which was denied on the merits.

The case proceeded to the Sixth Circuit on appeal, and the Court of Appeals affirmed the district court’s decision on all grounds.  The Sixth Circuit ruled that Murphy’s “race rater” system was unreliable, untested, and lacked appropriate scientific controls.  The Court also concluded that the limited sample of driver’s license photos reviewed by Murphy’s team was not a representative sample of applicants.  The Court further chastised the EEOC for using visual identification as its means for determining race, while at the same time publicly instructing employers on its website of the inherent unreliability of using visual identification as a means of determining race.

The Sixth Circuit opinion’s final paragraph concisely summarizes the Court’s opinion and overall impression of the EEOC’s methods of proof:  “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 district court did not abuse its discretion in excluding Murphy’s testimony.”

The Kaplan decision is not the EEOC’s first setback in its crusade against the use of background checks by employers (that is, employers other than the EEOC).  As we blogged here, a Maryland district court in 2013 similarly slammed the EEOC’s pursuit of its disparate impact theory in light of a lack of evidence and a shoddy expert report, ultimately calling the EEOC’s lawsuit “a theory in search of facts to support it.”  The EEOC has appealed that case, captioned EEOC v. Freeman, to the Fourth Circuit Court of Appeals.  Written briefing has not yet concluded, so it will be several months before any decision is issued.

It remains to be seen whether the Kaplan decision will cause the EEOC to re-evaluate its aggressive position on the use of background checks.  A similar decision by the Fourth Circuit in Freeman could force the agency’s hand.  At a minimum, the EEOC needs to step back and reconsider whether it can continue to pursue these cases in good faith.  The inability of the agency to come up with admissible expert testimony in support of its disparate impact theory is troublesome, and federal courts have not hesitated in recent years to tag the agency with attorneys’ fees for lawsuits pursued in bad faith.

BakerHostetler will continue to blog the latest developments in background check litigation.