The Magazine

Thomas Perez Makes a Deal

How Obama’s Labor nominee made a Supreme Court case disappear

May 27, 2013, Vol. 18, No. 35 • By TERRY EASTLAND
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On November 7, 2011, the Supreme Court decided to hear Magner v. Gallagher, a case about racial discrimination in housing. Oral argument was scheduled for February 29, 2012. But shortly before that, on February 10, the case was dismissed. 

Thomas Perez

Thomas Perez

Newscom

Dismissal of a case about to be argued in the Supreme Court is unusual, but not unheard of; it happens maybe once a term. The question the Court had agreed to review in Magner was one that Thomas Perez, the assistant attorney general for civil rights, did not want the Court to decide. Making the case “go away,” as one Justice Department lawyer put it, thus became a “top priority” for Perez, as he himself said. Perez achieved it in a brisk three months. 

For more than a year now the House Committee on Oversight and Government Reform and the House and Senate Judiciary Committees have been pursuing the question of how Magner came to be dismissed and thus to evade Supreme Court review. The committees’ joint staffs released their report on April 15, just before confirmation hearings for Perez, the president’s nominee for secretary of labor, began before the Senate Health, Education, Labor and Pensions Committee. The joint staff report makes clear the outline of the Magner story, and Perez’s role is central.

The case had its origins more than a decade ago. In 2002, St. Paul, Minnesota, decided to step up enforcement of its housing code for rental properties. In 2004 and 2005, several property owners sued St. Paul in federal district court, alleging that the enhanced enforcement effort violated the prohibition of racial discrimination in the Fair Housing Act (FHA). 

The district court threw out the case, finding that the plaintiffs hadn’t made a strong enough claim for a trial. But on appeal, the U.S. Court of Appeals for the Eighth Circuit decided they had done so and reinstated their claim of “disparate impact.” The city then appealed that ruling to the Supreme Court. In taking the case, the Court asked the parties to address a question it had never resolved but which was certainly ripe: whether disparate impact claims are “cognizable under the FHA”​—​meaning, whether in St. Paul or anywhere else, they may be brought before a court.

Disparate impact is not to be confused with “disparate treatment,” the different treatment of someone because of his race or some other forbidden category, such as national origin, sex, or religion. Disparate impact targets companies and other entities for policies that are neutral and nondiscriminatory in their intent but have a disproportionate impact on people of a particular race, ethnicity, sex, or religion. For example, in a 1971 Supreme Court case, a power company was accused of discrimination because it required applicants to have a high school diploma. The policy adversely affected those lacking diplomas​—​vastly more blacks than whites. 

Disparate impact has been duly legislated in employment and some other areas, but not in housing. It is not provided for in the Fair Housing Act.

Eleven appeals courts, however, have concluded that disparate impact claims may be brought under the FHA. Parties have used the theory to challenge race-neutral actions by landlords, businesses, and local governments that affect groups differently. In Magner, the plaintiffs contended that St. Paul’s aggressive code enforcement burdened their rental businesses and decreased the amount of affordable housing in the city​—​developments, they said, that had a disparate impact on African Americans, who made up 60 to 70 percent of the city’s low-income renters.

Had Magner remained on the Court’s docket, and had the Supreme Court decided that disparate impact claims are not cognizable under the FHA, St. Paul would have won its case. But such a ruling would have denied Perez the chief tool he had been using to bring housing discrimination cases​—​a major initiative of his tenure at the Civil Rights Division. It also might have constrained his use of disparate impact in other areas, such as employment. And it could have complicated efforts elsewhere in the administration to apply disparate impact in new provinces, among them criminal background checks and school discipline.

Russlynn Ali, then the assistant secretary of education for civil rights, said during a press conference in March 2010 that “disparate impact is woven throughout civil rights enforcement in [the Obama] administration.” To continue the metaphor, the chief weaver of this thread is Perez, who holds the most important civil rights office in the government. Perez has called disparate impact “the linchpin” of civil rights enforcement.

Disparate impact theory, however, is controversial, and the reasons are evident. Disparate impact can impose liability for policies or practices that are entirely race-neutral, were adopted without discriminatory intent, and are applied fairly. The results of a policy, delineated by race, are what matter most. And if the numbers are “wrong,” then it falls to the defendant to prove that the policy or practice is necessary and that no other policy or practice with less-disparate impact can serve the defendant’s needs. Of course, those seeking to avoid being sued in the first place have alternatives. They can preemptively weaken a race-neutral policy to the point where it ceases to produce disparate outcomes. Or they can maintain the policy or practice but adjust the results to get the numbers “right”​—​in effect, adopt a racial double standard. 

In November 2011​—​the same month the Court took Magner​—​Perez wanted “to start a conversation with the City of St. Paul about [his] concerns relating to the Magner case,” according to Perez’s written answers to questions from senators. One concern was that the case lacked facts that would cast disparate impact theory in a sympathetic light. Perez also thought that the absence of a federal housing rule explicitly targeting policies and practices with disparate impact​—​though such a rule was in the works and has since been promulgated​—​could lead the justices to be less deferential to the executive branch’s use of the approach. But whether “bad facts” or the lack of the rule would have made any difference in the Court’s handling of the question in Magner​—​the validity of disparate impact​—​seems doubtful, since the more formidable difficulties for Perez’s position lay inside the Court. 

Consider that for the administration’s position on disparate impact to have prevailed in a Court review of Magner, at least five justices would have had to be willing write the theory into the FHA. But there are five justices who as a general matter believe that the authority to make law belongs to Congress, not the courts. And one of those is Justice Scalia, who in a 2009 public employment case wrote a concurrence in which he said that the disparate impact provisions in federal employment law “place a racial thumb on the scales, often requiring employers to evaluate the racial outcomes of their policies and to make decisions based on (because of) those racial outcomes.” That type of racial decision-making being discriminatory, said Scalia, the Court someday will have to decide whether the disparate impact provisions in employment law are consistent with the Constitution’s guarantee of equal protection of the laws. Writing disparate impact into federal housing law would raise the same constitutional problem for Scalia and other justices of similar judicial philosophy.

Through Minnesota connections, Perez found David Lillehaug, a former U.S. attorney serving as an outside counsel for the city. The two talked on November 23, 2011. We learn from the joint staff report that Lillehaug told the committees’ investigators that the civil rights chief discussed with him “the importance of disparate impact.” Lillehaug also said he told Perez that the United States might be suing the city in a separate case brought under the False Claims Act. The two men discussed “a potential solution,” namely that St. Paul would withdraw its petition in Magner if the Justice Department declined to intervene in the false claims case. The conversation ended with Perez indicating he would look into the case, responsibility for which lay with the Justice Department’s Civil Division.

Under the False Claims Act, a private individual​—​a “whistleblower”​—​may sue federal contractors for defrauding the government. In May 2009, Frederick Newell of St. Paul filed such a complaint, charging that the city had falsely certified its compliance with Section 3 of the Housing and Urban Development Act, which requires recipients of HUD financial assistance to provide job training, employment, and contracting opportunities to low- or very-low-income residents. Newell specifically alleged that the city had asserted on applications for HUD funds totaling almost $200 million that it had complied with Section 3, when in fact it had not done so and knew that it hadn’t.

United States ex rel. Newell v. City of St. Paul was the name of Newell’s case. By their nature, false claims cases seek to advance the interests of the United States. But the United States​—​represented by the Justice Department​—​may intervene in such cases. Justice joins no more than 25 percent of whistleblower cases, but it wins most of those it joins, and most of those it doesn’t join fail to proceed. Justice, you could say, has the job of screening out cases with deficiencies that render them unlikely to succeed, which happens to be most of them. 

Looking into the Newell case, Perez found that the three governmental entities involved in deciding whether to intervene were close to formal agreement in favor of joining the case. They reached that agreement on November 22, the day before Perez and Lillehaug first spoke. HUD, the party allegedly defrauded, wanted to intervene. So did the Civil Fraud Section in the Justice Department’s Civil Division, which is the law enforcement arm for the client agency in the case, which was HUD. And so did the U.S. Attorney’s Office in Minneapolis, which represents the government in Minnesota’s federal district court. In a memorandum recommending that the government intervene, the lawyer working the case in the U.S. Attorney’s Office wrote that HUD had “determined .  .  . the City was out of compliance with Section 3” and that “it did not appear to be a particularly close call.” 

If the United States had intervened in Newell, the “potential solution” Perez and Lillehaug had discussed would not have been possible, and Magner would not have been withdrawn from the Court’s docket. As the joint staff report shows, Perez, immediately after speaking with Lillehaug on November 23, began an arduous effort to turn around those reviewing Newell at HUD, the Civil Division, and the U.S. Attorney’s Office in Minnesota. By early January 2012 all three were in agreement: The Civil Division would decline to intervene in Newell as well as in another False Claims Act suit filed against St. Paul, United States ex rel. Ellis v. St. Paul

Meanwhile, also in early January, with oral argument in Magner scheduled for the last day of February, Perez stepped up his effort to get St. Paul to withdraw the case from the Supreme Court. According to Lillehaug, Perez presented a “roadmap” for how to get the city “to yes.” But on February 3, with “yes” still not reached, Perez flew to St. Paul to meet with the mayor and other city officials. Perez again “lobbied the mayor on the importance of disparate impact,” according to the joint staff report, while reiterating the government’s willingness not to intervene in the Newell and Ellis cases if Magner were withdrawn. City officials caucused privately and decided to accept the arrangement.

On February 9, the U.S. attorney for Minnesota filed a notice in court that the United States would not intervene in Newell. The similar filing in Ellis would come later. For now there was one thing left to be done. The next day, after three months in which Perez had relentlessly pursued his objective, St. Paul withdrew its petition in the case. Disparate impact had been saved, at least for now.

A press release from the city announcing St. Paul’s request for a dismissal of Magner focused on disparate impact: 

While Saint Paul likely would have won in the .  .  . Supreme Court, a victory could substantially undermine important civil rights enforcement throughout the nation. .  .  . The City of Saint Paul, national civil rights organizations, and legal scholars believe that, if Saint Paul prevails in the Supreme Court, such a result could completely eliminate ‘disparate impact’ civil rights enforcement, including the Fair Housing Act and the Equal Credit Opportunity Act. This would undercut important and necessary civil rights cases throughout the nation. 

Just seven weeks earlier, when it filed its brief in Magner with the Court, St. Paul had taken a far different view of disparate impact in housing, stating unequivocally, “This theory finds no support in the text of the FHA.”

During his confirmation hearing on April 18, Perez was asked about his work in getting Magner dismissed. The ranking Republican on the committee, Senator Lamar Alexander, commented that there seemed to him “an extraordinary amount of wheeling and dealing outside the normal responsibilities of the assistant attorney general for civil rights.” Indeed, there was, and it took place in a Justice Department so evidently mismanaged that its senior leadership, according to the joint staff report, “was unaware of the extent to which Perez had gone to realize his goal” until well after he achieved it.

Among the questions the Magner story raises is whether Perez did anything inherently wrong in getting the case withdrawn from the Court’s docket. And the answer is no, according to Supreme Court litigators with Justice Department experience. These litigators cautioned, however, that as a prudential matter the department wouldn’t want to try doing that often, since it could fairly be seen as an effort to game the legal process. Perhaps that is why the litigators I spoke with were hard pressed to recall any similar instance.

A second question follows: Did the Justice Department do anything wrong by linking the unrelated cases of Magner and Newell in order to have Magner pulled from the Court’s docket? The department has said that it is a “unitary actor” and may act in the “best overall interests” of the United States. That is, it may link cases if it thinks doing so necessary to vindicate the compelling interests of the United States. And that, says Justice, is what happened here. It bears noting that if a Republican had been president, the Justice Department would have had a different perception of the “best overall interests” of the United States. Almost certainly it would not have sought to save disparate impact from an adverse decision by the Supreme Court, and it might well have filed a friend-of-the-court brief in support of St. Paul. With Magner and Newell not linked, the department might even have joined Newell

And a third question: Should the United States have intervened in Newell? The Justice Department has pointed to Mike Hertz, a career lawyer in the Civil Division commonly looked to for his assessment of the merits of whistle-blower cases. Hertz, says Justice, saw Newell as a weak case not worth joining. Maybe so. But notes from an early January meeting attended by Hertz (who recently passed away) attribute to him the words “Odd​—​looks like buying off St Paul.” Hertz may have been reacting to the division’s final decision memorandum on Newell, and to the last of the factors that were considered in evaluating the case. They were: “potential evidence and witnesses, litigation risks, the lack of agency support, and policy considerations, including the City’s anticipated withdrawal of Magner [emphasis added], which would aid the Department’s civil rights enforcement.” 

The Magner story is a reminder that presidential elections matter, from the Oval Office down through the departments and agencies and their subunits. Electing Barack Obama in 2008 meant four years of Thomas Perez as the government’s chief civil rights officer. And reelecting Obama in 2012 has meant the nomination of Perez as secretary of labor.

The whole business has confirmed for Republicans in the Senate, and in the House, too, the perception that Perez is a lawyer who, in the words of Senator Orrin Hatch, has “a propensity for using the legal and judicial system to further an ideological agenda.” But absent new information about Magner or other matters still being pursued by Republicans on Health, Education, Labor and Pensions, Perez’s appointment is likely to be confirmed by the Senate. The presumption of deference that the Senate historically has extended to the president’s executive-branch nominations has been so tested by the choice of Perez, however, that the committee vote on his nomination last week split along party lines: Not a single Republican voted for it. 

Out in the country, the pursuit of disparate impact,
of racial proportionalism, proceeds apace. The township of Mount Holly, New Jersey, has asked the Supreme Court to hear its appeal of a decision against the city sustaining a disparate impact claim. Here again, the validity of the theory is the issue. The Court is still weighing whether to take the case and has asked the solicitor general for his opinion on the question. The mayor of Mount Holly has publicly signaled his interest in settling the case.

Has the mayor heard from the same groups that counseled the mayor of St. Paul? And maybe also from Perez himself? Two months ago congressional investigators asked Perez and two HUD officials about the Mount Holly case. Administration lawyers told them not to answer.

Terry Eastland is publisher of The Weekly Standard.


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