PATRICK O. OJO, Attorney, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. FARMERS GROUP, INC.; FIRE UNDERWRITERS ASSOCIATION; FIRE INSURANCE EXCHANGE; FARMERS UNDERWRITERS ASSOCIATION; FARMERS INSURANCE EXCHANGE, Defendants-Appellees.
No. 06-55522
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
May 12, 2009
5697
Opinion by Judge Pregerson; Dissent by Judge Bea
D.C. No. CV-05-05818-JFW. Appeal from the United States District Court for the Central District of California. John F. Walter, District Judge, Presiding. Argued and Submitted November 6, 2007—Pasadena, California.
FOR PUBLICATION
Appeal from the United States District Court for the Central District of California John F. Walter, District Judge, Presiding
Argued and Submitted November 6, 2007—Pasadena, California
Filed May 12, 2009
Before: Myron H. Bright,* Senior Circuit Judge, Harry Pregerson and Carlos T. Bea, Circuit Judges.
Opinion by Judge Pregerson; Dissent by Judge Bea
*The Honorable Myron H. Bright, Senior United States Circuit Judge for the Eighth Circuit, sitting by designation.
COUNSEL
Harriet S. Posner, Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California, for the defendants-appellees.
OPINION
PREGERSON, Circuit Judge:
I. Introduction
Patrick L. Ojo (“Ojo”), on behalf of himself and all others similarly situated,1 appeals the district court’s dismissal under
Ojo, an African-American resident of Houston, Texas, alleges that Farmers used “a number of undisclosed factors” to compute credit scores and price homeowners’ insurance policies. As a result, “Farmers charged minorities higher premiums for homeowners’ property and casualty insurance than the premiums charged to similarly situated Caucasians.” Farmers moved to dismiss the Complaint under
In dismissing Ojo’s claim, the district court erred in two respects. First, the district court erroneously read Ojo’s claim as challenging the practice of credit scoring per se. Second, the district court erroneously interpreted Texas state insurance law as permitting disparate impact race discrimination that results from credit scoring, thereby triggering McCarran-Ferguson reverse-preemption.
We have jurisdiction pursuant to
II. Background
A. The Class Action Complaint
Patrick L. Ojo is an African-American resident of Houston, Texas, and the owner of a homeowner’s property and casualty policy issued by Farmers Group, Inc.5 In
According to Ojo, “[o]vеr the years” Farmers has employed “geographical distinctions” and “various other artifices” to “identify and target minorities for the purpose of charging minorities higher premiums . . . than the premiums charged to similarly situated Caucasians.” Specifically, he contends that the credit scoring system is a formula that uses “a number of undisclosed factors” to produce a credit score for each applicant for homeowners’ property and casualty coverage.6 The
Complaint further alleges that “[m]inorities as a group have lower credit scores than whites,” and that the “effect of Farmers’ credit scoring system is that minorities are charged [disparately] higher prices” in violation of the federal FHA.7
Ojo also alleges that Farmers has “vigorously defended” its use of this credit scoring system as “actuarially sound,” whilst keeping secret the formula, the actuarial basis for the formula, and the specific credit factors which impact a policyholder’s score. The result is that “the price an individual pays for a policy is largely dependent on a secret credit score allegedly justified by secret actuarial information.” As a result of Fаrmers’ unlawful practices, Ojo and those similarly situated “have lost and face losing millions of dollars in premiums paid” as a result of “overcharges due to racial discrimination.”
B. The McCarran-Ferguson Act
The McCarran-Ferguson Act (“McCarran-Ferguson” or “Act”) provides that “[t]he business of insurance . . . shall be subject to the laws of the several States which relate to the regulation or taxation of such business.”
regulating the business of insurance.”
The Supreme Court has outlined the analytical framework for McCarran-Ferguson questions: “When federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state
The Supreme Court has defined the terms “invalidate, impair, [and] supersede” as they are enumerated in McCarran-Ferguson. “Invalidate” is defined as “render[ing] ineffective, generally without providing a replacement rule or law.”
Humana, 525 U.S. at 307. “Supersede” is defined as “displac-[ing] (and thus render[ing] ineffective) while providing a substitute rule.” Id.
As for “impair,” Humana concluded that Congress did not intend for state insurance laws to completely and automatically preempt any federal statute not specifically directed at insurance regulation. 525 U.S. at 308 (“We reject any suggestion that Congress intended to cede the field of insurancе regulation to the States, saving only instances in which Congress expressly orders otherwise.”). While states have “administrative regimes and mechanisms in place to regulate insurance [fraud], the question is not whether the state administrative regime has ‘occupied that field.’ Instead, the question is whether the [state and federal] regulatory goals are in harmony.” Dehoyos, 345 F.3d at 299 (quoting Humana, 525 U.S. 299).
Humana also held that when state law proscribes conduct similar to that proscribed by federal law, the fact that federal law provides different or stronger remedies does not bar application of federal law. Humana, 525 U.S. at 311-13 (emphasis added). In such circumstances, federal law complements, rather than impairs, frustrates or interferes with state law. Id. at 313.
C. The Federal Fair Housing Act
[1] The federal Fair Housing Act states that it is unlawful “[t]o discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status, or national origin.”
The Sixth and Seventh Circuits recognize that the FHA’s ban on racial discrimination extends to the underwriting of
[2] While the federal FHA applies to cases involving discriminatory denials of homeowners’ insurance to persons based on race, the Act is not specifically directed at insurance regulation. See Cisneros, 52 F.3d at 1360-61 (“[B]ecause the [FHA] does not mention insurance, it is covered by the McCarran-Ferguson Act and cannot be construed . . . to invalidate, impair or supersede any state law enacted to regulate the business of insurance”); Am. Family Mut. Ins. Co., 978 F.2d at 298 (recognizing that the Fair Housing Act “does not mention insurers”).
D. Texas State Law
[3] Like most states, Texas has a statutory scheme regulating the business of insurance. The Texas Insurance Code broadly prohibits unfair discrimination in the premium rate charged for insurance bеcause of “race, color, religion or national origin,” as well as “age, gender, or disability.”
A person may not refuse to insure or provide coverage to an individual, refuse to continue to insure or provide coverage to an individual, limit the amount,
extent, or kind of coverage available for an individual, or charge an individual a rate that is different from the rate charged to other individuals for the same coverage because of the individual’s:
(1) race, color, religion, or national origin;
(2) age, gender, marital status, or geographic location; or
(3) disability or partial disability.
Subsection (c) of § 544.003 provides another exception to § 544.002: an insurer does not violate the unfair discrimination рrovision of § 544.002(a)(2) or (3) if the “refusal, limitation, or charge” is otherwise “required or authorized by law or a regulatory mandate.”9
fied in
Farmers attempts to invoke the public filing requirements, enumerated in
[4] Moreover, the 2003 Texas credit scoring legislation imposes another critical limitation on insurers doing business in that state. An insurer “may use credit scoring, except for factors that constitute unfair discrimination, to develop rates, rating classifications, or underwriting criteria.”
tion.”
The 2003 credit sсoring law also empowers the Texas Commissioner of Insurance (“Commissioner”) to “adopt rules that prescribe the allowable differences in rates charged by insurers due solely to the difference in credit scores.”
III. Standard of Review
We review de novo a district court’s dismissal of a case on federal preemption grounds. Olympic Pipe Line Co. v. City of Seattle, 437 F.3d 872, 877 n.12 (9th Cir. 2006); Williamson v. Gen. Dynamics Corp., 208 F.3d 1144, 1149 (9th Cir. 2000). We also review de novo a district court’s interpretation of federal statutes. Olympic Pipe Line Co., 437 F.3d at 872.
IV. Discussion
As stated earlier, the district court erred in two respects. First, it erroneously read Ojo’s Complaint as challenging credit scoring per se, when in fact Ojo challenges only Farmers’ use of certain “undisclosed factors” in credit scoring and the disparate impact that resulted. Second, the district court erred in concluding that Ojo’s claim was reverse-preempted by the McCarran-Ferguson Act.
A. The District Court Erred by Misinterpreting Ojo’s Complaint
When reviewing a Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction, “we must accept all fаctual allegations in the complaint as true.” Carson Harbor Village, Ltd. v. City of Carson, 353 F.3d 824, 826 (9th Cir. 2004); Wolfe v. Strankman, 392 F.3d 358, 362 (9th Cir. 2004). As the district court acknowledged, this requires a reviewing court to construe the “allegations in the complaint in the light most favorable to the plaintiff.” Ojo v. Farmers Group, Inc., 2006 WL 4552707 at *3 (citing Doe v. Mann, 285 F.Supp.2d 1229, 1232 (N.D. Cal. 2003)).
Ojo’s Complaint alleges that Farmers’ “credit scoring system has a disparate impact on minorities” because it uses “a number of undisclosed factors” and has resulted in “minorities [being] charged higher premiums for [p]olicies than Caucasians.” Nowhere does the Complaint challenge credit scoring per se. Despite the lucidity of the Complaint, the district court nonetheless concluded that Ojo “challenges the very practice of credit scoring.”10 Ojo at *16. On that basis, the district court concluded that, if Ojo prevailed, then “his victory would likely render ineffective—and certainly frustrate and interfere with—Texas’s . . . use of credit scoring models that are actuarially sound.”11 Id.
[5] Read in the light most favorable to Ojo, the Complaint does not advance an “all or nothing” challenge to the practice of credit scoring. The Complaint alleges only that certain “undisclosed factors” used by Farmers in its credit scoring system produces a disparаte impact on minorities. Therefore, the district court erred in concluding that Ojo’s claim “impaired” Texas state law because the claim challenged credit scoring per se.
B. The District Court Erred in Dismissing Ojo’s Claim Based on McCarran-Ferguson Reverse-Preemption
[6] A claim is reverse-preempted by McCarran-Ferguson when a federal law of general applicability conflicts with a state
[7] The district court properly concluded that the first two prongs of the McCarran-Ferguson framework were satisfied: (1) the federal FHA is a law of general applicability; and (2) both the Texas Insurance Code and Texas’s subsequent 2003 credit scoring law were enacted specifically to regulate insurance. As to the third prong, however, we hold that the district court erred in concluding that the federal FHA would “invalidate, impair, or supersede” Texas’s state insurance law.
We review whether the district court was correct in concluding that Ojo’s federal FHA claim “impairs” Texas state
law. As the district court stated, “[t]he question thus becomes whether Texas’s [2003 credit scoring law] ‘requires or authorizes’ insurers to . . . charge different rates on the basis of credit information such that they are exempt from the general prohibition on discrimination set forth in Section 544.002 [of the Texas Insurance Code].” Ojo at *11.
[8] The district court recognized that the 2003 “credit scoring [law] does not explicitly authorize the alleged disparate impact that results from credit scoring.” Ojo at *30 n.42. But based on its statutory analysis, the district court read the phrase in question, “except for factors that constitute unfair discrimination,”
In interpreting the phrase “unfair discrimination,” the district court applied Texas’s rules of statutory construction: “[w]hen a stаtute is ambiguous, Texas courts ‘must consider all laws in pari materia, meaning we are to consider all laws related to the subject of the act and the general system of legislation of which the act forms a part.’ ” Ojo at *13 (citing Collins v. City of El Paso, 954 S.W.2d 137, 147 (Tex. App. 1997)). The district court stated, “[o]ur objective is to ‘ascertain the consistent purpose of the [Texas] legislature in the enactment of the laws and to carry out the legislative intent by giving effect to all laws bearing on the same subject matter.’ ” Id. “ ‘The cardinal principle of statutory construction is to save and not to destroy. It is [the court’s] duty to give effect, if possible, to every clause and word of a statute, rather than to emasculate an entire section . . . .’ ” Estate of Reynolds v. Martin, 985 F.2d 470, 473 (9th Cir. 1993) (quoting United States v. Menasche, 348 U.S. 528, 538-39 (1955)).
First, while the district court properly referred to the statutory construction principle of “consider[ing] all laws,” the court failed to abide by that principle. In interpreting the phrase in question, “unfair discrimination,” the district court failed to consider other important provisions within Texas law and its legislative history which prohibit “unfair discrimination” based on race.
[9] The most significant oversight was the district court’s failure to consider that Texas’s own Fair Housing Act prohibits disparate impact race discrimination.
[10] In enacting the Texas FHA, the Texas legislature sought to “provide rights and remedies substantially equivalent to those granted under federal law.”12
identical to the federal regulation that banned both intentional and disparate impact race discrimination by insurers in “refusing to provide” property insurance or providing such insurance “differently.”
Considering all laws in pari materia, Collins, 954 S.W.2d at 147, we would be remiss in recognizing the Texas FHA’s prohibition against disparate discrimination while condoning the district court’s interpretation that Texas’s credit scoring law permits the same. In failing to consider the Texas FHA, the district court erroneously concluded that the phrase “unfair discrimination,” read in light of Texas’s general system of legislation, permits disparate impact race discrimination by insurers.
The district court also failed to consider another Texas law that prohibits race-based discrimination: Texas Insurance Code article 1.02. Article 1.02(c)(3) states that an insurance rate is “unfairly discriminatory” if it is (i) not actuarially sound, (ii) not correlated to risk, “or” (iii) based “in whole or in part” on race.
Second, in addition to failing to consider “all laws in pari materia,” the district court failed to apply the “cardinal principle” of statutory construction: “to save and not to destroy.” Applying that rule to the phrase “except for factors that constitute unfair discrimination” necessitates the conclusion that Texas insurance law prohibits all forms of “unfair discrimination,” and not just one. Farmers, by contrast, urges us to bifur-
cate the phrase into two parts—disparate treatment and disparate impact discrimination—and to give meaning to one while flatly dismissing the other.13 But we must “ ‘give effect to [a]
[11] Third, the district court overlooked that Texas’s 2003 credit scoring laws themselves were designed to “prevent discrimination.” The district court stated that the Texas legislature “authorized the practice of credit scoring to help ‘creat[e] a transparent process that would protect consumers and prevent discrimination.’ ” Ojo at *14 (citing TX B. An., S.B. 14, 5/21/2003).
[12] It is difficult to imagine that a state legislature would at once seek to proscribe insurance practices that are “unfairly discriminatory as to race, color, religion, ethnicity, or national
origin,” and explicitly seek to “prevent discrimination,” while permitting insurers to use a credit scoring system that results in disparate impact race discrimination. While the district court is correct that Texas’s “clear legislative desire [was] to authorize at least some use of credit scoring,” Texas’s numerous prohibitions against any type of race-based discrimination certainly do not support the conclusion that the Texas legislature intended to permit disparate impact race discrimination.
Fourth, the district court erred in concluding that, because Texas law permits “differences in rates . . . due solely to credit scoring” so long as the differences are “based on sound actuarial principles,”
The Eleventh Circuit’s decision in Moore v. Liberty Nat’l Ins. Co, 267 F.3d 1209, 1222 (11th Cir. 2001) is instructive. In interpreting whether McCarran-Ferguson reverse-preempted insurance discrimination
We have not been directed to any relevant Alabama authority that has required, condoned, or suggested that racial distinctions in the provision of life insurance are acceptable. Indeed there is nothing in Alabama’s insurance law that directs or encourages insurers to engage in such practices . . . .
Moore, 267 F.3d at 1222. Similar to the Texas law at issue here, the Alabama law at issue in Moore forbade “unfair discrimination” between individuals that occupied the same class of risks. Id. at 1220. In an argument similar to the one that Farmers posits, the insurer in Moore argued that Alabama permitted racial discrimination so long as it was actuarially based. Id. at 1220-21. The Eleventh Circuit rejected the insurer’s argument and refused to “construe Alabama’s scheme of insurance regulation in such a formalistic and narrow way.” Id. at 1221.
[13] The Moore court concluded that, “absent . . . convincing evidence that racial discrimination in the insurance context is an integral part of Alabama’s regulatory scheme,” no direct conflict exists between the federal FHA and Alabama state law. Id. at 1222-23. Therefore, Moore’s claims were not reverse-preempted by McCarran-Ferguson.15 Because Texas law is similarly bereft of evidence that Texas “encourage[s] or condone[s] racial distinctions in thе provision of . . . insurance,” Moore, 267 F.3d at 1222, we hold that the federal FHA and Texas FHA are in regulatory harmony. Ojo’s claim is therefore not reverse-preempted by McCarran-Ferguson.
Dehoyos v. Allstate Corp., 345 F.3d 290, 293 (5th Cir. 2003), further corroborates our decision. In Dehoyos, six non-Caucasian policyholders alleged that an insurance company’s credit scoring system “targeted” minorities by placing them in more expensive policies based on credit report information. Plaintiffs brought a class action asserting violations of the federal FHA and of
Our case is analogous to Dehoyos.16 Here, Farmers has not identified any “declared policy goal” within Texas state law that permits disparate impact race discrimination. While Dehoyos was decided at a “preliminary stage of litigation” during which the district court decided not to differentiate between disparate treatment and disparate impact claims, Dehoyos, 345 F.3d at 299 n.7, the court nonetheless rejected the insurer’s сlaim that “disparate impact
Lastly, we note the importance of a case decided after the district court decided Ojo. In Lumpkin v. Farmers Group, Inc.
Inc., No. 05-cv-02868-SHM (W.D. Tenn. April 16, 2007, reconsideration denied July 6, 2007), a case involving an almost-identical set of facts as those before us, the district court held that Tennessee state insurance law—which is almost identical to Texas insurance law—created no distinction between intentional and disparate impact discrimination. On that basis, the Lumpkin district court denied the insurer‘s motion to dismiss based on McCarran-Ferguson reverse-preemption.
Lumpkin, an African-American plaintiff, on behalf of herself and all others similarly situated, brought a class action against Farmers alleging disparate impact race discrimination in the issuance and pricing of homeowners’ insurance policies, in violation of the federal Fair Housing Act. In a claim almost identical to Ojo‘s, Lumpkin alleged that Farmers’ credit scoring system resulted in disparately high premiums charged to racial minorities than those afforded to similarly situated Caucasians. Lumpkin, Order Denying Def.‘s Motion to Dismiss (“Order Denying MTD“) at 3. Farmers moved to dismiss on the grounds that McCarran-Ferguson barred Lumpkin‘s claim because Tennessee law prohibited disparate treatment discrimination, but not disparate impact. Id.
For purposes of the McCarran-Ferguson analysis, we note that Tennessee insurance law is almost identical to its Texas counterpart.18 In pertinent part, Tennessee prohibits insurers from using an “insurance score that is calculated using . . . [an] ethnic group” as a negative factor in any insurance scoring methodology. Id. at 13. Similarly, Texas prevents an insurer from calculating a credit score using “factors that constitute unfair discrimination,”
In denying Farmers’ motion to dismiss, Lumpkin expressly rejected Farmers’ reading of Tennessee law—the same reading that Farmers’ urges us to adopt here. Lumpkin, Order Denying Mot. for Recons. at 16. There, the phrase that required interpretation was “unfairly discriminatory.” Id. Just as the district court did here, Lumpkin looked to other provisions of state law to interpret whether “unfairly discriminatory” permitted disparate impact race discrimination. The Lumpkin court concluded that Farmers “fail[ed] to show how Tennessee . . . permits disparate impact in insurance rates between Caucasians and non-Caucasians.” Id. at 17.
The Lumpkin court went on to explain that a “distinction between intentional discrimination and disparate impact [discrimination]
The Lumpkin court criticized Farmers for reading the phrase “unfairly discriminatory” “too broadly to permit disparate impact as long as the rates are actuarially sound.” Id. It stated that “the goals of federal and Tennessee law are the same, preventing impermissible racial and ethnic discrimination,” and that “the two bodies of law can be applied in harmony to effect that purpose.” Order Denying MTD at 14. Lumpkin is indistinguishable from the case here: the goals of the federal FHA and Texas FHA, including the 2003 credit scoring law, are to prevent unlawful discrimination based on race, regardless of whether the discrimination involves disparate treatment or disparate impact.
V. Conclusion
[14] The district court erred by misconstruing Ojo‘s Complaint as challenging credit scoring per se, when in fact it only challenged Farmers’ use of credit scoring that resulted in disparate impact discrimination against minorities. The district court also erred in interpreting Texas‘s 2003 credit scoring law as permitting disparate impact race discrimination despite evidence that the Texas legislature intended to prohibit insurers from engaging in “unfair discrimination.” Because Ojo‘s federal FHA claim was not reverse-preempted by McCarran-Ferguson, the district court erred in dismissing Ojo‘s Complaint under
[15] We therefore reverse and remand to the district court to allow Ojo‘s federal FHA claim to proceed.
REVERSED AND REMANDED.
BEA, Circuit Judge, dissenting:
I respectfully dissent because the district court got it precisely right: Ojo‘s complaint does not state a valid claim for relief because it does not allege that Farmers uses any race-based considerations in its credit scoring system for the computation of insurance premiums. That is an essential allegation in a disparate treatment claim under the Fair Housing Act (“FHA“),
Ojo does allege that Farmer‘s race-neutral policy of using credit scores to price insurance policies results in a disparate impact on racial minorities. To make out a claim under Texas law, Ojo needs to allege that Farmers uses race either (1) directly to price policies or (2) as a factor in determining a credit score that is used to price policies. Tеxas law allows the use of credit scores to price policies where race is not a factor in the computation of the credit score, even if such use happens to
Accordingly, the application of a federal law, such as the FHA, which does not allow such use of credit scores if the credit scores have a disparate impact would invalidate, impair, or supersede Texas law. Thus, under the McCarran-Ferguson Act, the district court was correct when it found that Texas law reverse preempts the claims Ojo makes under federal law, and was correct in dismissing the case for lack of federal jurisdiction.1
The majority holds two things: (1) Ojo‘s complaint adequately states a claim for relief for disparate impact racial discrimination in violation of the FHA; and (2) Texas insurance law does not apply to effect a reverse preemption of the FHA because Ojo has alleged that “undisclosed factors” were used by Farmers in computing its credit scoring. Those undisclosed factors, as alleged by Ojo, are interpreted by the majority as perhaps including race-based considerations. Such race-bаsed considerations would be equally illegal under the FHA and Texas insurance law. Where both state and federal law prohibit a practice, the McCarran-Ferguson Act does not provide for reverse preemption. Therefore, the majority reasons, if discovery uncovers that race-based considerations were a factor in Farmers‘s credit scoring algorithms, and such credit scores caused disproportionately higher insurance premiums to be charged to racial minorities, then Ojo has alleged a valid class action claim under both federal and Texas law. This reasoning sounds like it runs on rails, but there are actually several problems with it.
Ojo Failed to Plead a Disparate Impact Claim Under Texas Law Because, under Texas Law, There Is No Such Thing
The majority correctly describes Ojo‘s complaint as a disparate impact claim under the FHA. In paragraph 18 of his complaint, Ojo directly complained of Farmers‘s
The automated credit scoring program has an adverse impact on minorities. Minorities as a grоup have lower credit scores than whites. The effect of Farmers’ credit scoring system is that minorities are charged higher premiums.
As is clear from this allegation, the majority is simply wrong when it says that Ojo does not challenge Farmers’ use of credit scores per se. That is exactly what the above allegation challenges.
A measure has a disparate impact on a racial group when its effect has a higher incidence in that group than in similarly situated groups of other races. There are no disparate impact cases under the FHA (Title VIII). The closest cases are found in federal employment discrimination cases (Title VII).
By citing Ojo‘s allegations of “undisclosed factors” which perhaps could be race-based considerations, the majority appears to confuse disparate treatment and disparate impact claims. Unlike a disparate treatment claim, a disparate impact discrimination claim does not require proof of intentional racial discrimination. Watson v. Fort Worth Bank & Trust, 487 U.S. 977, 986 (1988). In federal disparate impact cases under Title VII, after the plaintiff makes a prima facie showing that a facially neutral practice has a disparate impact on racial minorities, the burden of proof shifts to the defendant to justify the practice as a business necessity. Connecticut v. Teal, 457 U.S. 440, 446-47 (1982).
Even under statutes that allow an action for claims based on disparate impact, such as Title VII, not all measures that have a disparate impact are actionable. For instance, in Association of Mexican-American Educators v. California, 231 F.3d 572, 584 (9th Cir. 2000) (en banc), we held that where the State gave teachers a legitimate test of the skills needed for their positions, the state had a valid affirmative defense that its test was a “business necessity.” This is also the statutory standard under Title VII—an employer can defend a prima facie disparate impact case by proving business necessity. Thus, the state was not liable.
By contrast, where a test was given that did not relate to the skills needed for the position, that measure was actionable. “[D]iscriminatory tests are impermissible unless shown, by professionally acceptable methods, to be predictive of or significantly correlated with important elements of work behavior which comprise or are relevant to the job or jobs for which candidates are being evaluated.” Albemarle Paper Co. v. Moody, 422 U.S. 405, 431 (1975).
Texas insurance law differs from federal law when the practice being сhallenged is the use of credit scores to price homeowners insurance. Texas law allows the use of credit scores, without an insurance company having to prove in each case that the use of credit scores satisfies a business necessity. In effect, Texas law has already decided that the use of credit scores to price homeowners insurance constitutes a valid business necessity; a defendant does not have to prove such business necessity in each case. The Texas Insurance Code specifically allows an insurer to use a policy holder‘s credit score in the pricing of its policies, so long as the insurance company does not use race as a factor in computing the credit score:
An insurer may use credit scoring, except for factors that constitute unfair discrimination, to develop rates, rating classifications, or underwriting criteria
regarding lines of insurance subject to this chapter.
Texas law also provides that the use of credit scores is allowed even if it has a disparate impact on racial minorities. Subsection (c) of § 544.003 states, “A person does not violate Section 544.002 [unfair discrimination based on race] if the refusal, limitation, or charge is required or authorized by law or a regulatory mandate,” as is the use of credit scores.
Given that Texas law specifically authorizes the use of credit scores, even if that practice results in a disparate impact on racial minorities, application of the FHA—which would require a defendant to justify the use of credit scores as a business necessity in each case—would invalidate, impair, or supersede the application of Texas law. This means that under the McCarran-Ferguson Act, Texas law reverse-preempts the FHA. Because Ojo cannot rely on federal law, the district court lacked federal jurisdiction.
To avoid the application of the McCarran-Ferguson Act, Ojo needed to have alleged a practice that violated not only federal law, but also Texas law. What Ojo needed to have alleged is that Farmers uses race-based considerations in its credit scoring algorithms.
Which brings us to the question on which this case turns: Did Ojo adequately allege that Farmers‘s credit scoring uses race-based considerations when he alleged Farmers used “unclosed factors” in computing a policyholder‘s credit score? Under the pleading standards set forth in Bell Atlantic, Inc. v. Twombly, 127 S. Ct. 1955, 1964-65 (2007), the answer is clearly “No.”
Ojo Did Not Plead a Claim of Racial Discrimination
The majority holds that when a plaintiff pleads the defendant is doing something unknown to harm the plaintiff, the court can fill in the missing facts and presume the plaintiff has pleaded the facts necessary to state a claim for relief. This holding could have far reaching implications because now the great unknown would conceivably save every complaint from a motion to dismiss.
Perhaps recognizing that Ojo does not have a valid disparate impact claim, the majority actually fills in the gaps in Ojo‘s complaint to provide him with a disparate treatment claim.
Both the FHA and Texas law contain provisions prohibiting discrimination based on race in certain commercial situations. The FHA does not directly address the sale of homeowners insurance, but it does state it is unlawful to discriminate against any person in the provision of services in connection with the sale or rental of a dwelling because of that person‘s race.
Our court has not yet decided whether the FHA applies to discrimination claims with respect of the sale of homeowners insurance. The Sixth and Seventh Circuits have decided the FHA does apply to a disparate treatment claim in the sale of homeowners insurance. See Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351, 1359 (6th Cir. 1995); NAACP v. Am. Family Mut. Ins. Co., 978 F.2d 287, 290 (7th Cir. 1992). The Fourth Circuit held the FHA does not apply to homeowners insurance. Mackey v. Nationwide Ins. Cos., 724 F.2d 419, 424 (4th Cir. 1984).2 The majority wisely refrains from deciding whether the FHA applies to either a disparate treatment claim or a disparate impact claim in the sale of homeowners insurance.
Under Texas insurance law an insurance company cannot use race as a factor in setting premiums. See
But Ojo does not allege that Farmers uses race either directly to set pricing or indirectly as a factor in its calculation of a policyholder‘s credit score, which is in turn used to set pricing. All he alleges is that certain “undisclosed factors” are used. The Supreme Court has made clear that a complaint‘s “[f]actual allegations must bе enough to raise a right to relief above the speculative level.” Bell Atlantic, 127 S. Ct. at 1964-65 (citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-36 (3d ed. 2004) (“The pleading must contain something more than a statement of facts that merely creates a suspicion of a legally cognizable right of action.“)).
In Bell Atlantic, the Court held that allegations of parallel conduct by the defendants in an antitrust case were insufficient to survive a motion to dismiss because that parallel conduct could just as easily result from sound business decisions independently made by each defendant, as from an agreement to collude with one another to fix prices.
It is just as plausible that the undisclosed factors upon which Farmers relies in its credit score computations are race-neutral. The disparate impact could as easily be caused by a legacy of historical societal discrimination and mistreatment, with which Farmers had nothing to do. To state a claim of disparate treatment, the complaint must allege that Farmers uses race as a factor in computing credit scores.
Here, to remedy Ojo‘s deficient complaint, the majority reads disparate racial treatment allegations into Ojo‘s comрlaint—and does so without a great deal of sense given that an insurance company‘s credit scoring methodology is not undisclosed; it is a matter of public record filed with the Texas Insurance Commissioner.
Insurance companies in Texas using credit scores to price their policies are required to disclose certain credit scoring information, notify applicants of any adverse actions, and file the company‘s credit scoring models with the Commissioner of Texas Department of Insurance, who is authorized to resolve any disputes.
Because this appeal from the district court‘s grant of a motion to dismiss requires us to accept the facts pleaded by the plaintiff as true, we accept that minorities as a group have lower credit scores than non-minorities. But we need not accept that minorities’ lower credit scores are caused by Farmers using race as a factor in the computation of credit scores because no such allegation is pleaded. Only speculation can bridge the gap between the facts pleaded in Ojo‘s complaint and the majority‘s conclusion that Ojo sufficiently stated a claim for disparate racial treatment.
Since Ojo‘s complaint does not allege that Farmers intentionally discriminated against minorities based on race, and it does not allege that Farmers used race as a factor in computing credit scores, Ojo has not alleged a cognizable claim of racial discrimination based on disparate treatment. We cannot imply such allegations where none exist. We especially ought not imply such allegations where the plaintiff was given leave to amend his complaint and did not do so, as Ojo did.3
The pleading standards of Bell Atlantic apply to this case because this is a сlass action, which raises a high risk of abusive discovery. The Court has held that, “[o]n certain subjects understood to raise a high risk of abusive litigation, a plaintiff must state factual allegations with greater particularity than Rule 8 requires.” 127 S. Ct. at 1974 n.14 (citing
But even under the lesser standard of
It‘s as simple as this: Bell Atlantic laid down the rules for class action pleading. Class action litigation is too expensive to allow a plaintiff to engage in discovery unless and until the plaintiff can at least in good faith allege the defendant has done something prohibited by law.
Ojo has not done so here. For that reason, I would affirm the district court, and respectfully dissent from the majority opinion