Market power and inequality: A competitive conduct standard for assessing when disparate impacts are unjustified

California Law Review

Volumn 95, Issue 3, 2007, Pages 669-720

  Ayres, Ian ^a  

^a YALE UNIVERSITY   (United States)

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EID: 34548620000     PISSN: 00081221     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (217)

1. The disparate impact and disparate treatment causes of action have distinct elements. Disparate treatment litigation challenges employer policies that are contingent on race, sex or some other protected characteristic. Disparate impact plaintiffs in contrast do not need to prove race-contingent policies. To make out a prima facie case plaintiffs need only prove that a defendant's policy disparately impacts a protected group. See 42 U.S.C. §§ 2000a - 2000h-6 (2000).
2. Christine Jolls, Antidiscrimination and Accommodation, 115 HARV. L. REV. 643, 655 (2001);
3. see also Steven R. Greenberger, A Productivity Approach to Disparate Impact and The Civil Rights Act of 1991, 72 OR. L. REV. 253, 257 (1993);
4. Andrew C. Spiropoulos, Defining the Business Necessity Defense to the Disparate Impact Cause of Action: Finding the Golden Mean, 74 N.C. L. REV. 1479, 1484 (1996).
5. See, e.g., Linda Lye, Title VII's Tangled Tale: The Erosion and Confusion of Disparate Impact and the Business Necessity Defense, 19 BERKELEY J. EMP. & LAB. L. 315, 349 (1998); see also Wards Cove Packing v. Atonio, 490 U.S. 642, 671 (1989) (Stevens, J., dissenting).
6. See, e.g., Robert Belton, The Dismantling of the Griggs Disparate Impact Theory and the Future of Title VII: The Need for a Third Reconstruction, 8 YALE L. & POL'Y REV. 243, 243-44 (1990);
7. Pamela L. Perry, Two Faces of Disparate Impact Discrimination, 59 FORDHAM L. REV. 523, 582-83 (1991).
8. S. 2104, 101st Cong. (2d Sess. 1990).
9. See, e.g., Neil A. Lewis, President's Veto of Rights Measure Survives By 1 Vote, N.Y. TIMES, Oct. 25, 1990, at A1. The 1990 bill explained that, in the case of employment practices, the term "required by business necessity" meant that practices "must bear a significant relationship to successful performance of the job." S. 2104, 101st Cong. § 3(o)(1)(A).
10. See generally Ian Ayres & Peter Siegelman, The Q-Word As Red Herring: Why Disparate Impact Liability Does Not Induce Hiring Quotas, 74 TEX. L. REV. 1485 (1996).
11. Civil Rights Act of 1991, Pub. L. No. 102-166, 105 Stat. 1071 (codified as amended in scattered sections of 42 U.S.C).
12. Id.; see 42 U.S.C. § 12112(b)(6) (1994).
13. 42 U.S.C.A. § 2000e-2(k)(1)(A)(i) (1994).
14. Dormeyer v. Comerica Bank, 223 F.3d 579, 583 (7th Cir. 2000) (quoting Finnegan v. Trans World Airlines, Inc., 967 F.2d 1161, 1164 (7th Cir. 1992)).
15. See Ernest F. Lidge, Financial Costs as a Defense to an Employment Discrimination Claim, 58 ARK. L. REV. 1, 2 (2005) (discussing the hypothetical example of an employer that would be bankrupted by hiring women).
16. The reasonable return on capital should be "risk-adjusted" because investors reasonably expect a higher return on more risky investments. The reasonable risk-adjusted return on particular company assets can be derived from beta regressions using the Capital Asset Pricing Model. RONALD J. GILSON & BERNARD S. BLACK, (SOME OF) THE ESSENTIALS OF FINANCE AND INVESTMENT 107-35 (1993).
17. Mark Kelman, Market Discrimination and Groups, 53 STAN. L. REV. 833, 850 (2001).
18. The hypothetical is, of course, inspired by Griggs v. Duke Power Co., 401 U.S. 424, 431-32 (1971), where the employer had a policy of only hiring and promoting high-school graduates. But our civil rights laws currently may not allow disparate impact suits with regard to equal pay act violations. See County of Washington v. Gunther, 452 U.S. 161, 170-71 (1981).
19. Alternatively, the employer might justify the lower pay by showing that non-graduates impose higher (training) costs on the employer. But this would still be a defense about their net productivity - net of training costs.
20. Remember in this hypothetical that the high-school graduates are being paid the competitive wage (equal to their marginal productivity).
21. Forcing an employer to forego a policy that has a disparate racial impact in favor of a less profitable policy becomes increasingly problematic when, in doing so, the employer is asked to accept sub-competitive profitability. An employer is prima facie justified in trying to cover its costs. In the foregoing example, trying to construct a wage policy where worker productivity does not fall short of an employer's wage bill is accordingly a reasonable concern. But forcing an employer to forego an anti-competitive policy in favor of a less profitable, but more procompetitive policy is not problematic - even if the employer is asked to forego a substantial, supra-competitive profit. This is the standard demand of both antitrust law and the common law of unconscionability.
22. Wage-gouging is analogous to price-gouging. A firm that wage-gouges earns a supra-competitive profit by paying workers less than they would earn if wage competition raised the wage to equal the worker's marginal product.
23. See generally RICHARD A. EPSTEIN, FORBIDDEN GROUND: THE CASE AGAINST EMPLOYMENT DISCRIMINATION LAWS (1992) (arguing that antidiscrimination law is antithetical to freedom of contract and that the problems to which it is addressed are not the types of coordination problems or externalities that typically justify state intervention).
24. See also Richard Posner, The Efficiency and the Efficacy of Title VII, 136 U. PA. L. REV. 513 (1986) ("Social welfare legislation, notably including legislation designed to help minority groups, is usually thought to involve a trade-off between equity and efficiency, or between the just distribution of society's wealth and the aggregate amount of that wealth.").
25. Daria Roithmayr is one of the few scholars to analyze how antitrust laws might be used to attack the problem of civil rights. See Daria Roithmayr, Barriers to Entry: A Market Lockin Model of Discrimination, 86 VA. L. REV. 727 (2000).
26. See also Ruby Z. Afram, Comment, Civil Rights, Antitrust, and Early Decision Programs, 115 YALE L.J. 880 (2006) (arguing that college early admission programs raise both antitrust and disparate impact concerns);
27. Edward B. Rock, Antitrust and the Market for Corporate Control, 77 CALIF. L. REV. 1365 (1989) (showing how antitrust analysis could be used to improve markets for corporate control).
28. Dana L. Kaersvang has recently shown how disparate impact can be used to make basic housing more accessible. The Fair Housing Act and Disparate Impact in Homeowners Insurance, 104 MICH. L. REV. 1993 (2006).
29. The potential pro-competitive impact of civil rights law was first seen by John Donohue. See generally John J. Donohue, Is Title VII Efficient?, 134 U. PA. L. REV. 1411 (1986). Donohue saw that imposing extra costs on employers with discriminatory tastes could hasten their exit from the market and thus dynamically improve market efficiency.
30. Gary Becker long ago emphasized that certain racial disparities were more likely to persist in the absence of competition. GARY S. BECKER, THE ECONOMICS OF DISCRIMINATION 46-52, 159 (2d ed. 1971).
31. See DAVID CAPLOVITZ, THE POOR PAY MORE: CONSUMER PRACTICES OF LOW-INCOME FAMILIES 19-20 (1967).
32. See IAN AYRES, PERVASIVE PREJUDICE? UNCONVENTIONAL EVIDENCE OF RACE AND GENDER DISCRIMINATION 19-44 (2001);
33. JOHN YINGER, CLOSED DOORS, OPPORTUNITIES LOST: THE CONTINUING COST OF HOUSING DISCRIMINATION 89-103 (1995);
34. Ian Ayres, Further Evidence of Discrimination in New Car Negotiations and Estimates of its Cause, 94 MICH. L. REV. 109 (1995);
35. Ian Ayres & Peter Siegelman, Race and Gender in New Car Bargaining, 85 AM. ECON. REV. 304 (1995);
36. Kathryn Graddy, Do Fast-Food Chains Price Discriminate on the Race and Income Characteristics of an Area?, 15 J. BUS. & ECON. STAT. 391 (1997);
37. Howell E. Jackson & Jeremy Berry, Kickbacks or Compensation: The Case of Yield Spread Premiums, 9 (2002), available at http://www.law.harvard.edu/faculty/hjackson/pdfs/january_draft.pdf;
38. Jane Kolodinsky, et al., Time Price Differentials in the Rent-to-own Industry: Implications for Empowering Vulnerable Consumers, 29 INT'L J. CONSUMER STUD. 119 (2005);
39. John Yinger, Evidence on Discrimination in Consumer Markets, 12 J. ECON. PERSP., Spring 1998. at 23 (describing evidence of discrimination in several different consumer markets).
40. It is striking, however, that the sales practices found below with regard to car loans, see infra Part III, would almost certainly be deemed independently illegal if the underlying financial assets being traded were characterized as "securities" rather than loans and thus subject to the full panoply of (a) the know-your-customer rules; (b) the NASD/NYSE mark-up rules; and (c) the anti-fraud rules (i.e. the SEC's Rule 17 CF.R. § 240.10b-5 (2005)).
41. Severin Borenstein, Price Discrimination in Free-Entry Markets, 16 RAND J. ECON. 380 (1985).
42. Traditionally, the antitrust inquiry has been firm-centric instead of consumer- or worker-centric. While it would be theoretically comprehensible to analyze how multiple workers might behave in competing for an individual job, or how multiple consumers would behave in competing for an individual product, the standard normative lens to judge the behavior of firms (qua both sellers and employers) is to ask how multiple firms would compete for the services of employees or the patronage of customers.
43. Kelman, supra note 13, at 850.
44. Dormeyer, 223 F.3d at 583 (quoting Finnegan, 967 F.2d at 1164).
45. Allocative efficiency ensures that goods and services end up in the hands of (in other words, are allocated to) the people who value them the most highly. See generally IAN AYRES, OPTIONAL LAW (2005) (analyzing the impact of law on allocative efficiency).
46. Id.
47. For more on dead-weight losses, see William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937, 954, app. (1981) (defining dead-weight loss as "loss of consumer and producer surplus when output declines from the competitive to the monopoly level; it is the most common measure of the social costs of monopoly").
48. The next section will show this tendency more explicitly. See infra Section I.C.
49. See generally RICHARD POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE (2d ed. 2001).
50. Even if price discrimination were a net improvement in allocative efficiency relative to an inflated single-price (or a deflated single-wage) equilibrium, it still might not constitute a business justification under the competition standard. Less than perfect price discrimination would still not represent an enhancement in allocative efficiency relative to a competitive single-price equilibrium. As in antitrust, the crucial question is whether the competitive or the non-discriminatory (but possible supra-competitive) is used as the allocative benchmark. At a minimum, any price-discrimination that does not increase the quantity of goods sold (relative to the quantity that would be sold under a non-discriminatory scheme) should not be viewed as business justified.
51. With second-degree price discrimination, the seller gives quantity discounts or charges different prices for versions of the same product with different qualities. With third-degree price discrimination the seller separates consumers into different groups (for example, by age or geography) and charges different prices to each group. See DOUGLAS A. RUBY, PRICE DISCRIMINATION (2003), http://www.digitaleconomist.com/ pd_4010.html.
52. Moreover, the price discrimination tends to be inefficient in a more dynamic sense because it gives firms a bigger incentive to invest in creating market power. Prohibitions of price discrimination, by reducing the incentive to invest in barriers to entry and the like, may produce more competitive equilibria. See Richard A. Posner, The Social Costs of Monopoly and Regulation, 83 J. POL. ECON. 807, 822 (1975) (additional profit created by price discrimination creates social costs, because it gives monopolists increased incentives to undertake socially wasteful investments to create or maintain market power).
53. See 15 U.S.C. § 13(a). The Robinson-Patman Act prohibits price discrimination on goods sold to equally situated distributors where the effect of the discrimination is substantially to lessen or eliminate competition.
54. Id.
55. A competition standard should also take into account the requirement that businesses cover their fixed costs. For example, price discrimination might be justified by the attempt of sellers to cover their legitimate fixed costs by charging higher prices to a class of consumers who have less elastic demand. But the discussion of automobile dealerships in Part III illustrates that some of the fixed costs may be the costs of implementing a price-discrimination system and would not be justified. See infra Part III. A natural standard for assessing whether fixed costs justify a particular policy is to ask whether enjoining the policy would lead to a reduction in industry output. As applied to automotive lending, the evidence suggests that two states, Arkansas and Ohio, that severely limited price-gouging did not experience a disruption in consumers' ability to finance cars. See infra Part III; Ian Ayres, Expert Report, Willis et al. v. American Honda Finance Corp. No. 3-02-0490, at 34 (M.D. Tenn. Jun. 30, 2004) [hereinafter Ayres, Honda Report]. This suggests at least that lending markups detailed below were not justified by lenders' or dealerships' need to cover fixed costs.
56. Connecticut v. Teal said that individual questions on a test can give rise to disparate impact liability even if the overall results on the test did not produce a disparate impact. 457 U.S. 440, 452 (1982) (rejecting the "bottom line" defense; that is, a disparate impact in any one stage in the hiring process will still give rise to a prima facie employment discrimination claim even if the employer's resulting hiring profile exhibits no disparate impact in the end); see also Ayres & Siegelman, supra note 6, at 1489-91 (arguing that disparate impact liability might actually induce employers to discriminate against minorities in hiring because disparate impact liability can also attach to employers' firing decisions). At least as an analytic matter it would be possible to aggregate the various types of harm to assess whether the monopoly overcharge disproportionately hurt minorities. In economic terms, both the purchasing and non-purchasing consumers are forced to sacrifice some of their consumer surplus and it would be possible to assess whether minority consumers sacrificed a disproportionate amount of the consumer surplus they would have enjoyed if a more competitive price had been offered. (Even more expansively, one might consider the potentially offsetting incidence of such impacts on minority shareholders or employees). But the burdens of exclusion from employment and consumption markets could create distinct burdens on minority communities that might justify the more disaggregated analysis of impacts on the non-purchasing and purchasing groups.
57. See Charles A. Sullivan, The World Turned Upside Down?: Disparate Impact Claims by White Males, 98 NW. U. L. REV. 1505, 1512 (2004).
58. See id. at 1524-26; see also Woods v. Perry, 375 F.3d 671, 673 (8th Cir. 2004) (noting that in reverse discrimination claims, plaintiffs must also demonstrate background circumstances establishing that the defendant is "that unusual employer who discriminates against the majority"); Mattioda v. White, 323 F.3d 1288, 1293 (10th Cir. 2003) (same); Russell v. Principi, 251 F.3d 815, 818 (D.C. Cir. 2001) (same).
59. I have argued that Teal should be repealed, because it perversely punishes firms for success in hiring minorities. Specifically, Teal holds liable firms that fire minorities at disproportionately high rates even when the firm's minority employee share remains greater than the minority share of the qualified applicant pool after the firing. See Ayres & Siegelman, supra note 6, at 1517; see also Cynthia Estlund, Wrongful Discharge Protections in an At-Will World, 74 TEX. L. REV. 1655, 1679-82 (1996).
60. Harmonization is a two-way street. The analysis also suggests that antitrust and consumer protection enforcement can be mobilized to make markets less discriminatory. Indeed, enforcement authorities in these related areas might do well to look for market processes that produce racial disparities as a guide to consumer-oriented intervention more generally. And civil rights authorities might do well to look for places of market failure as a likely indicator of discrimination.
61. Civil Rights Act of 1991 § 105, 42 U.S.C. § 2000e-2(k)(A)(ii) (1991).
62. See Teal, 457 U.S. at 446-47 (1982) (noting that the employer must demonstrate job-relatedness); Albemarle Paper Co. v. Moody, 422 U.S. 405, 408, 425 (1975) (reaffirming that the burden of proving job-relatedness is the employer's and discussing the question of "what must an employer show to establish that pre-employment tests racially discriminatory in effect, though not in intent, are sufficiently 'job-related' to survive challenge under Title VII"); Pamela L. Perry, Two Faces of Disparate Impact Discrimination, 59 FORDHAM L. REV. 523, 582-83 (1991). In doing so, such opponents ignore the use of the phrase "business necessity" in three parts of the statute. See 42 U.S.C.A. § 2000e-2(k)(1)(A)(i) (West 2006); 42 U.S.C.A. § 2000e-2(k)(1)(B)(ii) (West 2006); 42 U.S.C.A. § 2000e-2(k)(2) (West 2006).
63. 42 U.S.C. § 2000e-2(k)(A)(ii) (1991).
64. Griggs, 401 U.S. at 431. See also id. at 426 (stating that the practice must be "significantly related to successful job performance").
65. Id. at 432.
66. Id. at 431. See also id. at 432 (practice must have "a manifest relationship to the employment in question").
67. See 433 U.S. 321, 331 (1977).
68. Id. at 331 n.14.
69. See, e.g., Davis v. Washington, 352 F. Supp. 187, 191 (1972) ("The [EEOC] guidelines recognize the fact that basically there are three methods of validating the job-relatedness of a given test: criterion, content, and construct.").
70. 29 C.F.R. § 1607.5.
71. Id.
72. Id.
73. For example, an employment application might ask employees about their ties to the community, willingness to move or even their amount of indebtedness. The Graduate and Professional School Financial Aid Service Form that many students fill out can be seen as just such a "test." The University says, "You tell us (under penalty of perjury) how much you can pay, and then we'll tell you how much (net of scholarship) we'll charge you to attend." See Aaron Edlin & Ian Ayres, Why Legislating Low Tuitions for State Colleges is a Mistake, Findlaw's Legal Commentary, Oct. 30, 2003, http://writ.news.findlaw.com/commentary/20031030_ayres.html.
74. 440 U.S. 568, 587 n.31 (1979).
75. Lye, supra note 3, at 328.
76. 563 F.2d 353 (8th Cir. 1977); see infra note 73.
77. 563 F.2d at 354. See also Kingsley R. Browne, The Civil Rights Act of 1991: A "Quota Bill," a Codification of Griggs, a Partial Return to Wards Cove, or All of the Above?, 43 CASE W. RES. L. REV. 287, 348-62 (1993) (discussing the application of business necessity under the 1991 Civil Rights Act, including whether an employer is limited to performance-based justifications).
78. 563 F.2d at 356; see also Am. Fed'n of Mun. Employees v. Washington, 770 F.2d 1401, 1407 (9th Cir. 1985) ("We find nothing in the language of Title VII or its legislative history to indicate Congress intended to abrogate fundamental economic principles such as the laws of supply and demand or to prevent employers from competing in the labor market."); Lemons v. City & County of Denver, 620 F.2d 228, 229 (10th Cir. 1980).
79. See 544 U.S. 228, 242-43 (2005).
80. Pub. L. No. 102-166.
81. S. 3239, 101 st Cong. (2d Sess. 1990).
82. See Spiropoulos, supra note 2, at 1510.
83. 2 F.3d 1112 (11th Cir. 1993).
84. See id. at 1119. The idea of non-job-related but legitimate business goal practices is also discussed in Browne, supra note 62, at 348: [H]iring procedures may be adopted for legitimate business reasons other than prediction of future job performance. For example, in Wards Cove the employers had entered into a hiring-hall agreement with a largely Filipino union local in Seattle. As a result, the positions for which the union supplied employees were held disproportionately by Filipinos. If a black person had challenged the employers' use of a hiring hall on the ground that a disproportionately small number of blacks were hired for cannery positions, the employers could not possibly defend on the basis of "job performance," since that would require a showing that employees procured through the hiring hall performed better than potential employees who were excluded because of the hiring-hall agreement. However, the usual reason for an employer's entering into a hiring-hall agreement is not that employees hired under such an agreement will perform better than other employees. Rather, it is to maintain a reliable source of labor.
85. City of Jackson, 544 U.S. at 228.
86. Id. at 423. This evidence about the percentage increase in wages may not be the most accurate measure of impact. Because more senior workers earned a higher base wage, a smaller average percentage increase might still represent a higher absolute dollar increase. But the Court bizarrely ruled that the plaintiffs had "not identified any specific test, requirement, or practice within the pay plan that has an adverse impact on older workers" - even though the very next paragraph described in detail the operation of the city's algorithm of dividing the five basic police officer positions into "a series of steps and half-steps." Id. at 422. As a result of the algorithm, officers in the lowest steps that were disproportionately under 40 received larger percentage wage increases. See id. If City of Jackson does not constitute a specific practice, one wonders, what does?
87. Id.
88. 563 F.2d at 356.
89. 544 U.S. at 242.
90. Id. at 241.
91. Id. at 242.
92. LINDA BABCOCK & SARAH LASCHEVER, WOMEN DON'T ASK: NEGOTIATION AND THE GENDER DIVIDE 41-61 (2002).
93. See supra Section II.B.
94. See supra text accompanying notes 48-50.
95. Johnson v. Transp. Agency, 480 U.S. 616, 626-27 (1987) (holding that once a defendant has offered a nondiscriminatory rationale for an employment decision, the burden of proving the decision's invalidity remains with the plaintiff).
96. The BFOQ defense allows employers to consider "religion, sex, or national origin in those certain instances where religion, sex, or national origin is a bona fide occupational qualification reasonably necessary to the normal operation of that particular business or enterprise." The Civil Rights Act of 1964, 42 U.S.C. § 2000e-2(e) (2000). See, e.g., Healey v. Southwood Psychiatric Hosp., 78 F.3d 128 (3d Cir. 1996) (holding that the BFOQ defense allowed a psychiatric hospital to consider gender as part of its employment policies without illegally discriminating).
97. 42 U.S.C. § 2000e-2(e).
98. Wilson v. Sw. Airlines Co., 517 F. Supp. 292, 304 (N.D. Tex. 1981) ("[The] necessity test focuses on the company's ability 'to perform the primary function or service it offers,' not its ability to compete . . . . [A] potential loss of profits or possible loss of competitive advantage following a shift to non-discriminatory hiring does not establish business necessity . . . .").
99. Gunther, 452 U.S. at 170-71.
100. Mark A. Cohen, Imperfect Competition in Auto Lending: Subjective Markup, Racial Disparity, and Class Action Litigation (Working Paper Oct. 2006), available at http://www.appam.org/conferences/fall/madison2006/ sessions/downloads/10393.doc.
101. Gregory Zuckerman & Mark Whitehouse, Auto Maker Ponders Selling Stake in Lucrative GMAC Finance Unit, WALL ST. J., Oct. 18, 2005, at A1, A10. Cohen also estimated that, in 2002, American Honda Credit Corporation financed 38% of all Honda automobile sales. Cohen, supra note 85, at 12.
102. See, e.g., Deposition of Kelly, Willis et al. v. America Honda Fin. Corp. (AHFC), No. 3-02-0490, at 61 (M.D. Tenn. Nov. 8, 2004): Q. Do your disclosure policies include disclosing the buy rate to the consumer? A. The buy rate that we - that we have from particular outlet? No. Q. And do your disclosure policies include disclosing the markup to the consumer? A. No need to. No. Q. Do your disclosure policies include disclosing the existence of markup? A. No need to. No.
103. See Stephen Brobeck, Opinion, Dealer Finance Reserve Should Be Dumped: Markup Caps Help, But They Don't End Abuses and Discrimination, AUTOMOTIVE NEWS, Feb. 21, 2005, at 14;
104. Sarah A. Webster, Bad Rap or a Bad Buy?: Dealers Defend Financing, But Consumer Groups Seek Changes, DETROIT FREE PRESS, Dec. 6, 2004, at 1A.
105. A similar system of undisclosed markups has existed in the relationship between home-mortgage lenders and brokers (often with similar disparate impacts on minority borrowers). See HOWELL E. JACKSON & JEREMY BERRY, KICKBACKS OR COMPENSATION: THE CASE OF YIELD SPREAD PREMIUMS 9 (2002), available at http://www.law.harvard.edu/faculty/hjackson/pdfs/ januarydraft.pdf.
106. Webster, supra note 88, at 1A.
107. Mark A. Cohen, Report on the Racial Impact of AHFC's Finance Charge Markup Policy, Willis et al. v. AHFC, at 39 (June 30, 2004), available at http://www.consumerlaw.org/initiatives/cocounseling/content/ AHFCCohenReportAppendicesA_C.pdf [hereinafter Cohen, AHFC Report].
108. The disparate impact created by tying buy rates to credit scores is potentially justified. People with poorer credit scores are more likely to fail to pay back their loans or fail to pay them back in a timely matter, and thus impose higher costs on lenders. See Avery et al., Credit Risk, Credit Scoring, and the Performance of Home Mortgage, 82 FED. RES. BULL. 621, 631-36 (1996). Buy rate policies that allow interest rates to cover lenders' expected costs are presumptively justified - even if they lead to minority borrowers disproportionately paying higher interest rates. But buy rate policies that imposed grossly inflated rates on poorer-credit-score borrowers might still be unjustified. If a poorer credit score imposes a 1% higher cost on a lender, but the lender increases the buy rate by 2%, then this inflated, supra-competitive increment might, according to the theory of this Article, be actionable.
109. Many of the lenders' programs did expose the dealer to a risk of borrower prepayment or nonpayment for the first two or three payments of the loan. See, e.g., Ian Ayres, Expert Report, Claybrooks et al. v. Primus Auto. Fin. Serv., Inc., No. 3-02-0382, at 22 (M.D. Tenn. Sept. 15, 2004) (on file with author) [hereinafter Ayres, Primus Report]. For example, if the borrower paid off the loan or failed to pay on the loan during this period, the dealer might have to pay back to the lender the compensation for arranging the marked up loan. But the industry norm was that the dealers did not bear the risk of paying back the principle if the borrower failed to pay. Testimony from dealers revealed that the three-month risk of a dealership losing its markup compensation did not restrain dealers from setting as high a hidden markup as they thought a borrower would be willing to sign. See, e.g., Ian Ayres, Expert Report, Cason et al. v. NMAC, No. 3-98-0223, at 37 (M.D. Tenn. May 25, 2001) (citing to deposition of Brent Adams) [hereinafter Ayres, NMAC Report].
110. AHFC, for example, as of 2004, typically paid dealers a loan arrangement fee of just $100 for promotional loans. Declaration of Ian Ayres, Willis et al. v. AHFC, No. 3-02-0490, at 7 (M.D. Tenn. Nov. 3, 2004) [hereinafter Ayres, AHFC Declaration]. In an unrelated example, one particular New York dealer agreed, as part of a settlement with the Attorney General, to fixed-fee compensation for loan arrangement, and estimated the fees would be in this same range. NY Dealer Sees Spitzer Settlement As A Win, CAR DEALER INSIDER, April 5, 2004, at 1 ("Metzner [the dealership owner] figures the average fee is about $225, but will rise to $300-350 as more lenders come on board and he negotiates higher fees."). A prime example of the disparate impact of selective markup caps was the "recent college graduate" programs offered by several lenders, which offered special interest rates that dealers were not allowed to mark up. Just as the employer's high school diploma requirement in Griggs induced a disparate racial impact, the (recent) college diploma requirement at times caused a disparate racial impact in markup loans as African American borrowers were less likely to qualify for this favorable program.
111. See for example Ayres, NMAC Report, supra note 93, at 19 n.24 ("Whites were 19 percent more likely than African-Americans to borrow under defendant's recent college graduate program" - but noting that this program only produced a small amount of the overall racial disparity).
112. This data is taken from Mark Cohen's expert report in the Primus Automotive Financial Services ("Primus") litigation. Mark A. Cohen, Expert Report on the Racial Impact of Primus' Finance Charge Markup Policy, Claybrooks et al. v. Primus Auto. Fin. Serv., Inc., (Sept. 20, 2004), available at www.consumerlaw.org/initiatives/cocounseling/content/ Primus_Cohen.pdf [hereinafter Cohen, Primus Report]. Primus is a wholly-owned subsidiary of Ford Motor Corporation and services many non-Ford brands such as Mazda, Volvo and Jaguar. I have also worked as an expert in litigation involving the following lenders AHFC, FMCC, NMAC, GMAC, DaimlerChrysler Financial Company ("DFC"), Among the financial institutions were AmSouth Bank Corp ("AmSouth"), WFS Financial Inc. ("WFS"), BankOne, Bank of America, and U.S. Bank.
113. The fact that the median white borrower paid no markup is itself strong evidence of the disparate impact of lender programs that selectively banned dealer markup. The median white borrower paid zero markup not because whites were disproportionately adept at bargaining. Most whites were unaware that APRs were negotiable. Rather the higher proportion of no markup loans can be attributed to a higher proportion of whites qualifying for no-markup loan products. See Mark A. Cohen, Report on the Racial Impact of GMAC's Finance Charge Markup Policy, Coleman et al. v. GMAC 55 tbls. 20A & 20B, 56 tbls. 21A & 21B, 57 tbls. 22A & 22B (Aug. 29, 2003), available at http://www.consumerlaw.org/initiatives/cocounseling/GMAC/CohenReport.pdf [hereinafter Cohen, GMAC Report].
114. Cohen, GMAC Report, supra note 96, at 58 tbl. 23A. Honda Finance charged 10% of its borrowers more than a $1000 markup. Mark A. Cohen, Report on the Racial Impact of AHFC's Finance Charge Markup Policy, Willis et al. v. AHFC 55 tbl. 16A (June 30, 2004), available at http://www.consumerlaw.org/initiatives/cocounseling/content/ AHFCCohenReportAppendicesA_C.pdf [hereinafter Cohen, AHFC Report]. Primus charged 10% of its borrowers more than a $1700 markup.
115. Cohen, Primus Report, supra note 95, at 35 tbl. 14.
116. Cohen, GMAC Report, supra note 96, at 28 tbl. 8. The story was much the same at the other lenders: The 5% of GMAC borrowers paying the highest markup paid 42% of the total markup profits. Id. at 3. Similarly, in FMCC, 25% of FMCC borrowers produced 53.1% of the total markup profit. Mark A. Cohen, Preliminary Report on the Racial Impact of FMCC's Finance Charge Markup Policy, Jones et al. v. FMCC 36 tbl. 8 (Jan. 9, 2004). available at http://www.consumerlaw.org/initiatives/cocounseling/content/FMCC_Cohen.pdf [hereinafter Cohen, FMCC Report]. Ten percent of Honda borrowers produced more than 65% of the total markup profits (a mere 5% of Honda Finance borrowers produced 41% of the total markup profits).
117. Cohen, AHFC Report, supra note 91, at 29 tbl 6. At Primus, 10% of borrowers produced more than 45% of the total markup profits (a mere 5% of Primus borrowers produced 26.7% of the total markup profits).
118. Cohen, Primus Report, supra note 95, at 22 tbl. 6.
119. Cohen, GMAC Report, supra note 96, at 28 tbl. 8. Again, the same story was seen elsewhere: while black borrowers were only 11.6% of the overall Honda sample of loans, they represented 26.5% of borrowers in the top decile of markup profitability.
120. Cohen, AHFC Report, supra note 91, at 29 tbl. 6. While black borrowers were only 16.3% of the overall Primus sample of loans, they represent 30.2% of borrowers in this top decile of markup profitability.
121. Cohen, Primus Report, supra note 95, at 22 tbl. 6. Or analyzed alternatively, African Americans are only 16.3% of Primus borrowers, but they pay 26.1% of the markup profits. Id.
122. Cohen, GMAC Report, supra note 96, at 28 tbl. 8.
123. Cohen, Primus Report, supra note 95, app. D. Similarly, the top 500 Honda borrowers (from the fifteen race-coded states), who each paid more than a $3600 markup, were disproportionately black: African Americans are only 11.47% of the Honda Finance borrowers in the fifteen states but they represented 36.4% of these 500 most-profitable markups.
124. Cohen, AHFC Report, supra note 91, app. D.
125. Cohen, GMAC Report, supra note 96, app. D.
126. Tenn. Code Ann. § 47-18-5103 (2001).
127. N.Y. Gen. Bus. Law § 396-r (3)(b) (2006).
128. Tenn. Code Ann. § 47-18-5103 (2001).
129. Richard Givens defended the traditional limited scope of the statute: The ability of the market to ration supplies through higher prices and encourage additional output because of the profit offered works only over a sufficient period of time and cannot avoid cutoff of supply to many when a spike-like price rise occurs for a temporary period, giving a windfall to holders of supply where encouragement of output cannot take effect within that time span. Over a
130. Price-gouging after a natural disaster, while inequitable, can actually enhance allocative efficiency. When the demand for batteries is greater than the supply, then charging higher prices may do a better job than a lottery or first-come, first-serve allocations in helping to assure that the batteries are not used for playing Gameboy. See Daniel Kahneman, Jack L. Knetsch & Richard Thaler, Fairness as a Constraint on Profit Seeking: Entitlements in the Market, 76 AM. ECON. REV. 728, 735 (1986) (acknowledging that certain perceived inequitable practices may be economically efficient). Price-gouging to a subset of auto loan borrowers would do absolutely nothing to enhance allocative efficiency, however.
131. Mark A. Cohen, Supplemental Report on Racial Impact of NMAC's Finance Charge Markup Policy, Cason et al. v. NMAC 60 Tbl. 22 (Aug. 28, 2001) (on file with author) [hereinafter Cohen, NMAC Report].
132. My reasoning parallels the attempt of Alan Dershowitz in representing Klaus Von Bulow to lure the prosecution on appeal into "taking the bait" and rearguing the question of guilt. ALAN DERSHOWITZ, REVERSAL OF FORTUNE (1986).
133. For example, defendants in various cases argued that: (1) Defendants were not "lenders," but merely repurchased loans that had been initiated by dealers. See Expert Report of Richard A. Epstein, Cason et al. v. NMAC, No. 3-98-0223, (M.D. Tenn. July 12, 2001) [hereinafter Epstein, NMAC Report]. (2) Defendants were justified in allowing markups, because if they didn't allow dealers to price-gouge, dealers would have directed the business to another lender that allowed price-gouging. Expert Report of George L. Priest, Willis et al. v. AHFC, No. 3-02-0490, (M.D. Tenn. Oct. 2, 2004) [hereinafter Priest, Primus Report]. (3) Defendants were justified in selective markup caps because they had a legitimate motive to try to sell cars. Epstein, NMAC Report supra.
134. For example, as discussed below, George Priest argued evidence of disparate impact with regard to markups was not sufficient to prove that plaintiffs suffered a disparate impact with regard to the net impact of the transaction. See Priest, Primus Report, supra note 110.
135. Cason et al. v. NMAC, No. 3-98-0223, 212 F.R.D. 518 (M.D. Tenn. 2002).
136. Deposition of Richard A. Epstein, Cason et al. v. NMAC, No. 3-98-0223, (M.D. Tenn. July 30, 2001) [hereinafter Epstein, NMAC deposition], at 86.
137. Id. at 136-37. Professor Epstein's indifference to the factual record can also be seen in this telling moment of his deposition: Q. Let me ask you, do you recall - A. I can't even recall reading the depositions or doing anything with them. Id. at 52.
138. While not a direct assault on my theory of justification, Professor Epstein did argue that my theory of disparate impact would essentially render superfluous disparate treatment liability: "[Ayres'] version of the world is essentially one in which there's no percentage whatsoever for using a disparate treatment case anywhere, ever, because you will always do better as a plaintiff by using a disparate impact case." Epstein, NMAC Deposition, supra note 113, at 83. But this criticism clearly misses the mark. The theory of disparate impact justification suggested both in this Article and in my expert testimony would still allow defendants to avoid liability for policies that help them cover their costs of doing business. Cost-based statistical discrimination on the basis of race might therefore be justified under a disparate impact theory but would not be justified under disparate treatment analysis.
139. Stigler, in considering whether the dispersion observed in new car pricing could be attributed to cost-based differences, concluded: "it would be metaphysical, and fruitless, to assert that all dispersion is due to heterogeneity." GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY 172 (1968).
140. Epstein, NMAC Report, supra note 110, at 19-20.
141. Cohen, NMAC Report, supra note 108, at tbl. 20. The persistence of racial disparity across credit tiers was found for other lenders as well. For example, Cohen's analysis of GMAC borrowers found substantial disparities within each credit tier for every year analyzed: 119.
142. Epstein, NMAC Report, supra note 110.
143. Settlement Agreement, Cason et al. v. NMAC, No. 3-98-0223 (M.D. Tenn. Feb. 18, 2003), available at http://www.consumerlaw.org/initiatives/ cocounseling/content/settlement_agreement.PDF.
144. Id. at 15.
145. Id. at 16.
146. Id. at 24. See also infra note 127 (commenting on the implications of race-dependent affirmative lending).
147. The outline of the settlement agreement explains, "NMAC will contribute $1 million over the next five years to three national consumer financial education programs." NMAC also promised to "mail an educational brochure in English and Spanish to existing customers annually for five years." And NMAC agreed to "provide written disclosure on NMAC financing contracts forms that a customer's annual percentage rate may be negotiable with the dealer." Outline of Settlement Agreement, Cason et al. v. NMAC, http://www.consumerlaw.org/initiatives/cocounseling/content/outline. pdf. In contrast to the $63 million benefits accruing to African American borrowers directly (through no-markup loans and markup caps) and indirectly through NMAC's financing of consumer education), the plaintiffs' attorneys were paid $6 million. Overall, in the settled cases Cohen estimates that legal fees have averaged less than 5% of minority benefits. See Mark A. Cohen, Declaration on Valuation of Settlement, Cason et al. v. NMAC [hereinafter Cohen, NMAC Declaration on Valuation of Settlement].
148. James J. Heckman, Expert Report, Coleman et al. v. GMAC, No. 3-98-0211 (M.D. Tenn. Dec. 15, 2003) (on file with author) [hereinafter Heckman, GMAC Report]. One might thus have expected Heckman to respond to the central econometric claim in my report, as well as the actual econometrics performed by plaintiffs' expert Mark Cohen. In my report, I opined that in disparate impact cases, it was important to intentionally exclude from regression analysis controls for variables that did not provide a plausible business justification. Ian Ayres, Expert Report, Coleman et al. v. GMAC, No. 3-98-0211, at 8 (M.D. Tenn. Aug. 29, 2003) (on file with author) [hereinafter Ayres, GMAC Report]. Even though econometricians are used to worrying about the problem of omitted variable bias, I showed that in disparate impact cases the problem of "included variable bias" was more important. Ayres, GMAC Report supra, at 7-8.
149. For example, in the original disparate impact case, Griggs, 401 U.S. at 424, it would be inappropriate to control for possession of a high school diploma in a regression trying to predict whether African Americans were less likely to be hired or promoted, because the goal in disparate impact cases is to determine whether nonracial factors unjustifiably caused employment disparities. See Ian Ayres, Three Tests for Measuring Unjustified Disparate Impacts in Organ Transplantation The Problem of "Included Variable" Bias, 48 PERSPECTIVES IN BIOLOGY & MED., at S68-S70 (2005). To test for unjustified disparate impacts, it is important not to control for any factors that do not provide a plausible business justification. In a disparate treatment case, on the other hand, controlling for whether an applicant had a high school diploma would be appropriate, because the goal is to see whether there was a racial disparity in employment after controlling for all plausible non-race factors.
150. See id. Heckman should have responded directly to this analysis. In fact, he had recently commented on a conference article of mine applying just this idea of included variable bias to the issue of disparate racial impacts in medicine. Robert Bornholz & James J. Heckman, Measuring Disparate Impacts and Extending Disparate Impact Doctrine to Organ Transplantation 3 (Nat'l Bureau of Econ. Research, Working Paper No. 10946 2004), available at http://www.nber.org/papers/w10946. But only a few pages of his report in the GMAC case concerned the included variable bias theory.
151. See Heckman, GMAC Report, supra (only 3 of the 54 pages).
152. Heckman, GMAC Report supra note 125, at 18.
153. Id. at 17-18.
154. Id. at 2.
155. Id. at 17. See generally JOSEPH ALOIS SCHUMPETER, CAPITALISM, SOCIALISM, AND DEMOCRACY (1947).
156. Heckman, GMAC Report, supra note 125, at 17. See also id. at 18 ("The presence of profits is not evidence of market failure, as claimed by Professor Ayres. The expectation of profits to be made provides the incentive to enter existing markets and to create entirely new markets by inventing entirely new ways to meet basic demands.").
157. Id. at 18.
158. Id. at 17.
159. Id.
160. Id. at 18.
161. Id. at 17 ("The competitive mechanism tolerates no permanent surplus values, but annihilates them . . .").
162. Id. at 18.
163. Id. at 15. See also id. at 3 ("[Ayres] phrases his methodology in economic terms. However his methodology depends on assumptions which fly in the face of fundamental principles of economics as a science as well as the principles on which free markets are founded.").
164. Id. at 18.
165. Heckman also claims that to forego a dollar of profit is economically equivalent to incurring a dollar of cost and therefore that no "valid economic distinction can be drawn between reducing cost and increasing revenue . . . ." Id. at 2. Heckman opines: "If there is an opportunity to earn revenue and the business fails to obtain it, economists refer to that as an 'opportunity cost.' Foregoing revenue is an opportunity cost. In the context of negotiation, if a buyer is willing to pay ten thousand dollars and the seller agrees to accept nine thousand dollars, that thousand dollars is an opportunity cost. Thus Professor Ayres' distinction between revenue and cost is untenable." Id. at 18. But many areas of the law distinguish between costs and opportunity costs. See, e.g., Fred S. McChesney, Tortious Interference with Contract versus "Efficient" Breach: Theory and Empirical Evidence, 28 J. LEGAL STUDIES 131 (1999) (in which the difference between monetary costs and opportunity costs is central to the author's model of the tort law's intersection with efficient breach theory).
166. Heckman, GMAC Report, supra note 125, at 31. Heckman goes on to suggest that in this example I am imputing to the employer "an intention of disparate treatment of women caregivers." Id. But this misses the mark. The example imputes to the employer only an intention to increase its profits by lowering the wage paid to equally productive but less mobile workers. Of course, an intention to wage gouge the vulnerable might result in a disparate impact on a protected class.
167. Id.
168. 42 U.S.C.A. § 2000e-2(k)(1)(A)(i) (1994). See supra note 7 and accompanying text.
169. Interview with James J. Heckman, The Region (June 2005), http://www.minneapolisfed.org/pubs/region/05-06/heckman.cfm (emphasis added).
170. Id.
171. See Settlement Agreement, Coleman et al. v. GMAC, No. 3-98-0211 (M.D. Tenn. Feb. 10, 2004), available at http://www.consumerlaw.org/ initiatives/cocounseling/content/GMACSettlementAgrmt.pdf (Feb. 10, 2004) [hereinafter GMAC Settlement Agreement].
172. For example GMAC agreed to a general markup cap of 2.5% (with a 2% cap for loans with a maturity of more than 3 years). Id. at 11.
173. Testimony of George L. Priest, Borlay et al. v. Primus Auto. Fin. Serv., No. 3-02-0382, (M.D. Tenn. March 10, 2005) [hereinafter Priest, Primus Testimony] at XVII: 55.
174. Q. Are you giving a legal opinion here today with respect to the business justification legal defense in the case? A. No, I'm not. Id. at 192.
175. Deposition of George L. Priest, Willis et al. v. AHFC, No. 3-02-0490, at 81 (M.D. Tenn. Nov. 8, 2004) [hereinafter Priest, AHFC Deposition].
176. Id. at 97.
177. Priest, Primus Report, supra note 110.
178. Contrary to Priest's suggestion of financing-profit-as-offset, in a study of an individual Atlanta car dealership that I performed as part of my book, Pervasive Prejudice?, I found that there was a positive correlation between vehicle profitability and financing profitability. See generally IAN AYRES, PERVASIVE PREJUDICE? 19-44 (2001).
179. Cohen found a similar positive correlation in analyzing Honda data. Cohen, AHFC Report, supra note 97, at 77.
180. 457 U.S. at 442.
181. Id. As the Teal Court defined the term, the "bottom line" theory of defense is that "an employer's acts of racial discrimination in promotions - effected by an examination having disparate impact - would not render the employer liable for the racial discrimination suffered by employees barred from promotion if the 'bottom line' result of the promotional process was an appropriate racial balance." Id. In Teal, the Court rejected the "bottom line" defense, holding that it "does not preclude respondent employees from establishing a prima facie case, nor does it provide petitioner employer with a defense to such a case." Id. As a normative matter, I am not a great fan of Teal's argument. See Ayres & Siegelman, supra note 6, at 1517 (criticizing the perverse effect of Teal's "no bottom line defense" holding as punishing firms for success in hiring minorities). But its application to ECOA may be particularly appropriate if one concludes that Congress did not intend for disparate treatment on non-credit terms to operate as a defense to racial disparities found in credit terms. 15 U.S.C. § 1691 (2000).
182. Cohen, supra note 85, at 9-18.
183. This possibility that dealers might accept lower profits on the "front-end" of the transaction - by accepting a lower car price and vehicle profit - is undercut by the extreme size of some of the markups at stake. As pointed out by plaintiffs' counsel, Clint Watkins, in his cross-examination of Professor Priest, setting vehicle price to fully offset some of the large markups would entail selling the car below cost: Q. Now, is it really rational to think that a dealer would sell an automobile for, say, $8,000 below cost because they're going to make $12,000 on the finance charge? Do you think that's rational? A. Sure. Q. So, in other words, a customer can go to a dealer and buy a car $8,000 below cost. And the next day they can go to their bank and pay it off. And the dealer just lost $8,000; correct? A. Well, if they pay it off immediately before the first payment, yes. Just to be precise. Q. So if it works the way you think, this is a great opportunity for consumers in this country to go to dealerships and let them slam them on the rate, get the car below cost, and the next day go to their bank and pay it off. Aren't dealers simply too savvy to let that happen, Professor? A. I think it happens all the time, where people use equity credit lines to pay it off or use other forms of assets to pay it off. . . . Priest, Primus Testimony, supra note 147, at 63. This theoretical dealership stratagem of selling a car at a price below its cost would be truly risky in a world in which the borrower could turn around and immediately repay the loan.
184. Deposition of George L. Priest, Borlay et al. v. Primus Auto. Fin. Serv., No. 3-02-0382, (M.D. Tenn. Nov. 2, 2004) [hereinafter Priest, Primus Deposition], at 21-22. See also: Q. What is your understanding as an economist that you need to know as far as the difference between analyzing a claim based on a disparate impact theory and a claim based on a disparate treatment theory? A. I don't think an economist can comment on that. I don't think there's any economic - there's nothing from economic theory that relates to that distinction. Priest, Primus Testimony, supra note 147, at 70. And: Q. So have you approached this case as an economist with an assumption that it was irrelevant to your report, the fact that this is a disparate impact case? A. Generally, it's irrelevant, yes. . . . Id.
185. Ayres, Primus Report, supra note 93, at 5-6.
186. For example, Priest testified: Q. Would you agree that one of the major differences in opinions held between you and Dr. Ayres is that you disagree that markup is revenue based and that you believe that it is more cost based? Would that be fair, at least to describe one of the primary differences between the two of you? A. Yes. I think that's fair. Priest, Primus Testimony, supra note 147, at 33.
187. This counterfactual also suggests that the causation requirement should merely be that the defendant's policy was a but-for cause of the disparity, not that the defendant's policy was the sole but-for cause of the disparity. Even if the plaintiffs' unwillingness to educate themselves was also a but-for cause, a defendant whose policy is a cause of the disparity should still be liable. In antitrust, courts never inquire whether anticompetitive harm caused by defendant conduct is somehow excused by consumers' contributory negligence. William M. Landes, Optimal Sanctions for Antitrust Violations, 50 U. CHI. L. REV. 652, 674 (1983) ("there should be no defense of contributory negligence"). In Griggs, the Supreme Court never suggested that the failure of applicants to earn a high school diploma might have undermined proof that Duke Power's policy caused a disparity. 401 U.S. at 432-33.
188. See Peter Siegleman, Two-Party Disparate Impact in Employment Discrimination Law (Working Paper Oct. 28, 2005) (on file with author). If an individual lender offered dealers a flat-fee compensation, some dealers may try to find other lenders for their customers who would be willing to pay a supra-competitive APR. But as Mark Cohen has observed: [T]here might also be ways to reduce this leakage. For example, bonuses can be offered for dealers that provide more than a certain percentage of their loans to the captive lender. This approach is already used by some captives. Cohen, supra note 85, at 15.
189. See also Ayres, GMAC Report, supra note 125 (arguing that lenders can also retard dealer incentive to switch to other lenders by explicitly advertising that their loans will not be marked up).
190. James Heckman similarly conflated the requirements of disparate treatment and disparate impact: Professor Ayres characterizes his report as a theory of how economists should test for the existence of racial discrimination in automobile credit rate spreads. The main premise of Professor Ayres' theory is that in testing for such a disparity, economists should ignore the impact of all characteristics of the vehicle dealer and the vehicle buyer (except for race) who negotiate the transactions and of all factors that might affect the disparity. Thus Professor Ayres would have the economist ignore all of the factors that govern whether a disparity exists between similarly situated individuals. The only exception Professor Ayes allows is for variables that meet his definition of 'legitimate business need' for either GMAC or the dealer. Heckman, GMAC Report, supra note 125, at 2. Heckman's insistence on comparing "similarly situated" borrowers commits the same error as Priest; it imposes the requirements of disparate treatment on a disparate impact case. As Heckman sees, I would only require a comparison of borrowers who are similarly situated with regard to plausible business justifications. The plaintiffs in Griggs without high school diplomas were not similarly situated with the promoted applicants who held high school diplomas - and according to Priest and Heckman, should be excluded from the analysis. But the applicants with and without diplomas were similarly situated for the purposes of a disparate impact test because the Supreme Court found that conditioning employment on a high school diploma was not a valid business justification.
191. Excerpt of Proceedings Volume A, Borlay v. Primus Auto. Fin., No. 3:02-0382 (M.D. Tenn. Mar. 16, 2005), available at http://www.tnmd. uscourts.gov/borlay.pdf.
192. Id. See order to negotiate remedy, available at http://www.tnmd.uscourts.gov/borlay.pdf.
193. Joint Status Report, Borlay v. Primus Auto. Fin., No. 3-02-0382 (M.D. Tenn. May 27, 2005), available at http://www.tnmd.uscourts.gov/ borlay20050527.pdf.
194. Mark Cohen has similarly analyzed the impact of the litigation on the lending market. Cohen, supra note 85.
195. The Table is taken from Cohen, supra note 85, tbl. 9.
196. See, e.g., Opinion: California Sounds Strict Warning on Finance Reserve, AUTOMOTIVE NEWS, July 28, 2003.
197. Bornholz & Heckman, supra note 125, at 3.
198. See, e.g., TRUSTMARK RATE SHEET (May 1, 2004) (setting 1% markup on certain loans between 67 and 72 months). See also Nowadays, F&I Should Mean Fair and Impartial, AUTOMOTIVE NEWS, Jan. 12, 2004, at 12 ("Most responsible banks and finance companies are capping the finance reserve at three percentage points.");
199. Cut To the Quick: Rate caps have little effect on loan profits already clipped by sharp competition among lenders, AUTOMOTIVE NEWS, Dec. 1, 2003, at 40.
200. Cut to the Quick, supra note 168, at 40.
201. See Opinion: California Sounds, supra note 166.
202. Press Release, The Rikess Group & Dixon Hughes, Dealers Say Automotive Retail Lenders have Strong Case for Eliminating Interest Rate Mark-ups on Customer Financing, (Oct. 11, 2004), available at http://www.rikessgroup.com/pdi72004Oct-TRGDHPress%20Release.pdf (stating that "dealers predict that replacing interest rate markups with flat fee financing will yield a great many benefits for their customers, business operations, and the industry").
203. Telephone conversation between Ian Ayres and Mark Cohen (Nov. 13, 2005) (discussing estimates that Cohen prepared in connection with final settlement of GMAC, AHFC, NMAC, Chrysler, Bank One, U.S. Bank and Bank of America litigation). This estimate probably represents a maximum potential benefit - as some minorities may not take advantage of the no markup loans or dealers may substitute toward less constrained lenders (although the latter strategy is constrained by the industry-wide cap reductions).
204. The details of the promise are described by the Wall St. Journal: Under such arrangements, auto lenders try to identify the race of potential applicants using ZIP codes or various databases that contain the details of previous loans they have issued. Once the race is established, the lender can send an offer of credit to the potential applicant. The offer discloses the annual percentage rate that the applicant qualifies for, which can't then be marked up at a dealership. Lee Hawkins, Jr., Honda, Three Banks Settle Loan-Bias Lawsuits, WALL ST. J., Jan. 27, 2005, at D2.
205. Bradley v. Pizzaco of Nebraska, 7 F.3d 795,799 (8th Cir. 1993), is one of the few cases in which a court ordered a race-contingent remedy. The claim was that the defendant employer's no-beard policy had an unjustified disparate impact against African American employees who disproportionately "suffered from pseudofolliculitis barbae ('PFB'), a skin condition affecting approximately fifty percent of African American males." Id. at 796. But instead of enjoining the policy with regard to any employee who suffered from PFB, the opinion only required the employer to make an "exception to its no-beard policy for African American males who suffer from PFB." Id. at 799. See Jolls, supra note 2, at 658.
206. Race-dependent "affirmative lending" programs are explicitly countenanced as potential means to remedy "discrimination": A lender may be permitted to establish a "special purpose credit program" in which "all program participants may be required to share one or more common characteristics (for example, race . . . )." ECOA Reg. 12 C.F.R. § 202.8(b)(2).
207. See Hawkins, supra note 173, at D2.
208. See Cohen, Primus Report, supra note 95, at 45 (noting that under a markup cap, average charge for whites went down from $513 to $311).
209. Id.
210. See Michael Selmi, Was the Disparate Impact Theory a Mistake?, 53 UCLA L. REV. 701 (2006).
211. Some courts have adopted the tactic as well. See, e.g., Okruhlik v. Univ. of Ark., 255 F.3d 615, 625-26 (8th Cir. 2001); In re Employment Discrimination Litig. Against Ala., et al., 198 F.3d 1305, 1316-17 (11th Cir. 1999).
212. This broader conception of disparate impact resonates with that adopted by Justices Blackmun and Stevens in a pair of decisions. See Wards Cove, 490 U.S. at 669-70 (Stevens, J., dissenting); Watson v. Fort Worth Bank & Trust, 487 U.S. 977, 1001-04 (1988) (Blackmun, J., concurring in part and concurring in the judgment). They objected that non-shifting disparate impact burdens (which were later displaced by the shifting burdens of the Civil Rights Act of 1991) were inconsistent with the independent wrong of disparate racial impacts: In their view, business necessity was an affirmative defense to be proved by defendants after plaintiffs had successfully established the legal injury of disparate impact. Once a disparate impact had been shown, an employer might be excused from liability on a showing of legitimate motive, but no showing at all about the employer's motive was necessary for liability to be imposed. Richard A. Primus, Equal Protection and Disparate Impact: Round Three, 117 HARV. L. REV. 493, 522 (2003).
213. Heckman, GMAC Report, supra note 125, at 2. See discussion supra text accompanying notes 155-156.
214. Richard Primus has argued against the idea that "disparate impact doctrine is merely an evidentiary dragnet designed to catch clandestine intentional discriminators": [A]dopting that idea would erase the theory of Griggs, which . . . . spoke explicitly about a concern with self-perpetuating racial hierarchies, hierarchies that could persist even in the absence of new discriminatory acts. As a matter of descriptive interpretation, it is problematic to interpret a doctrine in a way that so thoroughly ignores the fullest (and founding) judicial statement of that doctrine. As a matter of policy, and on the understanding (which I endorse) that the Griggs rationale is normatively desirable, it is problematic to choose an interpretation of Title VII that is wholly about present deliberate discrimination, given that history and de facto segregation remain relevant to the conditions of racial hierarchy in the workplace. To be sure, an honest assessment of the doctrine might require such a reading if Congress had endorsed Wards Cove in 1991. But the 1991 Act is a rejection of the Court's Wards Cove direction. See Primus, supra note 181, at 523 (discussing different plausible goals underlying disparate impact cause of action). Policies might also be misguided because of unconscious bias or other cognitive distortions. See Linda Hamilton Krieger, The Content of Our Categories: A Cognitive Bias Approach to Discrimination and Equal Employment Opportunity, 47 STAN. L. REV. 1161 (1995);
215. Charles Lawrence III, The Id, the Ego, and Equal Protection: Reckoning with Unconscious Racism, 39 STAN. L. REV. 317 (1987);
216. Amy Wax, Discrimination as Accident, 74 IND. L.J. 1129 (1999). But the resistance of corporations to such litigation suggests that profits are often at stake.
217. The intentionally fluid phrase "unfair or deceptive" in the FTC and baby FTC Acts, see, e.g., 15 U.S.C. § 45(a)(1) (2000); N.Y. Gen. Bus. Law §§ 349 et seq. (McKinney 2002); Cal. Bus. & Prof. Code §§ 17200 et seq., (or even the common-law standards for contractual "bad faith" and "unconscionability") might evolve to encompass disproportionate profit-taking from minorities. For example, consider Connecticut's contretemps with Acme RentaCar. See Ian Ayres & Barry Nalebuff, Connecticut's Speeder-Friendly Crackdown, N.Y. TIMES, Aug. 31, 2001, at A19. There, the State of Connecticut went after Acme for charging a $150 penalty for driving more than 80 miles per hour. The State challenged the policy on consumer protection grounds - arguing that it was an unfair and deceptive practice to profit from a liquidated damages provision. Am. Car Rental, Inc. v. Comm'r of Consumer Prot., 273 Conn. 296 (2005). But this Article suggests that the State might have alternatively challenged the unfairness of the practice as disproportionately extracting rents from minority customers. Of course, the disparate impact would have to be proved, but I recall that several of the people who were originally reported to be victims of the practice were African American. See, e.g., James Turner v. Am. Car Rental, Inc., 92 Conn. App. 123 (2005); http://www.popularmechanics. com/science/research/1161417.html?page=2; http://www.cbc.ca/consumers/market/ files/cars/gps/index.html. I would not be surprised to learn that there are a variety of backend fees that are disproportionately borne by minority customers.