Only Two Major Rulings

Katz, Marshall & Banks partners Debra S. Katz and Lisa J. Banks published an article in the National Law Journal entitled “Only Two Major Rulings.” The article, published on August 3, 2005, discussed the U.S. Supreme Court’s decisions in Smith v. City of Jackson, 125 S. Ct. 1536 (2005), Jackson v. Birmingham Board of Education, 125 S. Ct. 1497 (2005), and Commissioner of Internal Revenue v. Banks, 125 S. Ct. 826 (2005).  The full-text of the article is available below.



Only Two Major Rulings

by Lisa J. Banks and Debra S. Katz, The National Law Journal

Download the PDF here.

THE U.S. SUPREME Court's 2004-2005 term had few employment cases, although Justice Sandra Day O'Connor, who announced her retirement this term, once again played a crucial role in important employment and civil rights matters decided by the court. O'Connor authored the court's opinion in a case that recognized a private cause of action for claims of retaliation under Title IX and authored the lengthy dissent from the court's opinion recognizing disparate impact claims for plaintiff in age discrimination cases. O'Connor's position as the swing vote has often placed her at the center of many of the court's most important and controversial labor and employment cases, and her departure raises significant questions as to the direction such cases win take in the future.

The most anticipated employment case of the term was Smith v. City of Jackson, 125 S. Ct. 1536 (2005), in which the court considered whether disparate impact claims may be brought under the Age Discrimination in Employment Act (ADEA). Relying on the text of the statute, its legislative history and its implementing regulations, the court held that disparate impact claims are cognizable under the ADEA. The decision may prove to be only a pyrrhic victory for plaintiffs, however, as the court's opinion narrowed the applicability of the disparate-impact theory for age claims to such a degree mat its effectiveness for future plaintiffs is questionable.

In Smith, police and public safety officers brought suit against the dry, alleging that its revision of the employee pay plan, granting raises to officers to bring their salaries up to a regional average, violated the ADEA because older officers received raises that represented a lower. percentage of their salaries. A group of older officers alleged that, because of their age, they were adversely affected by the plan, which provided proportionately greater raises to officers with less seniority.

The district court's grant of summary judgment on behalf of the city was affirmed by the 5th U.S. Circuit Court of Appeals, which ruled that disparate-impact claims are categorically unavailable under the ADEA. The Supreme Court rejected the 5th Circuit's analysis but affirmed the judgment.

In a plurality opinion authored by Justice John Paul Stevens, the court first noted that the ADEA contains identical language to Title VII of the Civil Rights Act of 1964, which, the court ruled in Griggs v. Duke Power Co., 401 U.S. 424 (1971), allows for disparate-impact claims. The text of the ADEA also contains a provision that narrows its coverage by allowing any "otherwise prohibited" action "where the differentiation is based in reasonable factors other than age" (RFOA). This provision, the court opined, would have no effect if the ADEA only prevented intentional discrimination because an employment action based on a factor other than age is not "otherwise prohibited" by the ADEA. Finally, the court gave deference to the interpretation of the Department of Labor, which initially drafted the ADEA, and the Equal Employment Opportunity Commission (EEOC), the agency charged with implementing the statute, authorizing disparate-impact liability.

Although the court recognized disparate impact as a basis for liability under the ADEA, it also substantially limited the scope of disparate impact based on the RFOA provision and the Civil Rights Act of 1991. The court reasoned that in limiting the coverage of the ADEA with the RFOA provision, Congress recognized that, unlike race or other protected classifications, age may have relevance to an individual's capacity to engage in certain types of employment. Thus, for purposes of claims of age discrimination, certain employment criteria may be reasonable despite their adverse impact on older workers.

The court also noted that the 1991 act, which recognized disparate-impact claims under Title VII and shifted the burden of persuasion to the defendant, did not include or address age discrimination. Thus, the court determined that impact cases under the ADEA were con-strained by the analysis set forth prior to the 1991 act in Wards Cove Packing Co. v. Antonio, 490 U.S. 642 (1989). which placed the burden of persuasion on the plaintiff rather than on the defendant employer. Under that exacting framework, the court held that the petitioners failed to set forth a valid disparate-impact claim, as they identified no specific practice with an adverse impact, and the city's plan was based on a reasonable factor other than age.

Justice Antonin Scalia concurred in the judgment, concluding simply that "[t]his is an absolutely classic case for deference to agency interpretation" under Chevron U.S.A. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984), and that both the EEOC and the Department of Labor had issued regulations authorizing disparate-impact age claims. In sharp contrast, O'Connor's lengthy dissent, joined by justices Anthony M. Kennedy and Clarence Thomas, argued that the ADEA's text, legislative history and purpose make clear that Congress did not intend to authorize disparate-impact age claims.

Title IX and retaliation

In Jackson v. Birmingham Board of Education, 125 S. Ct. 1497 (2005), the court recognized a private right of action for retaliation claims under Title IX of the Educational Amendments of 1972, which prohibits recipients of federal funding from subjecting any person to discrimination "on the basis of sex." Petitioner Roderick Jackson, who worked as a teacher and girls' basketball-coach at a public high school, complained to his supervisors that the girls' team did not get equal funding or access to athletic equipment, and he was thereafter removed as coach. Jackson filed suit under Title IX, asserting that the school board retaliated against him for complaining about discriminatory treatment The district court and the 11th Circuit dismissed Jackson's claims, holding that Title IX bars only intentional sex discrimination, and not retaliation.

In reversing the holding of the llth Circuit, O'Connor, writing for a 5-4 majority, determined that retaliation for complaining of sex discrimination is "another form of intentional sex discrimination encompassed by Title IX's private cause of action" because retaliation is an intentional act that subjects an individual to differential treatment. Although Title IX, unlike Title VII, does not provide specifically for retaliation claims, the court held that because Congress did not list any specific discriminatory practices in Title IX, its failure to provide for retaliation does not indicate that it was not intended to be covered.

This ruling continued the court's trend of expanding the contours of the private right of action under Title IX. In past cases, the court ruled that Title IX encompasses a funding recipient's deliberate indifference to a teacher's sexual harassment of a student or sexual harassment of a student by another student. These previous decisions, Gebser v. Logo Vista Independent School District, 524 U.S. 274 (1998), and Davis v. Monroe Countg Board of Education, 526 U.S. 629 (1999), were also authored by O'Connor, who has consistently read "discrimination" under Title IX broadly.

According to the court in Jackson, " 'discrimination' is a term that covers a wide range of intentional unequal treatment" and "by using such a broad term. Congress gave the statute a broad reach." The court also held that it made no difference that the plaintiff was not himself a victim of sex discrimination: "The statute is broadly worded; it does not require that the victim of the retaliation must also be the victim of the discrimination that is the subject of the original complaint."

Thomas, joined by Chief Justice William H. Rehnquist and Scalia and Kennedy, issued a strongly worded dissent, concluding that "[a] claim of retaliation is not a claim of discrimination on the basis of sex." The dissent found particularly significant the fact that Title IX does not mention retaliation, even though Congress had identified retaliation as a prohibited act in other discrimination statutes. Thomas noted that if the majority were correct that "discrimination" by definition encompasses retaliation, the explicit reference to retaliation in these other statuses would be superfluous. The dissent accused the majority of "crafting its own additional enforcement mechanism" by creating a remedy "out of whole cloth to effectuate its vision of congressional purpose."

Taxation of settlements

In Commissioner of Internal Revenue v. Banks, 125 S. Ct. 826 (2005), the court considered whether the portion of a money judgment or settlement paid to a plaintiff's attorney under a contingent-fee arrangement is income to the plaintiff under the Internal Revenue Code and therefore must be recorded as "gross income" on federal tax returns. Kennedy, writing for a unanimous court (Rehnquist did not participate), held that when a litigant's recovery constitutes taxable income, such income includes a portion of the recovery paid to the attorney as a contingent fee. In reaching this conclusion, the court applied the doctrine of anticipatory assignment, under which a taxpayer cannot exclude an economic gain from gross income by assigning the gain in advance to another party. The court viewed a contingent-fee agreement as an anticipatory assignment because the client always retains control over the income-generating asset - the underlying cause of action.

The court left open some issues, such as whether the anticipatory assignment principle would apply to court-awarded fees under statutes that authorize fee awards to prevailing plaintiffs' attorneys. In those cases, the court noted, the plaintiff usually has little control over the amount awarded and, in some instances, the court-awarded fees can exceed a plaintiff's monetary recovery, leading to the "perverse result that the plaintiff loses money by winning the suit." In this instance, however, because the fee paid to John W. Banks II's attorney as part of his settlement was calculated solely on the basis of the private contingent-fee contract, and not by virtue of a court-ordered fee award, that issue was not decided by the court.

Any adverse effect of this ruling was neutralized by passage of the American Jobs Creation Act of 2004, which included an amendment known as the Civil Rights Tax Relief Act. This act went into effect on Oct. 26, 2004, and creates an above-the-line deduction for attorney fees and costs paid by or on behalf of the taxpayer in connection with a wide variety of civil rights and employment discrimination claims. The act is prospective and therefore did not apply to the consolidated cases at issue in Banks, but would cover future taxpayers in a similar position. Further, even though the court in Banks did not address the tax treatment of court-awarded fees, it noted that the amendment to the Jobs Creation Act would redress the concern for many, if not most, claims governed by fee-shifting statutes.

Lisa J. Banks is a partner at Washington's Bernabei & Katz, which specializes in the representation of plaintiffs in employment law, civil rights and civil liberties matters. Debra S. Katz is managing partner at the firm.