In a much-watched case, the 6th Circuit Court of Appeals on April 9, 2014, handed down its decision in E.E.O.C. v. Kaplan Higher Education Corp. et al., in which it rejected an attempt by the Equal Employment Opportunity Commission (EEOC) to overturn a district court decision holding that the statistical proof offered by the EEOC to defeat summary judgment in the case was unreliable.

The EEOC had sued Kaplan alleging that Kaplan’s use of credit checks caused it to screen out more African-American applicants than white applicants, creating a disparate impact in violation of Title VII of the federal Civil Rights Act. In rather harsh language, the 6th Circuit disagreed, finding that the “[t]he EEOC brought this case on the basis of a homemade methodology, crafted by a witness with no particular expertise to craft it, administered by persons with no particular expertise to administer it, tested by no one, and accepted only by the witness himself.”

The 6th Circuit’s opening line in its decision — “[i]n this case, the EEOC sued the defendants for using the same type of background check that the EEOC itself uses” — foreshadowed the rather severe blow the court ultimately delivered to the EEOC. In fact, the court devoted the first paragraph of its opinion to explaining why both the EEOC and Kaplan run credit checks on applicants for certain positions; namely, because — as stated in the EEOC’s personnel handbook — overdue debts “increase temptation to commit illegal or unethical acts as a means of gaining funds to meet financial obligations.” Thus, in the court’s view, the EEOC runs credit checks on applicants for 84 of the agency’s 97 positions just as Kaplan runs credit checks on applicants for positions that provide access to students’ financial-loan information, among other positions.

Against this backdrop, the 6th Circuit then turned to the underlying evidence proffered by the EEOC to support its disparate impact theory. The EEOC’s expert in the case began his analysis by obtaining background data for 4,670 applicants from one of the vendors used by Kaplan for its credit checks. Because the data did not include the race of each individual applicant, the EEOC subpoenaed records from the department of motor vehicles. While some states provided records that identified an applicant’s race, 36 states and the District of Columbia provided color copies of drivers’ license photos for approximately 900 applicants. The expert, in turn, created a process that allegedly was able to identify the race of each person in the drivers’ license photos.

The district court in its decision found that the expert’s methodology of determining the race of the applicants “flunked all” of the indicators of reliability identified by the Supreme Court in its decision in Daubert v. Merrell Dow Pharmaceuticals, Inc., and the 6th Circuit agreed.

The 6th Circuit began its analysis by focusing on two factors: whether the technique can and has been tested, and the known or potential rate of error of the technique. In response to the district court’s conclusion that the EEOC failed to provide evidence in support of either of these factors, the EEOC argued that the 6th Circuit could find support in its expert’s “anecdotal corroboration.” Specifically, the expert found a 95.7 percent success rate when cross-checking the classifications of 47 applicants with racial identifications provided by a DMV and an 80 percent match cross-checking classifications of 10 applicants with racial information provided by an internal personnel-software program used by Kaplan. The 6th Circuit described the 80 percent match as an “unimpressive correlation” in a case where a few percentage points might make the difference between significant liability and none but, “more to the point”, concluded that a mere 57 instances of anecdotal corroboration proved insufficient to establish the reliability of the methodology.

The 6th Circuit then found that the “EEOC’s case goes downhill from there.” Specifically, the 6th Circuit agreed with the district court’s conclusion that the methodology was unreliable because there was no evidence that the theory or technique was subjected to peer review and publication; the methodology lacked standards controlling the technique’s operation; there was no evidence that the race-rating methodology was generally accepted in the scientific community; and there was no indication that the expert’s group of applicants was representative of the applicant pool as a whole where it had a fail rate of 23.8 percent as opposed to the 13.3 percent fail rate of the applicant pool from the vendor.

Conducting criminal history or credit record background checks on potential employees for many employers is considered a legitimate and reasonable component of a hiring process. Some employers, in fact, believe it to be a necessary part of hiring not only to defend against negligent hiring claims but also to avoid hiring individuals who have a proven tendency to defraud or steal from their employers or to engage in workplace violence.

The EEOC’s recent focus on background check policies as potentially discriminatory barriers to hiring has caused employers in recent years to closely examine their policies and practices to ensure that they are not running afoul of the EEOC’s guidance in this area. The 6th Circuit’s decision signaled that the standards the EEOC must meet in pursuing these claims, however, are high and will be closely scrutinized. Indeed, the Kaplan decision likely will be instructive to the 4th Circuit Court of Appeals as it takes up a decision from a district court in E.E.O.C. v. Freeman holding that the EEOC in yet another background check case failed to meet its burden of “supplying reliable expert testimony and statistical analysis that demonstrates disparate impact stemming from a specific employment practice.”

While the 6th Circuit’s decision should provide some comfort to employers in this area, it is not clear whether the EEOC will rethink its enforcement strategy in these cases. Employers thus should continue to strive to ensure they are striking the appropriate balance they often seek between adopting employment background check policies that adequately protect their legitimate business interests, while also ensuring that their practices do not cause a disparate impact on applicants based on race or other impermissible factors.