                    FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

PATRICK O. OJO, Attorney, on             
behalf of himself and all others
similarly situated,
                 Plaintiff-Appellant,
                                                No. 06-55522
                  v.
FARMERS GROUP, INC.; FIRE                        D.C. No.
                                              CV-05-05818-JFW
UNDERWRITERS ASSOCIATION; FIRE
                                                 OPINION
INSURANCE EXCHANGE; FARMERS
UNDERWRITERS ASSOCIATION
FARMERS INSURANCE EXCHANGE,
              Defendants-Appellees.
                                         
        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.

                               5697
                         OJO v. FARMERS GROUP                          5701
                               COUNSEL

Sanford Svetcov, Lerach Coughlin Stoia Geller Rudman &
Robbins LLP, San Francisco, California, for the plaintiffs-
appellants.

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
Fed. R. Civ. P. 12(b)(1) of a class action suit brought against
Farmers Group, Inc., and its affiliates, subsidiaries, and rein-
surers (collectively “Farmers”). The Complaint alleges, inter
alia,2 disparate impact race discrimination in violation of the
federal Fair Housing Act (“FHA”), 42 U.S.C. §§ 3604 et seq.
   1
     Ojo sues on behalf of himself and on behalf of “minorities . . . who
were issued [homeowner’s] policies by Farmers . . . or who applied for”
such policies, and “who received less favorable pricing than Caucasians
as a result of the discriminatory credit evaluative and scoring system
developed and administered by Farmers in violation of 42 U.S.C. § 3604.”
The Complaint “reasonably estimates that there are hundreds of thousands
of persons” in the purported class.
   2
     Counts II and III of the Complaint alleged violations of two state stat-
utes: California’s Fair Employment and Housing Act, Cal. Gov’t Code
§§ 12955 et seq. (“FEHA”) (Count II), and California’s Unfair Competi-
tion Law, Cal. Bus. & Prof. Code § 17200 et seq. (“UCL”) (Count III).
The district court concluded that it lacked diversity jurisdiction to hear
these state law claims and dismissed them without prejudice. Ojo v. Farm-
ers Group, Inc., 2006 WL 4552707 at *20 (C.D. Cal. Mar. 7, 2006). Ojo
does not appeal the district court’s dismissal of those claims.
5702                      OJO v. FARMERS GROUP
   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 pre-
miums for homeowners’ property and casualty insurance than
the premiums charged to similarly situated Caucasians.”
Farmers moved to dismiss the Complaint under 12(b)(1) for
lack of subject matter jurisdiction and under 12(b)(6) for fail-
ure to state a claim.3 The district court4 granted Farmers’
12(b)(1) claim on the grounds that it was reverse-preempted
by the McCarran-Ferguson Act, 15 U.S.C. §§ 1011 et seq.

   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.
  3
     The district court declined to reach the 12(b)(6) motion, stating that
“[u]ntil it is assured that it has jurisdiction to hear the state law claims, the
court declines to consider defendants’ Rule 12(b)(6) challenge to those
claims.”
   4
     The original district court proceeding occurred on January 3, 2006
before Judge Margaret M. Morrow, who took the case under submission.
On January 28, 2006, Judge Morrow recused herself from the case, which
was then reassigned to Judge John F. Walter. On February 26, 2007, Judge
Walter granted Farmers’ Motion to Dismiss without prejudice to Ojo filing
an amended complaint within ten days, and adopted Judge Morrow’s Jan-
uary 3, 2006 Tentative Order Granting Defendants’ Motion to Dismiss
Plaintiff’s Complaint (“Tentative Order”).
   On March 6, 2007, Ojo notified the court that he would not file an
amended complaint because he believed that it had been properly plead.
He further requested that the district court “proceed and dismiss the Com-
plaint so that final judgment may be entered.” On March 7, 2007, Judge
Walter dismissed Ojo’s FHA claim with prejudice, dismissed the remain-
ing two claims without prejudice to Ojo filing those claims in state court,
and filed Judge Morrow’s Tentative Order.
                         OJO v. FARMERS GROUP                          5703
  We have jurisdiction pursuant to 28 U.S.C. § 1291, and we
reverse.

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 January 2004, Farm-
ers increased the premium on Ojo’s homeowner’s policy by
nine percent, despite the fact that he had made no prior claims
on the policy. Farmers allegedly advised Ojo that the increase
was due to “unfavorable credit information” obtained through
the company’s automated credit scoring system (also referred
to as Farmers’ “automated risk assessment system”).

   According to Ojo, “[o]ver 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 appli-
cant for homeowners’ property and casualty coverage.6 The
  5
     Farmers is a Nevada company with its principal place of business in
the Central District of California. Farmers is also the parent company of
the other defendant insurers (Fire Insurance Exchange, Farmers Insurance
Exchange, Fire Underwriters Association and Farmers Underwriters Asso-
ciation), all of which are California corporations that are in the business
of selling homeowners and fire insurance. Farmers sets its “credit scoring”
pricing policies in its Los Angeles headquarters. Ojo asserts that Farmers
and its various subsidiaries and affiliates have acted in concert in carrying
out the discriminatory conduct alleged in his complaint.
   6
     We note that Ojo’s claim stems from Farmers increasing his premium
on renewal of his existing policy. He contends that Farmers engages in the
same discriminatory credit scoring process for current policyholders as it
does for policyholders that are renewing an expiring policy.
5704                    OJO v. FARMERS GROUP
Complaint further alleges that “[m]inorities as a group have
lower credit scores than whites,” and that the “effect of Farm-
ers’ credit scoring system is that minorities are charged [dis-
parately] 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 Farm-
ers’ 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.” 15 U.S.C. § 1012(a).
McCarran-Ferguson provides that “[n]o Act of Congress shall
be construed to invalidate, impair, or supersede any law
enacted by any State for the purpose of regulating the busi-
ness of insurance, or which imposes a fee or tax upon such
business, unless such Act specifically relates to the business
of insurance.” Id. § 1012(b); see als Humana Inc. v. Forsyth,
525 U.S. 299, 306-07 (1999). In sum, the Act “establishes a
form of inverse preemption” which prevents a federal law of
general applicability from inadvertently impairing state laws
  7
   Importantly, Ojo does not allege intentional discrimination. Rather, he
asserts that Farmers discriminated and continues to discriminate against
minorities in its underwriting, pricing, formation, administration, and
renewal of policies by using “undisclosed factors” to compute credit
scores which place minorities in substandard policies and which result in
disparately higher premiums charged to minorities than are charged to
similarly situated Caucasians.
                         OJO v. FARMERS GROUP                           5705
regulating the business of insurance.” Id.; see also Merchants
Home Delivery Serv. v. Frank B. Hall & Co., 50 F.3d 1486,
1488 (9th Cir. 1995).

   The Supreme Court has outlined the analytical framework
for McCarran-Ferguson questions: “When federal law does
not directly conflict with state regulation, and when applica-
tion of the federal law would not frustrate any declared state
policy or interfere with a State’s administrative regime, the
McCarran-Ferguson Act does not preclude its application.”
Humana, 525 U.S. at 310. Stated differently, three require-
ments must be met before a state insurance law preempts a
federal statute: “(1) the federal law in question must not be
specifically directed at insurance regulation; (2) there must
exist a particular state law (or declared regulatory policy)
enacted for the purposes of regulating insurance; and (3)
application of federal law to the controversy in question must
invalidate, impair or supersede that state law.” Dehoyos v.
Allstate Corp., 345 F.3d 290, 295 (5th Cir. 2003) (emphasis
added).8

  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.”
   8
     The district court pointed out as a matter of history that the Ninth Cir-
cuit, in a decision that predated Humana, applied a four-factor test: “The
McCarran-Ferguson Act precludes the application of a federal statute if:
(1) the statute does not ‘specifically relate’ to the business of insurance,
(2) the acts challenged under the statute constitute the business of insur-
ance, (3) the state has enacted a law or laws regulating the challenged acts,
and (4) the state law would be superseded, impaired or invalidated by the
application of the federal statute.” Merchants Home Delivery Serv., Inc. v.
Frank B. Hall & Co., 50 F.3d 1486, 1489. All of the four factors discussed
in Merchants Home are covered by the Humana requirements, which we
of course apply. The district court further noted that the Ninth Circuit’s
second prong of Merchants Home is “clearly satisfied here, since Ojo
challenges the way in which Farmers uses credit information to assess risk
and set policy rates.” See id. at 490. We agree.
5706                 OJO v. FARMERS GROUP
Humana, 525 U.S. at 307. “Supersede” is defined as “displac-
[ing] (and thus render[ing] ineffective) while providing a sub-
stitute rule.” Id.

   As for “impair,” Humana concluded that Congress did not
intend for state insurance laws to completely and automati-
cally preempt any federal statute not specifically directed at
insurance regulation. 525 U.S. at 308 (“We reject any sugges-
tion that Congress intended to cede the field of insurance reg-
ulation to the States, saving only instances in which Congress
expressly orders otherwise.”). While states have “administra-
tive 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 harmo-
ny.” 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 comple-
ments, 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.”
42 U.S.C. § 3604(b) (emphasis added).

  The Sixth and Seventh Circuits recognize that the FHA’s
ban on racial discrimination extends to the underwriting of
homeowners’ property insurance. Nationwide Mut. Ins. Co. v.
                    OJO v. FARMERS GROUP                     5707
Cisneros, 52 F.3d 1351, 1359 (6th Cir. 1995) (concluding that
no “Congressional intent [exists] to preclude the application
of the Fair Housing Act to insurance underwriting practices”);
N.A.A.C.P. v. Am. Family Mut. Ins. Co., 978 F.2d 287, 293
(7th Cir. 1992) (The federal Fair Housing Act “applies to dis-
criminatory denials of insurance, and discriminatory pricing,
that effectively preclude ownership of housing because of the
race of the applicant”); Nat’l Fair Housing Alliance, Inc. v.
Prudential Ins. Co. of Am., 208 F.Supp.2d 46, 57 (D. D.C.
2002) (“The application of the FHA to homeowners insurance
is fully consistent with the statute’s purpose in eliminating
discrimination resulting in segregated housing and lack of
equal housing opportunities,” citing Trafficante v. Metropoli-
tan Life Ins. Co., 409 U.S. 205, 211-12 (1972)).

   [2] While the federal FHA applies to cases involving dis-
criminatory 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 inval-
idate, 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 regulat-
ing the business of insurance. The Texas Insurance Code
broadly prohibits unfair discrimination in the premium rate
charged for insurance because of “race, color, religion or
national origin,” as well as “age, gender, or disability.” Tex.
Ins. Code § 544.002(a). Section 544.002(a) provides:

     A person may not refuse to insure or provide cover-
     age to an individual, refuse to continue to insure or
     provide coverage to an individual, limit the amount,
5708                    OJO v. FARMERS GROUP
      extent, or kind of coverage available for an individ-
      ual, 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 ori-
           gin;

           (2) age, gender, marital status, or geo-
           graphic location; or

           (3)   disability or partial disability.

   Id. Section § 544.003 contains various exceptions to certain
subsections of § 544.002. Section 544.003(b) states that “a
person does not violate Section 544.002(a)(2) [age, gender,
marital status, or geographic location] or (3) [disability or par-
tial disability]” if the increased insurance coverage charge “is
based on sound underwriting or actuarial principles reason-
ably related to actual or anticipated loss experience.” Id.
§ 544.003(b). Significantly, the district court emphasized that,
“[d]iscrimination on the basis of race is conspicuously exclud-
ed” from the exceptions provided in § 544.003(b).

   Subsection (c) of § 544.003 provides another exception to
§ 544.002: an insurer does not violate the unfair discrimina-
tion provision of § 544.002(a)(2) or (3) if the “refusal, limita-
tion, or charge” is otherwise “required or authorized by law
or a regulatory mandate.”9 Tex. Ins. Code § 544.003(c). This
provision is particularly important because, in 2003, Texas
enacted a new insurance law authorizing and regulating the
use of credit scoring by insurers. Act of June 11, 2003, 78th
Leg. ch. 206, 2003 Tex. Sess. Law Serv. 206 (Vernon), codi-
  9
   As is the case with § 544.003(b), § 544.003(c) refers only to
§ 544.002(a)(2) and (3), conspicuously omitting any mention of
§ 544.002(a)(1), which is the subsection that prohibits race-based discrim-
ination.
                     OJO v. FARMERS GROUP                   5709
fied in Tex. Ins. Code § 559 et seq. (hereinafter “2003 credit
scoring law”). In pertinent part, the 2003 credit scoring law
requires insurers who use credit scores in underwriting to dis-
close certain credit scoring information, notify applicants of
any adverse actions, and file their credit scoring models with
the Texas Department of Insurance. Tex. Ins. Code
§§ 559.053-559.054, § 559.151. Importantly, nowhere does
Texas insurance law explicitly require insurers to file, reveal,
or make known the specific factors used in its credit scoring
models.

   Farmers attempts to invoke the public filing requirements,
enumerated in Tex. Ins. Codes §§ 559.053-559.054 and
§ 559.151, as a shield against any scrutiny of its credit scoring
practices. But Ojo does not challenge Farmers’ use of credit
scoring per se. He challenges only the use of certain “undis-
closed factors” used in Farmers’ credit scoring model. The
sections pertaining to filing requirements do not explicitly
require that insurers file or make public the specific factors
used in calculating a homeowner’s risk assessment rate.
Because Ojo should be permitted discovery so that he can
“unearth[ ]” details—specific factors—regarding Farmers’
homeowners’ insurance credit scoring system, we reverse the
district court. See generally Swierkiewicz v. Sorema N.A., 534
U.S. 506 (2002) (recognizing that, at least insofar as a claim
of employment discrimination is concerned, “[i]t may be dif-
ficult to define the precise formulation of the required prima
facie case . . . before discovery has unearthed relevant facts
and evidence.”). Ojo deserves his day in court.

   [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.” Id. § 559.051
(emphasis added). Section 559.002 makes actionable a viola-
tion of § 559.001: “An insurer may not use a credit score that
is computed using factors that constitute unfair discrimina-
5710                 OJO v. FARMERS GROUP
tion.” Id. § 559.052. Furthermore, in the same 2003 legisla-
tion that authorized credit scoring, Texas also enacted a
statute defining “unfairly discriminatory” for purposes of
insurance rates “used under this code.” Tex. Ins. Code art.
1.02(b). The statute provides, inter alia, that a rate is unfairly
discriminatory if it is “based in whole or in part on the race
. . . of the policyholder or an insured.” Tex. Ins. Code art.
1.02(c)(3).

   The 2003 credit scoring 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.” Id.
§ 559.004(b). Accordingly, Farmers points to a regulation
adopted by the Commissioner stating that differences in rates
charged due “solely to credit scoring” are permissible, pro-
vided that they are “based on sound actuarial principles and
supported by data filed with the department.” 28 Tex. Admin.
Code § 5.9941(a) (2008).

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 fed-
eral 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 Farm-
ers’ 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.
                         OJO v. FARMERS GROUP                           5711
A.     The District Court Erred by Misinterpreting Ojo’s Com-
       plaint

   When reviewing a Rule 12(b)(1) motion to dismiss for lack
of subject matter jurisdiction, “we must accept all factual alle-
gations 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 dis-
trict 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 sys-
tem 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 Cauca-
sians.” 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 actu-
arially sound.”11 Id.
  10
      The district court’s conclusion here is somewhat baffling. The oral
argument transcript, January 3, 2006, reveals the following. The district
court asked Ojo’s counsel to clarify the precise basis of the Complaint.
Ojo’s counsel responded: “[t]he basis of the [C]omplaint is that Farmers’
system has a discriminatory impact. [We are] not taking on nor are we
alleging that credit scoring is unlawful per se.” The district court then pro-
ceeded to question counsel about the disparate impact claim.
   11
      Farmers contends that “[i]n any event, whether Plaintiff challenges
[credit] scoring generally, or simply the factors themselves, does not affect
the outcome of the [C]ourt’s McCarran-Ferguson analysis.” Appellee’s Br.
at 12. Defendants are misguided. Understanding Ojo’s specific allegations
is, however, dispositive: if Ojo challenges credit scoring per se, his federal
5712                    OJO v. FARMERS GROUP
   [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 “un-
disclosed factors” used by Farmers in its credit scoring system
produces a disparate impact on minorities. Therefore, the dis-
trict 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 law relating to the business of insurance and when
applying the federal law would “frustrate any declared state
policy or interfere with a State’s administrative regime.”
Humana, 525 U.S. at 310. Importantly, where the state and
federal “regulatory goals are in harmony,” reverse-preemption
is not triggered. Dehoyos, 345 F.3d at 299.

   [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 insur-
ance. As to the third prong, however, we hold that the district
court erred in concluding that the federal FHA would “invali-
date, impair, or supersede” Texas’s state insurance law.

   We review whether the district court was correct in con-
cluding that Ojo’s federal FHA claim “impairs” Texas state

FHA claim is susceptible to McCarran-Ferguson reverse-preemption. If,
however, Ojo challenges only the use of certain discriminatory factors in
credit scoring—as we hold that he does—then his federal disparate impact
claim does not “directly conflict” with state law and he must be permitted
to proceed in federal court.
                     OJO v. FARMERS GROUP                   5713
law. As the district court stated, “[t]he question thus becomes
whether Texas’s [2003 credit scoring law] ‘requires or autho-
rizes’ 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 scor-
ing [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,” Tex. Ins. Code § 559.051, as prohibiting only
“disparate treatment based on invidious classifications, and
not the use of actuarially sound credit scoring models that . . .
disparately impact minorities.” Id. For purposes of McCarran-
Ferguson analysis, we hold that the district court erred in
reading Texas insurance law as permitting disparate impact
race discrimination resulting from credit scoring.

   In interpreting the phrase “unfair discrimination,” the dis-
trict court applied Texas’s rules of statutory construction:
“[w]hen a statute 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 leg-
islation of which the act forms a part.’ ” Ojo at *13 (citing
Collins v. City of El Paso, 954 S.W.2d at 147). 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)).
5714                    OJO v. FARMERS GROUP
   First, while the district court properly referred to the statu-
tory 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 discrimina-
tion” based on race.

   [9] The most significant oversight was the district court’s
failure to consider that Texas’s own Fair Housing Act prohib-
its disparate impact race discrimination. Tex. Prop. Code
§§ 301.001 et seq. (2004) (“Texas FHA”). A court must con-
sider “ ‘all laws related to the subject of the act [in question]
and the general system of legislation of which the act forms
a part.’ ” Collins, 954 S.W.2d at 147 (citation omitted). Here,
the act in question is Texas’s 2003 credit scoring law and the
subject is disparate impact race discrimination resulting from
Farmers’ credit scoring system. The “general system of legis-
lation” of which the 2003 credit scoring law forms a part is
the Texas FHA.

   [10] In enacting the Texas FHA, the Texas legislature
sought to “provide rights and remedies substantially equiva-
lent to those granted under federal law.”12 Tex. Prop. Code
§ 301.001,    § 301.002(3),    § 301.021(b);    24    C.F.R.
§ 100.70(d)(4); see also Meadowbriar Home for Children,
Inc. v. Gunn, 81 F.3d 521, 531 n.8 (5th Cir. 1996). The fed-
eral FHA prohibits both disparate treatment and disparate
impact race discrimination. 42 U.S.C. §§ 3604 et seq. In
implementing the Texas FHA, the state adopted a regulation
  12
     Every circuit that has addressed this issue has held that federal race
discrimination laws supplement, and are not preempted by, their state
insurance law counterparts which also ban race discrimination. Dehoyos,
345 F.3d 290, 295 (5th Cir. 2003); Moore v. Liberty Nat’l Life Ins. Co.,
267 F.3d 1209, 1213-14 (11th Cir. 2001); Nationwide Mut. Ins. Co. v. Cis-
neros, 52 F.3d 1351, 1356 (6th Cir. 1995); N.A.A.C.P. v. Am. Family Mut.
Ins. Co., 978 F.2d 287, 293 (7th Cir. 1992); Mackey v. Nationwide Ins.
Cos., 724 F.2d 419 (4th Cir. 1984).
                     OJO v. FARMERS GROUP                    5715
identical to the federal regulation that banned both intentional
and disparate impact race discrimination by insurers in “refus-
ing to provide” property insurance or providing such insur-
ance “differently.” 40 Tex. Admin. Code § 819.124(b)(4); 24
C.F.R. § 100.70(d)(4).

   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 “un-
fair 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. Tex. Ins. Code art. 1.02(c)(3) (emphasis
added). The use of the disjunctive term “or” indicates that an
insurance rate based on one factor (such as race) is unfairly
discriminatory even though it may be actuarially sound and
correlated to risk. Pacific-Atlantic Trading, 64 F.3d 1292,
1302 (9th Cir. 1995); In re Porter, 126 S.W.3d 708, 711 (Tex.
App. 2004). Thus, Article 1.02(c)(3) further suggests that the
district court erred in reading the phrase “unfair discrimina-
tion” as precluding disparate impact race discrimination.

   Second, in addition to failing to consider “all laws in pari
materia,” the district court failed to apply the “cardinal princi-
ple” of statutory construction: “to save and not destroy.”
Applying that rule to the phrase “except for factors that con-
stitute unfair discrimination” necessitates the conclusion that
Texas insurance law prohibits all forms of “unfair discrimina-
tion,” and not just one. Farmers, by contrast, urges us to bifur-
5716                     OJO v. FARMERS GROUP
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] statute as a whole, and not render it partially or entirely
void.’ ” Id. (quoting Bresgal v. Brock, 843 F.2d 1163, 1166
(9th Cir. 1987)). Therefore, we understand “unfair discrimina-
tion” to prohibit both disparate treatment and disparate impact
discrimination.

   [11] Third, the district court overlooked that Texas’s 2003
credit scoring laws themselves were designed to “prevent dis-
crimination.” The district court stated that the Texas legisla-
ture “authorized the practice of credit scoring to help ‘creat[e]
a transparent process that would protect consumers and pre-
vent 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
  13
     In support of this rhetorical bifurcation, Farmers relies almost exclu-
sively on a January 31, 2005 letter from the Texas Insurance Commis-
sioner (“Letter”) and a Supplemental Report by the Texas Department of
Insurance to the 79th Legislature titled, “Use of Credit Information by
Insurers in Texas: The Multivariate Analysis: (“Supplement Report”).
Neither of these documents was supplied with Farmers’ moving papers.
Ojo at *7 n.26. As the district court observed, it is generally “improper for
the moving party to . . . introduce new facts or different legal arguments
in the reply brief [beyond] . . . [those that were] presented in the moving
papers.” Ojo at id. (citing William W. Schwarzer, A. Wallace Tashima,
and James M. Wagstaffe, Federal Civil Procedure Before Trial, § 12:107
(The Rutter Group 2005)). Nonetheless, after taking judicial notice of the
two documents, the district court ultimately concluded that they lack the
force of law. Ojo at *7 n.26.
  We agree with the district court that, even if the Letter and the Supple-
mental Report could be said to declare Texas policy, the policy they delin-
eate was not in effect at the time of Ojo’s alleged injury in January 2004.
Therefore, the district court declined to consider the documents as evi-
dence and so do we. Id.
                        OJO v. FARMERS GROUP                         5717
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 numer-
ous prohibitions against any type of race-based discrimination
certainly do not support the conclusion that the Texas legisla-
ture 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,” 28 Tex. Admin. Code § 5.9941(a), an
actuarially sound system can inflict disparate impact discrimi-
nation on minorities and still be lawful. Texas insurance law
“generally prohibits discrimination by insurers . . . .” Tex. Ins.
Code § 544.002. This general prohibition, read together with
Texas Insurance Code’s “broad ban against discriminatory
insurance practices,” Tex. Ins. Code § 544.002d, strongly sug-
gests that the 2003 credit scoring law was not intended to per-
mit disparate impact discrimination on minorities.14

  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 claims brought by Afri-
can American policyholders against an insurer, the court held:
   14
      As discussed above in Section D, while § 544.003 sets forth excep-
tions to the “broad ban against discriminatory insurance practices” in
§ 544.002, provided that the “refusal, limitation or charge is based on
sound underwriting or actuarial principles,” Tex. Ins. Code. § 544.003(b),
“[d]iscrimination on the basis of race is conspicuously excluded” from the
list of exceptions. Ojo at *11 (emphasis added). Other sections of the
Texas Insurance Code specifically include “race” as a prohibited basis of
discrimination. For the legislature to omit “race” from the exceptions enu-
merated in § 544.003, but permit discrimination based on “age, gender,
and/or disability” further indicates that the Texas FHA prohibits both dis-
parate treatment and disparate impact discrimination.
5718                     OJO v. FARMERS GROUP
       We have not been directed to any relevant Alabama
       authority that has required, condoned, or suggested
       that racial distinctions in the provision of life insur-
       ance are acceptable. Indeed there is nothing in Ala-
       bama’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 dis-
crimination” 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 per-
mitted racial discrimination so long as it was actuarially
based. Id. at 1220-21. The Eleventh Circuit rejected the insur-
er’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 . . . convinc-
ing evidence that racial discrimination in the insurance con-
text 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 the provision of . . . insur-
ance,” 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.
  15
     Here, the district court attempted to distinguish Moore, stating that
“Farmers cites a statute that condones the very practice being challenged
[here] — i.e., the use of credit information in insurance underwriting and
rate making.” Ojo at *16 n.42. As discussed above in Section IV (A), the
district court erroneously read Ojo’s Complaint as challenging credit scor-
ing per se, when in fact the Complaint specifically challenges Farmers’
use of a credit scoring system that results in disparate impact race discrim-
ination. Moore is therefore apposite.
                        OJO v. FARMERS GROUP                          5719
   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 42 U.S.C. §§ 1981 and 1982. Allstate
moved to dismiss, citing McCarran-Ferguson reverse-
preemption. The district court denied the motion to dismiss
and the Fifth Circuit affirmed, holding that Allstate had failed
to identify any state statute or “declared policy goal of [a]
state scheme” that would be frustrated by application of fed-
eral laws. Id. at 299.

   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, 345
F.3d at 299 n.7, the court nonetheless rejected the insurer’s
claim that “disparate impact claims are particularly likely to
impair state [insurance] law.”17 Id.

   Lastly, we note the importance of a case decided after the
district court decided Ojo. In Lumpkin v. Farmers Group,
  16
      The district court attempts to distinguish Dehoyos because it was
decided before Texas’s 2003 credit scoring law went into effect. Ojo at
*10. But, as we have explained, the 2003 credit scoring law did not
broaden the ambit within which an insurer is permitted to discriminate
against minority homeowners. Texas law prohibits “unfair discrimination”
based on race—be it disparate treatment or disparate impact. Therefore,
Dehoyos is instructive.
   17
      The majority also explicitly rejected the Dehoyos dissent’s argument
that disparate impact claims would impair Texas law. Dehoyos, 345 F.3d
at 299 n.7 (“The dissent reiterates [Allstates’] argument but offers no more
convincing evidence that disparate impact suits will necessarily impair
state insurance regulation.”).
5720                     OJO v. FARMERS GROUP
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 distinc-
tion 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 her-
self and all others similarly situated, brought a class action
against Farmers alleging disparate impact race discrimination
in the issuance and pricing of homeowners’ insurance poli-
cies, 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 Lum-
pkin’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
   18
      Texas and Tennessee both define a “credit score” or an “insurance
score” as a “number or rating . . . derived from an algorithm, computer
application, model, or other process that is based . . . on credit information
[for the purposes of] predicting the future insurance loss exposure . . . .”
Tenn. Code Ann. § 56-5-401(7); § 559.001(8)(A)(B). Like Texas, Tennes-
see addresses restrictions on the use of credit scores by any insurers in that
respective state. Tenn. Code Ann. § 56-5-401 et seq. (2006); Tex. Ins.
Code §§ 559.101 and 559.052. Tennessee and Texas also both require
insurers who use credit scores to file their scoring models with their
respective states’ insurance departments. Tenn. Code Ann. § 56-5-405;
Tex. Ins. Code § 559.151.
                     OJO v. FARMERS GROUP                    5721
from using an “insurance score that is calculated using . . .
[an] ethnic group” as a negative factor in any insurance scor-
ing methodology. Id. at 13. Similarly, Texas prevents an
insurer from calculating a credit score using “factors that con-
stitute unfair discrimination,” Tex. Ins. Code § 559.151, and
prevents an insurer from “us[ing] a credit score that is com-
puted using factors that constitute unfair discrimination.” Tex.
Ins. Code § 559.052.

   In denying Farmers’ motion to dismiss, Lumpkin expressly
rejected Farmers’ reading of Tennessee law—the same read-
ing 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 provi-
sions of state law to interpret whether “unfairly discriminato-
ry” 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 [dis-
crimination] . . . has not been recognized in controlling case
law and is not mandated by Tennessee insurance law.” Id. at
10. Significantly, the district court also stated that, “[e]ven if
such a distinction were acknowledged by courts, careful scru-
tiny of the Tennessee insurance law scheme indicates that
Defendants’ motion to dismiss should have been denied
because Tennessee insurance law does not create such a dis-
tinction.” Id. (emphasis added).

   The Lumpkin court criticized Farmers for reading the
phrase “unfairly discriminatory” “too broadly to permit dispa-
rate 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 discrimina-
tion,” and that “the two bodies of law can be applied in har-
5722                 OJO v. FARMERS GROUP
mony 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 dispa-
rate treatment or disparate impact.

V.     Conclusion

   [14] The district court erred by misconstruing Ojo’s Com-
plaint as challenging credit scoring per se, when in fact it only
challenged Farmers’ use of credit scoring that resulted in dis-
parate 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 insur-
ers 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 Com-
plaint under Fed. R. Civ. P. 12(b)(1).

   [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 pre-
cisely 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 com-
putation of insurance premiums. That is an essential allega-
tion in a disparate treatment claim under the Fair Housing Act
(“FHA”), 42 U.S.C. §§ 3604 et seq.
                       OJO v. FARMERS GROUP                        5723
   But, the majority opinion is correct that Ojo’s claim is not
really a disparate treatment claim, but is a disparate impact
claim. Maj. Op. at 5701-02. All right then, why isn’t his claim
nonetheless valid as a disparate impact claim? Because—
again, as the district court correctly determined—Texas insur-
ance law, unlike the FHA, makes it perfectly legal to use
credit scores to price insurance policies, even if doing so
causes a disparate impact on racial minorities, so long as race
is not used as a criteria in computing the credit scores. But,
of course, he doesn’t allege race is used as a factor. Therefore,
he fails to allege a viable claim for relief under either a dispa-
rate treatment or a disparate impact theory.

   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. Texas 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 have a disparate impact on racial minorities. Tex.
Ins. Code §§ 544.003(c), 559.051 (Vernon 2005); 28 Tex.
Admin. Code § 5.9941(a).

   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 jurisdic-
tion.1
  1
   The McCarran-Ferguson Act declares, “The business of insurance, and
every person engaged therein, shall be subject to the laws of the several
States which relate to the regulation or taxation of such business.” 15
U.S.C. § 1012(a). It further provides: “No act of Congress shall be con-
5724                     OJO v. FARMERS GROUP
   The majority holds two things: (1) Ojo’s complaint ade-
quately states a claim for relief for disparate impact racial dis-
crimination 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-based
considerations would be equally illegal under the FHA and
Texas insurance law. Where both state and federal law pro-
hibit 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 fac-
tor in Farmers’s credit scoring algorithms, and such credit

strued to invalidate, impair, or supersede any law enacted by any State for
the purpose of regulating the business of insurance, or which imposes a
fee or tax upon such business, unless such Act specifically relates to the
business of insurance . . . .” 15 U.S.C. § 1012(b). Accordingly, Congress
has made the decision that state statutes that specifically relate to the busi-
ness of insurance prevail over federal statutes that do not. See Merchants
Home Delivery Serv., Inc. v. Frank B. Hall & Co. Inc., 50 F.3d 1486,
1488-89 (9th Cir. 1995). Thus, where a general federal law conflicts with
a state insurance law, the state law “reverse-preempts” the federal law. We
are so accustomed to federal law preempting state law that in the odd case
where the contrary happens, we have come to describe it with the phrase
reverse preemption. See Merchants Home Delivery Serv., Inc. v. Frank B.
Hall & Co., Inc., 50 F.3d 1486, 1488-89 (9th Cir. 1995) (construing the
McCarran-Ferguson Act).
   Under Humana Inc. v. Forsyth, 525 U.S. 299 (1999), there are three
requirements for the McCarran-Ferguson Act to trigger such state law pre-
emption of federal law: “(1) the federal law in question must not be specif-
ically directed at insurance regulation; (2) there must exist a particular
state law (or declared regulatory policy) enacted for the purpose of regu-
lating insurance; and (3) application of federal law to the controversy in
question must invalidate, impair or supersede that state law.” Dehoyos v.
Allstate Corp., 345 F.3d 290, 295 (5th Cir. 2003). The parties agree the
first two prongs of this test are met. The only question is whether applica-
tion of the federal FHA invalidates, impairs, or supersedes the Texas
Insurance Code.
                     OJO v. FARMERS GROUP                   5725
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 rea-
soning sounds like it runs on rails, but there are actually sev-
eral 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 dis-
parate impact claim under the FHA. In paragraph 18 of his
complaint, Ojo directly complained of Farmers’s use of credit
data to underwrite and price homeowners insurance policies
by alleging:

    The automated credit scoring program has an
    adverse impact on minorities. Minorities as a group
    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
5726                 OJO v. FARMERS GROUP
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 show-
ing 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 dispa-
rate 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 sig-
nificantly correlated with important elements of work behav-
ior 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 challenged 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 busi-
ness necessity; a defendant does not have to prove such busi-
ness necessity in each case.
                     OJO v. FARMERS GROUP                     5727
   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.

Tex. Ins. Code § 559.051 (Vernon 2005). Insurance compa-
nies may set “differences in rates . . . due solely to credit scor-
ing,” as long as these differences are “based on sound
actuarial principles.” 28 Tex. Admin. Code § 5.9941(a).

   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. Tex.
Ins. Code § 544.003(c) (emphasis added). This is an exception
to all of the discriminatory bases prohibited by § 544.002,
including race.

   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 busi-
ness 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
5728                 OJO v. FARMERS GROUP
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 “un-
disclosed 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 defen-
dant 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 dispa-
rate 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. 42 U.S.C. § 3604(a) & (b). This statute is the basis of
Ojo’s claim for relief.

   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
                        OJO v. FARMERS GROUP                          5729
FHA does apply to a disparate treatment claim in the sale of
homeowners insurance. See Nationwide Mut. Ins. Co. v. Cis-
neros, 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 insur-
ance.

   Under Texas insurance law an insurance company cannot
use race as a factor in setting premiums. See Tex. Ins. Code
art. 1.02(c)(3); Tex. Ins. Code §544.002(a) (Vernon 2005).
Similarly, insurance companies cannot compute a credit score
“using factors that constitute unfair discrimination,” such as
race. Tex. Ins. Code § 559.052(a); see also Tex. Ins. Code
§ 559.051.

   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.
   2
     Note that no court has held that the FHA applies to claims of disparate
impact. The Sixth and Seventh Circuits recognized only claims of dispa-
rate treatment, which may explain why the majority is willing to rewrite
Ojo’s complaint for him to allege a disparate treatment claim. Indeed, the
Seventh Circuit was careful to make this distinction. “Because the district
judge dismissed claims under Title VIII and Wisconsin’s insurance code
in advance of discovery, we must assume that plaintiffs can establish that
the defendant intentionally discriminates on account of race. That is, we
must assume that the plaintiffs can establish disparate treatment and not
just a disparate impact of decisions made on actuarial grounds. The dis-
tinction is important not only because the Supreme Court has yet to decide
whether practices with disparate impact violate Title VIII, see Huntington
v. NAACP, 488 U.S. 15 (1988), but also because of the nature of insur-
ance.” NAACP v. Am. Family Mut. Ins. Co., 978 F.2d at 290.
5730                OJO v. FARMERS GROUP
   The Supreme Court has made clear that a complaint’s
“[f]actual allegations must be 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 insuffi-
cient to survive a motion to dismiss because that parallel con-
duct 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 dis-
parate 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
complaint—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. Tex. Ins. Code §§ 559.053-559.054,
559.151. Any party dissatisfied with an action of the Commis-
                         OJO v. FARMERS GROUP                          5731
sioner “may file a petition for judicial review against the
Commissioner as defendant,” but such review is available
only after the party fails to get relief from the Commissioner.
Tex. Ins. Code § 36.202(a). Ojo does not allege that Farmers
failed to file its algorithms and processes with the Texas
Department of Insurance as required. Nor does Ojo allege he
filed a complaint with the Commissioner to discover the
credit scoring algorithms and factors, much less that any such
complaint to the Commissioner would be unavailing.

   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 specula-
tion 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 inten-
tionally discriminated against minorities based on race, and it
does not allege that Farmers used race as a factor in comput-
ing 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
  3
    Ojo did not allege race-based considerations were used in computing
Farmers’s algorithms and consequent credit scoring. Given the opportu-
nity to amend his complaint to so allege, counsel for plaintiffs refused to
do so, thus loyally complying with Federal Rule of Civil Procedure 11. Of
course, counsel’s position is understandable given that all insurers in
Texas that use credit scores in their pricing must file their algorithms with
the Texas Department of Insurance.
5732                     OJO v. FARMERS GROUP
   The pleading standards of Bell Atlantic apply to this case
because this is a class action, which raises a high risk of abu-
sive 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 Fed. R. Civ.
P. 9(b)-(c)). The Supreme Court and our court have since rou-
tinely applied Bell Atlantic in antitrust cases4 and in non-
antitrust class actions, such as this one.5

    But even under the lesser standard of Federal Rule of Civil
Procedure 8(a)(2), this complaint still does not allege facts
sufficient to survive a motion to dismiss. A plaintiff has a
duty under Rule 8(a)(2) to provide “a short and plain state-
ment of the claim showing that the pleader is entitled to
relief,” in order to “give the defendant fair notice of what the
. . . claim is and the grounds upon which it rests.” Bell Atlan-
tic, 127 S. Ct. at 1963-69. The “grounds” to which Rule
8(a)(2) refers are the facts showing the plaintiff is entitled to
relief. Id. Here, there are no facts alleged that Farmers dis-
criminated on the basis of race. What there is is speculation
that some undisclosed factors may be racially discriminatory.
  4
     See, e.g., Pacific Bell Tel. Co. v. Linkline Commc’ns, Inc., 129 S. Ct.
1109, 1112, 1114, 1123 (2009) (antitrust class action applying Bell Atlan-
tic); Rick-Mik Enter., Inc. v. Equilon Enters., 532 F.3d 963, 966-67, 970
(9th Cir. 2008) (antitrust class action holding that for the purposes of anti-
trust litigation, Bell Atlantic applies); Kendall v. Visa U.S.A., Inc., 518
F.3d 1042, 1044, 1047 (9th Cir. 2008) (same); Cascade Health Solutions
v. PeaceHealth, 515 F.3d 883, 891, 905 (9th Cir. 2008) (same).
   5
     See, e.g., Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981,
986-87, 989-90 (9th Cir. 2009) (securities fraud class action applying Bell
Atlantic), amended on other grounds by 2009 WL 311070 (9th Cir. Feb.
10, 2009); In re Gilead Sciences Sec. Litig., 536 F.3d 1049, 1050, 1055,
1057 (9th Cir. 2008) (same); Williams v. Gerber Prods. Co., 552 F.3d 934,
936, 938 (9th Cir. 2008) (applying Bell Atlantic to a class action under
California law); Clemens v. DaimlerChrysler Corp., 534 F.3d 1117, 1022
(9th Cir. 2008) (same).
                    OJO v. FARMERS GROUP                   5733
   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
