The city violated the law by tossing a promotion exam after it yielded too many qualified white applicants and no acceptable black candidates, the justices ruled 5-4 in a major civil rights and affirmative action decision that was split along conservative and liberal lines.
The justices overturned a ruling for the city by a U.S. appeals court panel that included Judge Sotomayor, who is President Barack Obama's Supreme Court nominee.
The appeals court's ruling in the case is expected to be a focus of questioning by Republicans at Sotomayor's Senate confirmation hearing, which is scheduled to start next month.
The court ruled that the city of New Haven was wrong to abandon the promotion exam because no blacks and only two Hispanic firefighters were likely to be made lieutenants or captains based on the results. The city said that it had acted to avoid a lawsuit from minorities.
The ruling could alter employment practices nationwide and make it harder to prove discrimination when there is no evidence it was intentional.
"Fear of litigation alone cannot justify an employer's reliance on race to the detriment of individuals who passed the examinations and qualified for promotions," Justice Anthony Kennedy said in his opinion for the court. He was joined by Chief Justice John Roberts and Justices Samuel Alito, Antonin Scalia and Clarence Thomas.
In dissent, Justice Ruth Bader Ginsburg said the white firefighters "understandably attract this court's sympathy. But they had no vested right to promotion. Nor have other persons received promotions in preference to them."
Justices Stephen Breyer, David Souter and John Paul Stevens signed onto Ginsburg's dissent, which she read aloud in court Monday.
In his opinion, Kennedy made only passing reference to the work of Sotomayor and the other two judges on the 2nd U.S. Circuit Court of Appeals who upheld a lower court ruling in favor of New Haven.
But the appellate judges have been criticized for producing a cursory opinion that failed to deal with "indisputably complex and far from well-settled" questions, in the words of another appeals court judge, Sotomayor mentor Jose Cabranes.
"This perfunctory disposition rests uneasily with the weighty issues presented by this appeal," Cabranes said, in a dissent from the full 2nd Circuit's decision not to hear the case.
Kennedy said an employer needs a "strong basis in evidence" to believe it will be held liable in a disparate impact lawsuit. New Haven had no such evidence, he said.
"The city could be liable for disparate-impact discrimination only if the examinations were not job related" or the city failed to use a less discriminatory alternative, Kennedy said. "We conclude that there is no strong basis in evidence to establish that the test was deficient in either of these respects."
But Ginsburg said the court should have assessed "the starkly disparate results" of the exams against the backdrop of historical and ongoing inequality in the New Haven fire department. As of 2003, she said, only one of the city's 21 fire captains was African-American.
Until this decision, Ginsburg said, the civil rights law's prohibitions on intentional discrimination and disparate impact were complementary, both aimed at ending workplace discrimination.
"Today's decision sets these paired directives at odds," she said.
In other Supreme Court news, the justices failed to decide on whether a scathing documentary about Hillary Rodham Clinton that was shown during last year's presidential race should be regulated as if it were a campaign ad.
The court said it will hear arguments in the "Hillary: The Movie" case again in a special session on Sept. 9. Retiring Justice Souter is scheduled to have left the court by then and his successor may be seated on the court. The justices said they want lawyers to address whether the court should overturn its earlier rulings on limiting corporate and union contributions in federal elections.
In another decision, the justices ruled Monday that the New York attorney general's office can investigate whether national banks discriminated against minorities seeking mortgages.
The justices overturned part of a ruling by a U.S. appeals court that entirely blocked the state office from investigating or enforcing the fair lending laws against national banks because they are primarily subject to federal regulation, according to news agencies.
The court also declined to hear arguments on whether to block Cablevision Systems Corp.'s new remote-storage digital video recorder system. The devices could make it cheaper and easier for viewers to record shows and watch them when they want, without commercials.
For consumers, the action means that Cablevision and perhaps other cable system operators soon will be able to offer DVR service without need for a box in their homes. The remote storage unit exists on computer servers maintained by a cable provider.
Hollywood studios and television networks had been vying for the court to block the use of the devices on the grounds that they violate copyright agreements.