Why is it so hard to find a job now? Enter Ghost Jobs

You're correct that they are under no obligation to fire the employee on the H-1B. (In theory, they are applying for a "new" job, and them not getting it for whatever the reason isn't an issue for their current job and status.)

However, what OP is missing is that rejecting the US citizen application based on their citizenship is still likely a prohibited discrimination case regardless of what they do with the existing employee.

The problem is that it’s hard to prove they did that. Until the law is changed the show will go on.

Interesting. So practically, they would have to hire the new applicant and then let go of the h1b worker because presumably they don’t have the budget for it?!

Yes, to really prove it, one would need an admission from the employer. But isn't the above comment such an admission?

Ok, present the HN handle to court:)

OP isn't rejecting the US citizen application because they are a US citizen - they are rejecting all candidates applying for the position regardless of ability to do the job or not since the position is already filled. There was no intent to fill the position to begin with - just a test to see if they can sponsor the current h1b employee for their greencard or not. There is no discrimination if no applicant had a chance of being hired to begin with.

They might be running afoul of discrimination laws if they only interview US citizens to cut down on their workload for fake interviews, but I'd guess someone this careful (e.g. not actually submitting the greencard sponsorship where many employers would with a wink and a nod) is likely careful enough to not filter candidates on such obvious things either.

It's a problem with the h1b (and green card) program itself, not OPs behavior. If anything, OP is probably in the top few percentile of ethical businesses/managers if they are actually denying the sponsorships because they made a good faith attempt to test to see if the local market had appropriate candidates.

I think the issue is that they would hire at least one noncitizen if they apply (the "target" employee). So the odds are absolute zero for citizens, and higher for noncitizens.

As for actually submitting the application--as I understand they actually audit the job ad responses and your decisions--so if you didn't even pretend to have a reason for not hiring them, you would automatically be in a lot of trouble. The game is to come up with flaws in the citizen candidates by requiring highly specific experience--e.g. "JDK v17.0.9 Programming" vs "experience with Java" to justify your target being the only one qualified. That would ultimately be for the court to decide.

Only interviewing citizens to the exclusion of PR/EAD card holders as in your example as written would be a violation.

What I think you meant though, which is not interviewing those who don't have permission to work (without your future attempt to get it for them) is normally completely fine; however, this situation is a little different since you would be willing to provide that for the "target" employee but not the other applications. However, I still don't think it would run afoul of this particular law.