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.

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?!

Is this a serious comment? Use your intelligence.