In what is sure to give Wal-Mart a large sigh of relief, the United States Supreme Court yesterday overturned the Ninth Circuit's decision to grant class certification to nearly 1.5 million female Wal-Mart employees in the matter of Dukes et al. v. Wal-Mart Stores, Inc., No. 10-277 (June 20, 2011). The lawsuit, filed on behalf of current and former Wal-Mart employees, alleges generally that local Wal-Mart managers disproportionately favor men through the exercise of their discretion over pay and promotions, which has an unlawful disparate impact on female employees. Plaintiffs further allege that Wal-Mart refuses to limit the amount of discretion given to managers, resulting in disparate treatment.
In the Supreme Court's decision, written by Justice Antonin Scalia, the Court held class certification improper on two significant grounds.
No Individualized Monetary Claims Under 23(b)(2)
A unanimous Court overturned class certification because of Plaintiffs' request for back pay. There are several different kinds of class actions; in this case, the district court and Ninth Circuit had certified the class under Rule 23(b)(2) of the Federal Rules of Civil Procedure, which permits class certification if the class representatives are seeking declaratory or injunctive relief. It contrasts with Rule 23(b)(3), which is appropriate for classes seeking substantial monetary relief. Certification under Rule 23(b)(2) is much easier, with fewer requirements, than having to certify under Rule 23(b)(3), which imposes very strict requirements and greater protections.
Although Plaintiffs here unquestionably sought monetary relief (in the form of back pay) in addition to an injunction, to avoid the restrictions of Rule 23(b)(3) they argued that the back pay inquiry did not "predominate" over their request for injunctive relief, and thus certification under Rule 23(b)(2) was appropriate. The Court unanimously disagreed, setting a bright-line test that Rule 23(b)(2) certification is never appropriate where the class members have claims for individualized monetary relief, such as back pay.
The Court found that a contrary ruling could actually harm class members, as it would create incentives for class representatives to place at risk potentially valid monetary relief claims in the hopes of shoe-horning their case into Rule 23(b)(2). Indeed, that is exactly what happened in the Wal-Mart litigation; Plaintiffs declined to seek compensatory damages and only sought back pay. But this would mean that all class members (who cannot opt out in a Rule 23(b)(2) class) would forever be precluded from seeking compensatory damages.
Additionally, the Court found that permitting individualized monetary claims to proceed as a 23(b)(2) class action would rob Wal-Mart of significant procedural protections to which it was entitled. Specifically, in pattern and practice cases, when a plaintiff seeks individualized relief, a defendant is entitled to additional hearings for each plaintiff to determine the scope of that relief. Moreover, a defendant can raise individual affirmative defenses and demonstrate that its actions with regard to that individual were lawful. But such procedures are not provided for under Rule 23(b)(2). The Ninth Circuit attempted to side-step this protection by engaging in what the Court derisively called "Trial by Formula": using a "sampling" of class members to create a formula applicable to all, regardless of whether each individual was an actual victim of discrimination and regardless of the actual amount of damage the individual allegedly suffered. The Court determined that Wal-Mart could not be precluded from availing itself of this critical procedural mechanism.
No Commonality Between Class Members
The monetary relief issue was a sufficient basis for reversal. But Scalia, joined by four other justices, went even further. As a second basis for overturning the Ninth Circuit, the five-Justice majority held that Plaintiffs could not meet the "commonality requirement" of Rule 23(a)(2). Commonality requires plaintiffs to prove that the class has common "questions of law or fact." The Court concluded that Plaintiffs could not demonstrate even a single common question of law or fact.
The Court rejected Plaintiffs' claim that the commonality between all class members was a company-wide discriminatory pay and promotion policy, based on Wal-Mart's practice of allowing local supervisors to have discretion over employment matters. To the contrary, as the Court explained, such a practice is essentially a policy against having uniform employment practice, and moreover, Wal-Mart has a policy that specifically prohibits sex discrimination, with penalties for denials of equal opportunity. Based on these factors, the Court found it unlikely that all managers would exercise their discretion in a common way, against the stated anti-discrimination policy, without some common direction. Rather, with member of the class holding different jobs, at different levels of the organization, in 50 different states, with different supervisors and decision-makers, the Court concluded that the only thing a potential class would have in common is their sex and the lawsuit.
In this regard, the Court severely criticized the evidence Plaintiffs presented in an attempt to meet the commonality requirement. Of particular interest is the anecdotal evidence the Court rejected. Plaintiffs had offered approximately 120 affidavits of female employees ("about 1 for every 12,500 class members"), more than half of which were concentrated in six states, in an attempt to show that a common practice of discrimination pervaded all 3,400 Wal-Mart stores across the entire country. The Court held that this was simply grossly insufficient to demonstrate that the entire company operates under a general policy of discrimination; "a few anecdotes selected from literally millions of employment decisions prove nothing at all."
Impact of the Decision
This decision is obviously significant for Wal-Mart; the potential exposure for the claims could have been several billion dollars. Now, the women who brought the lawsuit, as well as any other potential claimants, will be required to pursue their claims individually (or at least in much smaller classes). Indeed, it is questionable how many former class members will actually pursue new claims, as the time, energy and expense that is necessary for an individual lawsuit is significantly greater.
This decision will severely curb the recent trend of class action plaintiffs attempting to use the more lax 23(b)(2) requirements to obtain monetary relief. This Court has made it perfectly clear that it will abide this end run no longer. Knowing the additional impediments plaintiffs will face could cause class action attorneys to think twice before bringing such an action. In addition, had the case been allowed to proceed, employers would have to worry that, despite their corporate policies prohibiting discrimination, decisions made by local supervisors could create company-wide risk of significant financial exposure. With the Supreme Court's decision, however, the unwieldy micromanaging of local supervisors may be less of a concern. Of course, the decision should not be seen as downgrading the importance of training all decision-makers about discrimination; that should always be of primary concern to employers of all sizes.
Please click here to view a previous bulletin from December 2010 with a link to Mercedes Colwin's interview on Fox Business Network as to the implications of the Wal-Mart case.