August 31, 2011

KEEPING CURRENT: Class Actions: Supreme Court Deals a Heavy Blow to Colossal Class Actions

On June 20, 2011, the United States Supreme Court handed down the long-awaited decision in Wal-Mart v. Dukes, No. 10-277, 564 U.S. ___, 2011 US LEXIS 4567 (2011) (Scalia, J.), which reversed class certification in what is believed to be the largest class action certified in the United States. The decision is a victory for businesses defending against massive class actions, and employers in particular. After a series of employee-friendly decisions, the United States Supreme Court has rendered a decision in favor of large employers with widespread operations.

According to the class representatives, although the 1.5 million women in the class had different supervisors in different stores at different times, held different positions, and were subject to different decisions, they had one common complaint. Specifically, they contended that a company-wide "policy" of allowing local managers to use discretion in pay and promotion decisions resulted in across-the-board discriminatory decisions.

The Supreme Court's decision to reverse the class certification was unanimous, but the justices divided as to why. The majority and dissent vigorously disputed that the plaintiffs' proof of decentralized, subjective, decision-making-allegedly coupled with a centralized yet pervasive culture and policies-was sufficient to support the aggregation of millions of claims by women from 3,400 Wal-Mart facilities nationwide who were seeking billions of dollars of back pay and injunctive relief based on alleged gender discrimination in promotion and pay.

Common Proof of Discrimination

The employees pursued both disparate impact and disparate treatment claims-disparate impact because the practice of granting discretion to local managers allegedly caused a disproportionately adverse effect on females, and disparate treatment because Wal-Mart allegedly knew about this adverse impact yet failed to correct it.

The Court held that the proposed class failed for lack of common questions under Rule 23(a). Specifically, the Court required proof of a specific employment practice that tied the class members' claims and common experiences together, which it found lacking in the case presented: "Merely showing that Wal-Mart's policy of discretion has produced an overall sex-based disparity does not suffice." For purposes of certifying this nationwide class, the "crux of this case [was] commonality." Federal Rule of Civil Procedure 23(a)(2) requires the trial court to find common questions of law or fact as a threshold matter in order to certify a class. According to the Court, the commonality question asks not whether all of the 1.5 million female employees had managers with discretion over their pay or promotions, nor whether they believed such discretion led to unlawful acts under the same provision of Title VII. The Court found the key to class action treatment was not whether common questions could be posed, but rather whether a class proceeding could generate common answers that would resolve the litigation.

An example of a truly common question is when employees assert discriminatory bias on the part of the same supervisor, which makes sense when considering that disparate treatment authorities typically require an employee claiming discrimination to show someone outside of his or her protected class received preferential treatment in nearly identical circumstances. Employers have long defended such claims by demonstrating that the employee's proffered comparator was invalid or irrelevant because it involved a different supervisor or different circumstances. In Dukes, the Supreme Court reaffirms the principle that an employee's claim of intentional discrimination is a fact intensive inquiry into what actually happened for that particular employee-it is not an issue that can be decided by anecdotes from other employees in other unrelated circumstances.

The four-justice dissent charges the majority with "disqualif[ying] the class at the starting gate," by elevating the standard for common questions to an unrealistic and unprecedented level. According to the dissent, the majority's framing of the common question precluded the Court from giving sufficient deference to the trial court's findings of fact. Justice Ginsburg surveyed the evidentiary landscape, concluding that the questions identified were in fact common under Rule 23(a)(2).

Dukes does not hold that class actions as a whole are inappropriate for intentional discrimination claims. Rather, to establish sufficient commonality for a discrimination class action, employees may show that an employer used a biased testing procedure, or they may provide "significant proof that an employer operated under a general policy of discrimination[.]" The Court rejected the argument that allowing local managers discretion in pay and promotion decisions was a "common" policy of discrimination. Instead, it reasoned that granting managers discretion was:

on its face . . . just the opposite of a uniform employment practice that would provide the commonality needed for a class action; it is a policy against having uniform employment practices. It is also a very common and presumptively reasonable way of doing business--one that [the Court has] said 'should itself raise no inference of discriminatory conduct' . . . .

Justice Scalia provided examples of how different managers could use discretion differently: by using sex-neutral, performance-based criteria; by using test scores or education criteria; or by using discriminatory motives. "In such a company, demonstrating the invalidity of one manager's use of discretion will do nothing to demonstrate the invalidity of another's. A party seeking to certify a nationwide class will be unable to show that all the employees' Title VII claims will in fact depend on the answers to common questions."

The Court found no single common question existed, and the employees had no convincing proof of a company-wide discriminatory pay and promotion policy. Rather, the "class" involved a multitude of different employees with different jobs at different levels for different periods of times in different stores in different states with different supervisors subject to different polices. Quoting from Judge Kozinski's dissent in the Ninth Circuit, the Court agreed that: "[s]ome thrived while others did poorly. They have little in common but their sex and this lawsuit."

Implications of Dukes Decision

While this decision is a major victory for employers, it also underscores the importance of having company policies forbidding discrimination. Indeed, the Court noted in the decision that Wal-Mart forbade discrimination and penalized employees who violated equal employment opportunity laws. The Court focused on the fact that the conduct alleged would have been contrary to company policy, countering the assumptions the plaintiffs asserted that managers would discriminate if left to their own choice and that there existed of an unwritten policy of discrimination contrary to the express policy. We also learn from Dukes that treating employees as individuals buttresses an employer claim that its defenses to discrimination may vary from employee to employee, not a circumstance for class treatment.

In the high-stakes world of complex litigation, courts, commentators, and practitioners alike have been wrestling with a number of vexing issues. In particular, consumer and labor class actions in particular have been on the rise-between 2001 and early 2007, they have increased 156 percent and employment class actions have increased over 200 percent. The trend has been growing against certification of class actions due to considerations of individual rights of both the plaintiffs and defendants, but the need for some sort of aggregate resolution of litigation stemming from mass disasters, wide-reaching business practices, and pervasive schemes has outpaced the historical judicial restraints. The Dukes decision is expected to reverse this trend and significantly limit the number of classes appropriate for certification. Its impact should also reach beyond the federal courts, as many states have patterned their class action practices on Federal Rule 23 and look to federal authorities as guidance for interpretation of their local rules.