January 31, 2012

Taming the Kraken: The Supreme Court Weighs in on Class Actions in 2011

A spate of high-profile class actions reached the United States Supreme Court in 2011, marking an unusually eventful year for class action jurisprudence. The three most notable decisions are AT&T Mobility LLC v. Concepcion, Smith v. Bayer Corp., and Wal-Mart v. Dukes. In this trio of cases, the Supreme Court resolved several hotly contested issues impacting a host of industries and interests. The goal of this article is to provide Business Law Today readers with the an overview of these key cases and a basic framework for understanding why each case is significant in its own way and how these developments may impact class action litigation in 2012 and beyond.

Wal-Mart and the Commonality Requirement

Wal-Mart Stores, Inc. v. Dukes , 131 S. Ct. 2541 (2011) was perhaps the most followed and anticipated class action decision by the Supreme Court in 2011. The case captured national media attention both before and after the Court issued its decision. In the majority opinion's own words, Wal-Mart was "one of the most expansive class actions ever." That may sound boastful, but the characteristics of the case justify the label.

The named plaintiffs in Wal-Mart were three current or former female employees who sought to represent an estimated class of 1.5 million members. The plaintiffs sued Wal-Mart for injunctive and declaratory relief, back pay, and punitive damages, alleging that the company had discriminated against them by denying them equal pay or promotions in violation of Title VII. The named plaintiffs did not allege that Wal-Mart had any express corporate policy against the equal pay or promotion of female employees. Rather, they alleged that local managers exercised discretion over pay raises and promotions, disproportionately favoring men. The trial court granted class certification and the Ninth Circuit affirmed. In a majority decision written by Justice Scalia, the Supreme Court reversed, holding that class certification was not appropriate under Federal Rule of Civil Procedure 23. The Wal-Mart decision was significant in four key respects.

First, the Court noted that the crux of the class certification analysis in the case was the commonality requirement under Rule 23(a)(2), which requires a party seeking class certification to prove that the class has common questions of law or fact. The Court declared that a class action plaintiff's claims "must depend upon a common contention" that "must be of such a nature that it is capable of classwide resolution-which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke." The Court further noted that satisfying the commonality requirement depends not on the raising of common questions, but on whether class certification will generate common answers that will drive the resolution of the case on a classwide basis. This means that the "rigorous analysis" trial courts must perform to determine whether each element of Rule 23 is met, including commonality, may entail some overlap with the merits of the class action plaintiff's claims. Applying this analysis, the Court held that the commonality requirement was not met with respect to the Title VII claims because "[w]ithout some glue holding the alleged reasons for all those [employment] decisions together, it will be impossible to say that examination of all the class members' claims for relief will produce a common answer to the crucial question why was I disfavored."

Wal-Mart effectively reinvigorated the commonality requirement, which had been treated by some courts as very easy to satisfy. Wal-Mart makes clear that that commonality is not an easy throwaway. Rather, it serves an important role among the Rule 23 requirements and must be meaningfully considered as part of the rigorous analysis courts are obligated to perform before certifying a class.

Second, the Court held--unanimously--that the plaintiffs' claims for backpay were improperly certified under Rule 23(b)(2), which allows class treatment when "the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole." The Court clarified that Rule 23(b)(2) applies only when a single injunction or declaratory judgment provides relief to each member of the class. The rule does not apply when each individual class member would be entitled to a different injunction, a different declaratory judgment, or an individualized award of money damages. The Court concluded that individualized monetary claims--like claims for backpay--are not certifiable under Rule 23(b)(2) because they are not merely incidental to the request for injunctive or declaratory relief. Instead, they must be analyzed under Rule 23(b)(3), which permits class treatment where "the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Once such monetary claims are within the orbit of Rule 23(b)(3), they are subject to the "[t]he procedural protections attending the (b)(3) class--predominance, superiority, mandatory notice, and the right to opt out."

This aspect of Wal-Mart is significant because it means that class action plaintiffs cannot avoid the procedural protections in Rule 23(b)(3) by seeking certification of claims for individualized monetary relief under Rule 23(b)(2) when such claims are not merely incidental to their request for injunctive and declaratory relief. This allows class action defendants greater opportunity to challenge class certification on any of the grounds available in Rule 23(b)(3) and also protects the rights of unnamed class members.

Third, the Court rejected a suggestion by the Ninth Circuit that a class could be certified and tried based on "Trial by Formula" whereby a master would determine Wal-Mart's liability to a sampling of class members and the percentage of valid claims derived from the sampling would be extrapolated to the entire class, without the need for further individualized proceedings. The Court reminded the lower courts that the Rules Enabling Act, 28 U.S.C. § 2072(b), prevents courts from interpreting Rule 23 to "abridge, enlarge, or modify any substantive right." As a result, a class could not be certified against Wal-Mart on the premise of a trial plan that would prevent Wal-Mart from litigating its defenses to individual class members' claims.

The Court's rejection of "Trial by Formula" is noteworthy because it reaffirms the constitutional due process rights of class action defendants to litigate any and all legitimate defenses they may have to individual class members' claims. It has become increasingly common for class action plaintiffs to advocate for trial-like administrative proceedings similar to the procedure suggested by the Ninth Circuit as a means of circumventing defendants' rights to litigate their defenses at trial. Wal-Mart makes it clear that a trial plan that deprives class action defendants of the ability to litigate their defenses to individual class members' claims is not a viable option.

Fourth, the Court hinted very strongly that expert testimony at the class certification stage should receive the same degree of scrutiny that expert testimony would receive at trial under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). The trial court in Wal-Mart held that Daubert is inapplicable to expert testimony offered at the class certification stage. Observing that aspect of the trial court's ruling, the Supreme Court commented, "We doubt that is so." Although the Court did not directly answer the question, the plain implication of the Court's comment is that Daubert applies to expert testimony offered at the class certification stage.

As a practical matter, this aspect of the Wal-Mart decision portends more Daubert challenges by defendants to the expert testimony and evidence proffered by plaintiffs at the class certification stage.

Wal-Mart had an immediate and pervasive impact on pending class action litigation across the country. Whether or not they agreed with the outcome in Wal-Mart, class action litigants and federal courts presiding over pending class action litigation have had to deal with it. For class action plaintiffs, this meant adjusting class certification strategies to respond and adhere to the Supreme Court's articulation of the requirements for class certification under Rule 23. For class action defendants, Wal-Mart provided greater ammunition for opposing class certification or, if a class had already been certified, asking the trial court to decertify the class.

Concepcion and Class Arbitration Waivers

AT&T Mobility LLC v. Concepcion , 131 S. Ct. 1740 (2011), is perhaps the second most significant class action case decided by the Supreme Court in 2011. Concepcion involved a consumer agreement between the named plaintiffs and AT&T Mobility for the sale and servicing of cellular telephones. Specifically, the plaintiffs alleged that AT&T fraudulently charged customers sales tax on the retail value of a free phone. However, the underlying contract provided for the arbitration of all disputes between the parties and prohibited claims brought by a party as "a plaintiff or class member in any purported class or representative proceeding." The Ninth Circuit affirmed the trial court's denial of AT&T's motion to compel arbitration, finding the provision unconscionable under a California Supreme Court decision, Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), which held that class arbitration waivers in consumer contracts are unenforceable and unconscionable in California.

The Supreme Court held that the Federal Arbitration Act (FAA) preempts the Discover Bank rule because Discover Bank conflicts with the primary purpose of the FAA, which is to ensure the enforcement of arbitration agreements according to their terms in order to facilitate streamlined arbitration proceedings. In an majority opinion written by Justice Scalia, the Court concluded that when state law prohibits the arbitration of a particular type of claim, the FAA displaces the conflicting rule. Additionally, the Court held that states could not apply a generally applicable doctrine in a manner that disfavors or interferes with arbitration. The Court observed that parties may agree to limit the issues subject to arbitration, establish the specific rules under which the arbitration will be conducted, and limit who may be a party to the arbitration.

In the wake of Concepcion, federal courts have become more willing to enforce arbitration provisions in consumer agreements notwithstanding state laws that might have otherwise impeded arbitration or deterred parties from seeking to enforce their arbitration rights. In Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (11th Cir. 2011), for example, the Eleventh Circuit affirmed a trial court's order compelling arbitration, finding that an arbitration provision in a wireless service agreement was enforceable. Similarly, in Litman v. Cellco Partnership, 655 F.3d 225 (3d Cir. 2011), the Third Circuit held that a New Jersey law forbidding class arbitration waivers as unconscionable was preempted by the FAA.

Thus, Concepcion effectively opened the door for class action defendants to seek to compel arbitration of individual claims in consumer class actions where the right to arbitration was previously thought to be foreclosed by operation of state law. Taking advantage of this new opportunity, droves of class action defendants filed motions seeking to compel the arbitration of individual claims or asking courts to revisit prior denials of motions to compel arbitration in still active cases. As these motions continue to be litigated and as some of them eventually find their way to the federal circuit courts, the full effect of Concepcion on the issue of arbitration clauses and class action waivers will undoubtedly take greater shape.

Bayer and the Anti-Injunction Act

In Smith v. Bayer Corporation, 131 S. Ct 2368 (2011), the Supreme Court overturned an injunction based on the "relitigation exception" to the federal Anti-Injunction Act, 28 U.S.C. § 2283, which provides that "A court of the United States may not grant an injunction to stay proceedings in a State court except as [1] expressly authorized by Act of Congress, or [2] where necessary in aid of its jurisdiction, or [3] to protect or effectuate its judgments." The third exception, i.e., "to protect or effectuate its judgments," is commonly referred to as the "relitigation exception" and serves to prevent state courts from relitigating claims or issues that were previously presented to and decided by a federal court.

The injunction at issue in Bayer enjoined a state court from considering a West Virginia plaintiff's request for class certification under West Virginia's class certification rule because a federal trial court in Minnesota had already considered and denied class certification in a related case brought by a different plaintiff against the same defendant alleging similar claims. The Eighth Circuit affirmed the injunction. The Supreme Court disagreed, however, holding that the federal trial court in Minnesota exceeded its authority under the relitigation exception to the Anti-Injunction Act when issuing the injunction against the West Virginia state court proceedings. The Court held that the exceptions to the Anti-Injunction Act, though designed for important purposes, are narrow. To invoke the relitigation exception, at least two conditions must be met: (1) the issue the federal court decided must be the same as the one presented in the statute tribunal; and (2) the party seeking class certification in the state court must have been a party to the federal suit, or else must fall within one of the few discrete exceptions to the general rule against binding nonparties.

With regard to the first condition, the Supreme Court held that the federal and state courts in Bayer faced differing issues due to the different legal standard applicable to class certification in the state court versus the federal court. The West Virginia Supreme Court had expressly disapproved of Federal Rule 23's approach to the predominance requirement for class certification, endorsing instead a different test for predominance. The Court reasoned, therefore, that a state court applying a different rule for class certification could reach a different conclusion on the question of class certification.

With regard to the second condition, the Supreme Court held that (1) the West Virginia state court plaintiff, Smith, was an unnamed member of a proposed but uncertified federal court class and, thus, did not qualify as a party to the federal court litigation, and (2) Smith was not bound by the federal trial court's judgment under the recognized exception to the rule against nonparty preclusion for members of class actions. The Court noted that due process requires notice and an opportunity to opt out before absent class members may be bound to the result in a damages action.

Following the decision in Bayer, a number of federal district courts have refused to enjoin state courts from considering class certification issues based on the relitigation exception. For example, in In re Sears, Roebuck & Company Tools Marketing and Sales Practices Litigation, No. 05 C 4742, 2011 WL 2745772 (N.D. Ill. July 11, 2011), the trial court denied Sears' request for a permanent injunction that would have prevented members of a decertified class from seeking to obtain class certification in state court proceedings. Thus, Bayer provides class action plaintiffs seeking to obtain class certification in state court proceedings with new ammunition to oppose certain federal court injunctions under the Anti-Injunction Act.


The outcomes in Wal-Mart, Concepcion, and Bayer--as well as other pending Supreme Court cases yet to be decided in 2012--will undoubtedly shape the evolution of class action litigation for years to come in both expected and unexpected ways. Some observers have queried whether these developments may eventually lead to the demise or significant curtailment of class action litigation, particularly in the realm of consumer class actions and employment class actions. These observers tend to highlight the seemingly pro-business aspects of the Concepcion and Dukes decisions. Other observers have expressed skepticism, suggesting that despite these developments, class action practice will be business as usual into the foreseeable future. One thing is certain, however: The full impact of these decisions, whatever it may ultimately be, cannot be measured for some time. For now, class action practitioners and litigants will continue to monitor how the Supreme Court's decisions in these cases are interpreted and applied by federal appellate courts and trial courts as 2012 unfolds.

Additional Resources

Other contributors to the 2012 edition of the Annual Review chapter on Class Action Law include: Joseph Ianno Jr., Dana R. Blunt, Anthony J. Glover, Stefanie D. Lincoln, Brian B. Vavra, and Ryan W. Wierenga of Carlton Fields; Kevin M. McGinty, Jerome Gotkin, Rashi Mittal, and Mitchell L. Lathrop of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.; Patrick Clendenen, David E. Fialkow, and Heather L. Bennett of Nelson Mullins Riley & Scarborough LLP; Christopher M. Hubbard, Anthony M.C. Alexander, and Elder Marques of McCarthy Tétrault LLP; and Scott Kugler, Deborah Templer, and Barry Stork of Gowlings.