On April 26, 2010, a sharply divided 6-5 en banc panel of the Ninth Circuit Court of Appeals issued a lengthy opinion, accompanied by a scathing dissent, upholding a portion of the massive nationwide sex discrimination class in Dukes v. Wal-Mart Stores, Inc., __ F.3d __, 2010 WL 1644259 (9th Cir. April 26, 2010) (en banc). The majority opinion, authored by Circuit Judge Michael Hawkins, affirmed the decision of District Judge Martin J. Jenkins certifying under Rule 23(b)(2) of the Federal Rules of Civil Procedure a class of current female Wal-Mart employees with respect to their claims for injunctive relief, declaratory relief and back pay.
A. Different Standard For "Rigorous Analysis" In Title VII Class Actions Based On Disparate Impact, At Least In The Ninth Circuit
The Ninth Circuit's opinion has broad ramifications for Title VII discrimination class actions alleging disparate impact, at least for courts within the Ninth Circuit. The Court began by noting that the evolution of the Rule 23 standard, including recent circuit court decisions confirming that as part of the required "rigorous analysis" of the Rule 23 factors a district court can and should probe behind the pleadings and consider the merits where they overlap with class certification issues, has largely occurred in securities fraud cases. Thus, the Court cautioned that "we must, then, be aware that applying the same procedural rules, such as Rule 23, can lead to different outcomes when the underlying legal and factual framework is different." Recognizing it was in uncharted territory, the Court then stated that "we are not aware of a circuit that has detailed the issue in the Title VII context, and the typical situation presented in such a case implicates significant differences in the doctrine that require explanation to reach a resolution here and in future Title VII class action certification decisions." Contrasting a Title VII pattern and practice discrimination case with a securities fraud case, the Court concluded that "the statistical evidence disputes typical to Title VII cases often encompass the basic merits inquiry and need not be proved to raise common questions and demonstrate the appropriateness of class resolution."
The dissenting opinion authored by Circuit Judge Sandra Ikuta criticized the majority for accepting a "chain of weak inferences" that could not "conceal the fact that [the Plaintiffs] have failed to offer any significant proof of a company-wide policy of discrimination." Thus, in the view of the dissenting judges, "the door is now open to Title VII lawsuits targeting national and international companies, regardless of size and diversity, based on nothing more than general and conclusory allegations, a handful of anecdotes, and statistical disparities that bear little relation to the alleged discriminatory decisions."
B. The Ninth Circuit Certified A Rule 23(b)(2) Class Including Individual Back Pay Awards Totaling In The Billions Of Dollars
Under federal court class action jurisprudence, claims for money damages are usually certified under Rule 23(b)(3), which carries with it the heightened requirements that (1) common questions of law or fact must "predominate" over individual questions, (2) the class action must be manageable and otherwise be a superior method of resolving the litigation, and (3) the prospective class members must be given the right to "opt out" if they wish to pursue their own litigation. On the other hand, Rule 23(b)(2) contains no such requirements and is generally limited to situations where injunctive and declaratory relief will affect the class as a whole, though monetary damages can also be included if they are not the predominant form of relief sought. Here, the Ninth Circuit (and the District Court) sidestepped the more stringent requirements of Rule 23(b)(3) and instead held that claims for potentially billions of dollars in back pay were properly included in the Rule 23(b)(2) class because, according to the Court, back pay in a Title VII discrimination case (1) generally involves relatively uncomplicated factual determinations and few individualized issues, and (2) is a "make whole remedial scheme" to which the drafters of the Federal Rules purportedly intended Rule 23(b)(2) to apply.
If the Supreme Court accepts a petition for certiorari, this will be a critical issue before the Court with wide-ranging impact, not only because of the size of the monetary damages involved, but also because the Ninth Circuit applied a new standard, which was a departure from its own earlier decisions and is not used in any other Circuit, for determining the propriety of certification under Rule 23(b)(2) when monetary damages such as back pay are involved.
C. Overruling Prior Ninth Circuit Precedent, The Court Creates A Three-Way Circuit Split With A New Standard For Determining Whether Monetary Damages Predominate For Purposes Of Certifying A Rule 23(b)(2) Class
Prior to the Dukes decision, there was a split amongst the Circuits as to the proper test for evaluating whether monetary damages predominate for the purposes of Rule 23(b)(2) certification, with the Ninth Circuit and the Second Circuit utilizing a test that requires a district court to focus on the plaintiffs' subjective intent in bringing the suit, while several other circuits such as the Fifth Circuit used an "incidental damages" standard. Exacerbating the inconsistency between the circuits and arguably now creating a three-way circuit split in which the Ninth Circuit appears to stand alone, the Ninth Circuit overruled its former precedent and announced a new standard for conducting the Rule 23(b)(2) analysis: "To determine whether monetary relief predominates, a district court should consider, on a case-by-case basis, the objective 'effect of the relief sought' on the litigation," which analysis could include a number of factors set forth by the Court, such as whether individualized hearings would be required or whether the size and nature of the monetary damages, as measured by recovery per class member, raise due process and manageability concerns.
D. Certification Of The Bifurcated Punitive Damages Claims Reversed
The Ninth Circuit held that the District Court abused its discretion in failing to consider "whether certifying Plaintiffs' punitive damages claims under Rule 23(b)(2) caused monetary damages to predominate, notwithstanding its decision to require notice and an opportunity for Plaintiffs to opt-out of the punitive damages claims," and remanded for further consideration of that issue. While the Ninth Circuit expressed no view as to the propriety of certification of the punitive damages claims under Rule 23(b)(2), it did note that it has never before approved certification under Rule 23(b)(2) where there was a potential for "substantial punitive damages." In this regard, the Court identified four factors in this case that it believed should bear on the District Court's analysis under the new Rule 23(b)(2) standard, and commented that three of four of those factors militated against certification under Rule 23(b)(2).
However, the Ninth Circuit also instructed the District Court to consider whether, in the alternative, certification of the punitive damages claims was appropriate under Rule 23(b)(3), which is not subject to the same requirement that monetary relief cannot predominate. The Court noted that other circuits have embraced a "hybrid" approach where certain claims for monetary relief were certified under Rule 23(b)(3) while other claims for injunctive or declaratory relief were certified under Rule 23(b)(2).
E. Rule 23(b)(2) Class Significantly Narrowed By Excluding Former Employees, But Ninth Circuit Advises District Court To Consider Whether Certification Appropriate Under Rule 23(b)(3) Instead
The Ninth Circuit dramatically narrowed the scope of the Rule 23(b)(2) class -- by some accounts, nearly a two-thirds reduction in the number of class members -- by excluding employees who no longer worked for Wal-Mart when the Complaint was filed, the reason being that they lacked standing to pursue injunctive and declaratory relief, and thus that relief could not predominate over monetary relief for the purposes of Rule 23(b)(2) certification. However, since those employees might be eligible for back pay and punitive damages, the Ninth Circuit advised the District Court to consider whether it would be appropriate to certify one or more classes of those former employees under Rule 23(b)(3) instead.
F. Lack Of Clarity In Ninth Circuit Over Whether Expert Testimony Must Be Subjected To The Same Rigorous Analysis As Other Evidence At The Class Certification Stage
An issue that frequently arises at the class certification stage is what standard to use in considering expert testimony that bears on the propriety of certifying a class. The Court's decision here does little to clarify the issue. As part of their proof in support of a finding that common questions of fact and law exist, Plaintiffs offered the expert testimony of Dr. William Bielby, a sociologist, that subjective decision-making by itself is "susceptible to unconscious discriminatory impulses." Wal-Mart challenged this expert testimony under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), but that objection was overruled by the district court on the basis that the evidence was not "so flawed that it lacks sufficient probative value to be considered in assessing" whether class certification was appropriate. The Ninth Circuit affirmed the district court's ruling.
The dissent criticized the majority for overlooking the critical question of whether Dr. Bielby's testimony was reliable, and thus admissible under Daubert. The dissent stated that "the district court misunderstood Daubert and the level of inquiry required at the class certification stage." Pointing to recent circuit court decisions such as American Honda Motor Co. v. Allen, --F.3d--, 2010 WL 1332781 (7th Cir. April 7, 2010) and In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305 (3d Cir. 2008), the dissent stated that "[l]ike any other evidence, expert evidence introduce to 'establish a component of a Rule 23 requirement' must be reliable; it is not enough that the expert testimony is 'not fatally flawed.'"
The majority responded to this attack by simply stating that "[w]e are not convinced by the dissent's argument that Daubert has exactly the same application at the class certification stage as it does to expert testimony relevant at trial" and "we need not resolve this issue here."
G. Despite The Unprecedented Size Of The Class, The Court Finds No Manageability Or Due Process Issues That Prevent Certification
The Court concluded that there were no specific problems that would either thwart management of a class of this size, recognizing that there were a range of possible courses of action that the District Court could employ that would be both manageable and in accordance with Wal-Mart's due process rights. The Court repeated the suggestion in the December 2007 panel decision that the District Court could implement a procedure of randomly selecting and evaluating claims of a fraction of plaintiffs to calculate damages in accordance with a method the Ninth Circuit endorsed in Hilao v. Estate of Marcos, 103 F.3d 767, 786 (9th Cir. 1996), a case involving a much smaller class consisting of 10,000 Philippine nationals.
The dissent took issue with this approach, claiming that it gave short shrift to Wal-Mart's right under Title VII to individual hearings to establish a defense to each class member's claim for back pay and punitive damages.
H. The Ninth Circuit Joins Other Recent Circuit Court Decisions Such As In re IPO Which Confirm That A District Court Can And Should Go Beyond The Pleadings In Making Class Certification Determinations
The Court performed an comprehensive review of recent circuit court decisions, such as the Second Circuit's decision in Miles v. Merrill Lynch & Co. (In re Initial Pub. Offerings Securities Litig.), 471 F.3d 24 (2d Cir. 2006), which have clarified the standard that a district court must apply when determining whether to certify a class. In accord with those cases, the Ninth Circuit confirmed that as part of the district court's required "rigorous analysis" of whether the Rule 23 criteria are met, the district court will often be required to probe behind the pleadings and "analyze underlying facts and legal issues going to the certification questions regardless of any overlap with the merits." What rigorous analysis will mean within the Ninth Circuit is potentially an open question, given the Ninth Circuit's statements regarding a potentially different level of inquiry depending on the nature of the case and the statute(s) under which it is brought.