The much-awaited decision of the United States Supreme Court is here. Dubbed by Justice Scalia as "one of the most expansive class actions ever," the Supreme Court unanimously reversed the decision of the Ninth Circuit Court of Appeals which had affirmed the certification of a class of approximately 1.5 million current and former female employees alleging discrimination in pay and promotion. While the result was widely anticipated, the decision clarifies some key class action principles in a manner favorable to employers defending such cases.

Throughout the lengthy proceedings (the District Court certified a class in 2004), the employees claimed that at each of Wal-Mart's 3,400 stores managers had discretion over pay and promotion, that that discretion was exercised disproportionately in favor of men and also that Wal-Mart was aware of this disparity and failed to curb the managers' authority. They alleged that there was a strong and uniform "corporate culture" permitting bias against women that infected the decision making of every manager, thereby affecting every female employee in one common discriminatory practice. To prove these allegations, the employees relied on statistical evidence, anecdotal reports of discrimination and a sociologist's opinion that Wal-Mart's corporate culture made it vulnerable to gender bias.

The Court began its analysis with class action Rule 23(a), which requires numerosity, commonality, typicality and adequate representation as a threshold for class certification. Although Wal-Mart argued that plaintiffs could not meet all but the numerosity requirements, the court stated that "the crux of this case is commonality." The court noted that it would be easy to craft a series of questions that appeared to present "common" issues. However, the court rejected that and reaffirmed that "commonality requires the plaintiff to demonstrate that the class members have suffered the same injury. Thus, the "claims must depend upon a common contention" that 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." Further, the court reaffirmed its prior holding that "certification is proper only if 'the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied.'"

Noting that "in this case, proof of commonality necessarily overlaps with [the employees'] merits contention that Wal-Mart engages in a pattern or practice of discrimination," the Court resolved a question that has been lingering since 1974: Whether in determining class action certification motions, the district courts can delve into the merits of the plaintiffs claims. On this issue, the Court recognized that rigorous analysis of the class action certification prerequisites will frequently "entail some overlap with the merits of the plaintiffs' underlying claim. That cannot be helped."

Conducting that analysis, the court held that for class certification there must be "significant proof" that Wal-Mart "operated under a general policy of discrimination," which it found "entirely absent." The Court thus rejected the sociologist's testimony since he admitted on deposition that he could not calculate whether the alleged biased "corporate culture" resulted in stereotyped decisions in 0.5 percent or 95 percent of the time. As to statistics, the Court stated that "merely showing that Wal-Mart's policy of discretion has produced an overall sex-based disparity does not suffice," but rather there must be a demonstration of a specific employment practice "other than the bare existence of delegated discretion." Finally, the Court also found the anecdotal evidence deficient, since there was only one affidavit for every 12,500 class members relating to only 235 out of Wal-Mart's 3,400 stores. Thus, the Court concluded that the evidence was "worlds apart" from that necessary for class certification under Rule 23(a).

In addition, the Court held that plaintiffs' request for monetary relief in the form of back pay for each class member removed the case from the category of class actions under Rule 23(b)(2) that primarily seek injunctive or corresponding declaratory relief. By alleging that their request for monetary relief was only "incidental," plaintiffs had sought to avoid the more onerous provisions of Rule 23(b)(3) and to bind the entire class without notice and an opportunity to opt out. In a major clarification of the law, the Court held that "We think that, at a minimum, claims for individualized relief (like the back pay at issue here) do not satisfy the Rule." Instead, (b)(2) applies only when a single injunction or declaratory judgment would provide relief to each member of the class and "does not authorize class certification when each class member would be entitled to an individualized award of monetary damages." The Court also noted that in order to obtain a (b)(2) certification, the plaintiffs had eschewed compensatory damages (such as mental distress), which in the Court's view "creates perverse incentives for class representatives to place at risk potentially valid claims for monetary relief."

Further, and very importantly, the Court expressly recognized the employer's entitlement to individualized determinations of each class member's eligibility for back pay. First, Title VII itself, the Court stated, precludes the payment of back pay to an employee who suffered an adverse employment action "for any reason other than discrimination." Second, courts must usually conduct hearings to determine the scope of individual relief in the second (remedial) stage of class actions. And third, the proposal by the Ninth Circuit that the issues be resolved by a "Trial by Formula" is contrary to the Federal Rules Enabling Act which "forbids interpreting Rule 23 to 'abridge, enlarge or modify any substantive right,' 28 U.S.C. Section 2072(b)." In short, "a class cannot be certified on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims."

Although focused on the world's largest class action to date, the decision reaffirms and establishes important principles beneficial to all employers. Some courts had held that only a minimal showing of compliance with Rule 23(a) was necessary for certification. This decision rejects that position and holds that a "rigorous analysis" must be made at the certification stage. Some courts had held that they could not address the merits of the claims in determining whether the prerequisites for a class action, such as the "commonality" test, had been met. Again, this decision expressly rejects that position and holds that the "rigorous analysis" will often require consideration of the merits (as it did in that case). Some courts had held that class actions could be based on "excessive subjectivity" in decision making by managers. The Court rejects that generally, instead requiring a "specific employment practice" be identified, common to all class members (and recognizing that allowing discretion by local supervisors is "a very common and presumptively reasonable way of doing business"). Further, the Court rejected the statistical, anecdotal and sociological evidence often presented in other cases as well. And finally, the Court clearly and emphatically held that where individual monetary relief is sought, the class cannot be certified under (b)(2) generally speaking and that the employer is entitled to a hearing at which it can present its defenses and reasons "other than discrimination" for each employment action at issue.