On June 20, 2011, the U.S. Supreme Court unanimously reversed the Ninth Circuit and held that the largest employment class action ever certified cannot proceed. In Wal-Mart Stores, Inc. v. Dukes, No. 10-277, the Court unanimously held that the class claims for backpay were improperly certified under Rule 23(b)(2). A majority of the Court further held that the plaintiffs had failed to prove that they had common claims, as required by Federal Rule of Civil Procedure 23(a).
The Supreme Court case involved an order certifying a nationwide class of as many as 1.5 million current and former female employees of Wal-Mart Stores, Inc. The plaintiffs alleged, among other things, that Wal-Mart had violated Title VII by adopting policies that "foster or facilitate gender stereotyping and discrimination, . . . and that this discrimination is common to all women who work or have worked in Wal-Mart stores."
The United States District Court for the Northern District of California certified the class in 2004. The Ninth Circuit granted Wal-Mart's Rule 23(f) petition for an interlocutory appeal and affirmed. The three-judge panel twice affirmed the certification in divided 2-1 decisions. The Ninth Circuit granted en banc review but affirmed in a sharply divided 6-5 decision in 2010.
The Ninth Circuit majority concluded that the plaintiffs had satisfied Rule 23(a)'s requirements of "commonality," "typicality," and "adequacy." The court found class treatment appropriate based not on a showing of any commonly applied policy or practice, but, rather on the basis of a "common question" whether female employees at Wal-Mart had experienced discrimination. In reaching this conclusion, the court rejected as a "hypothetical in clear dicta" the Supreme Court's holding in General Telephone Co. of the Southwest v. Falcon that a plaintiff seeking class treatment in this context must offer "[s]ignificant proof that an employer operated under a general policy of discrimination" that was implemented "through entirely subjective decisionmaking processes."
The Ninth Circuit also found that plaintiffs' claims for billions of dollars in backpay could be certified pursuant to Rule 23(b)(2). In doing so, the majority rejected the standards previously articulated by other circuits for mandatory certification of monetary claims and announced a newly formulated standard, which it said the plaintiffs had satisfied.
As the principal Ninth Circuit dissenting opinion put it, the decision opened the door "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." (Ikuta, J., dissenting).
In the first case to reach the Supreme Court on Rule 23(f) interlocutory appeal, that Ninth Circuit decision was unanimously reversed. Writing for the Court, Justice Scalia explained that "the crux of this case is commonality-the rule requiring a plaintiff to show that 'there are questions of law or fact common to the class.'" Slip op. 8 (quoting Rule 23(a)(2)). "That common contention, moreover, 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." Slip op. 9. In this case, the plaintiffs had failed to demonstrate a common contention of law or fact capable of classwide resolution. As a result, the class did not meet the requirements of Rule 23(a) commonality.
The plaintiffs had asserted that a common question existed because all Wal-Mart managers were afforded some discretion in making pay and promotion decisions. "On its face," the Court explained, "that is 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." Slip op. 14. This, the Court found, undermined commonality. "Without some glue holding the alleged reasons for all those 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." Slip op. 11-12.
In the absence of any claim that Wal-Mart had applied a uniform employment standard, the Court explained, Rule 23 required that Title VII plaintiffs show "significant proof" that Wal-Mart had operated under a general policy of discrimination. Slip op. 13 (quoting Falcon). But, the Court found, "significant proof" that Wal-Mart "operated under a general policy of discrimination . . . is entirely absent here." Slip op. 13. In fact, "Wal-Mart's announced policy forbids sex discrimination, and . . . the company imposes penalties for denials of equal employment opportunity." Slip op. 13.
The plaintiffs had attempted to show commonality through a combination of isolated anecdotes, statistical evidence, and the expert testimony of a sociologist. The Court held that such evidence should be "disregarded" and thus that plaintiffs' case was "worlds away from 'significant proof' that Wal-Mart operated under a general policy of discrimination." Slip op. 14. Explained the Court, "[i]n a company of Wal-Mart's size and geographical scope, it is quite unbelievable that all managers would exercise their discretion in a common way without some common direction. Respondents attempt to make that showing by means of statistical and anecdotal evidence, but their evidence falls well short." Slip op. 15-16.
Quoting Chief Judge Kozinski's dissent in the Ninth Circuit, the Court reiterated that the members of the class "have little in common but their sex and this lawsuit." Slip op. 19.
The Court further reached the unanimous conclusion that the class could not properly be certified under Rule 23(b)(2), given plaintiffs' claims for individualized backpay. Claims for monetary relief may not be certified under (b)(2), "at least where (as here) the monetary relief is not incidental to the injunctive or declaratory relief." Slip op. 20.
The plaintiffs had argued that Rule 23(b)(2) allowed monetary relief so long as it did not "predominate" over claims for injunctive or declaratory relief, but the Court squarely rejected this position. Slip op. 23-34. The Court contrasted the mandatory class authorized under Rule 23(b)(2) with those authorized under subsection (b)(3). Citing the structure and history of Rule 23, the Court explained that "[t]he key to the (b)(2) class is 'the indivisible nature of the injunctive or declaratory remedy warranted-the notion that the conduct is such that it can be enjoined or declared unlawful only as to all of the class members or as to none of them.' . . . [Rule 23(b)(2)] does not authorize class certification when each individual class member would be entitled to a different injunction or declaratory judgment against the defendant." Slip op. 20.
Similarly, explained the Court, Rule 23(b)(2) "does not authorize class certification when each class member would be entitled to an individualized award of monetary damages." Slip op. 20-21 (citation omitted); see also Mark A. Perry & Rachel S. Brass, Rule 23(b)(2) Certification of Employment Class Actions: A Return to First Principles, 65 N.Y.U. Ann. Surv. Am. L. 681 (2010). In contrast, Rule 23(b)(3) may apply when class-action treatment is not as clearly called for, as it provides the added procedural protections of notice to class members and the opportunity for class members to opt out. The Court explained that allowing classes for monetary damages to proceed under Rule 23(b)(2), even where an injunction or declaratory remedy predominates, would nullify the procedural protections that the Rule provides under subsection (b)(3).
Reserving the question whether monetary claims can ever be certified in a (b)(2) class, the Court unanimously concluded that the plaintiffs could not meet this standard in any event. The plaintiffs' backpay claims required individualized determinations that could not be considered "incidental" to a classwide injunction. In so holding, the Court rejected the "Trial by Formula" plan approved by the Ninth Circuit, which would have allowed the district court to try a sample set of selected cases and then apply the percentage of claims found to be valid and the average backpay award to determine recovery for the entire class. Rejecting this "novel project," the Court explained that Title VII affords Wal-Mart the right to raise individual defenses regarding each class member's eligibility for backpay. Slip op. 27. Wal-Mart must be permitted to litigate those statutory defenses, explained the Court, because the Rules Enabling Act forbids interpreting a Rule of Civil Procedure to "abridge, enlarge or modify any substantive right." The Court also emphasized the "need for plaintiffs with individual monetary claims to decide for themselves whether to tie their fates to the class representatives' or go it alone-a choice Rule 23(b)(2) does not ensure that they have." Slip op. 24.
Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, joined in full the majority's holding regarding Rule 23(b)(2) but wrote separately to express disagreement with the Court's conclusion regarding commonality. Justice Ginsburg would have remanded for the district court to consider whether the requirements of Rule 23(b)(3) were met. Slip op. 1 (Ginsburg, J., concurring in part and dissenting in part).
This is an extremely important victory for all companies, large and small, and for their employees. The decision clarifies fundamental rules of class action law and establishes principles that will protect the rights of all participants in the civil justice system. The case also demonstrates the importance of interlocutory challenges to class certification to curb Rule 23 abuses.