Yesterday, the U.S. Supreme Court reversed the Ninth Circuit’s decision affirming certification of a class action comprising some 1.5 million current and former female Wal-Mart employees seeking injunctive relief and backpay. Wal-Mart Stores, Inc. v. Dukes, No. 10-277, June 20, 2011. The Court was unanimous in its decision to reverse certification under Rule 23(b)(2), though the Justices split 5-4 on whether the plaintiffs had met their burden of establishing the presence of common issues of law or fact required by Rule 23(a). Both portions of the Court’s opinion will have a significant impact on class action litigation going forward.

Plaintiffs were current and former female employees who sued Wal-Mart in 2001 in the U.S. District Court for the Northern District of California, alleging that, despite Wal-Mart’s written non-discrimination policy, the company permitted local managers to exercise their discretion over pay and promotions disproportionately in favor of men. Plaintiffs alleged that the managers’ practices adversely impacted female employees, and that the company’s tolerance of such practices amounted to disparate treatment in violation of Title VII. Plaintiffs moved for certification of a nationwide class under Rule 23(b)(2) consisting of all women who had been subjected to Wal-Mart’s allegedly discriminatory practices. Plaintiffs sought a judgment for injunctive relief, punitive damages, and backpay that, if entered, could have cost the company more than a billion dollars.

The District Court certified the class, finding that respondents satisfied Rule 23(a)’s requirements for class certification and Rule 23(b)(2)’s requirement that “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 Ninth Circuit substantially affirmed in a divided en banc opinion, concluding, inter alia, that respondents met Rule 23(a)(2)’s commonality requirement and that their backpay claims could be certified as part of a (b)(2) class because those claims did not predominate over the declaratory and injunctive relief requests.

In an opinion authored by Justice Scalia, the Supreme Court reversed the Ninth Circuit and held that: (1) the plaintiffs did not satisfy Rule 23(a)’s commonality requirement for class certification; and (2) the plaintiffs could not proceed with their claims for backpay under Rule 23(b)(2) because such claims were specific to individual plaintiffs and thus had to be certified under Rule 23(b)(3) (which unlike (b)(2) requires notice and opt-out announcements) and tried on a plaintiff-by-plaintiff basis in order to allow the company to assert individualized affirmative defenses.

Rule 23(a) Certification. Writing for a 5-4 majority, Justice Scalia announced that the “commonality” inquiry under Rule 23(a) is not merely a pleading standard, but a standard with which plaintiffs must affirmatively demonstrate their compliance through the proffer of competent proof. The majority explained that, in order to be certified as a class action, plaintiffs must be “prepared to prove that there are in fact sufficient numerous parties, common questions of law or fact, etc.,” and that in evaluating the sufficiency of a plaintiffs’ proof of these issues it “may be necessary for the court to probe behind the pleadings.” Further, to meet their burden, plaintiffs must prove that their claims depend upon a common contention “of such a nature that . . . determination of its truth or falsity will resolve an issue that is central to the validity of each of the claims in one stroke.” Therefore, under the commonality inquiry, what matters is not the presence of common questions per se (which the Court observed can always be generated in a well-pleaded class action complaint), or whether the plaintiffs have allegedly been harmed in violation of the same law. What matters is plaintiffs’ ability to demonstrate that the harm they allegedly suffered resulted from common conduct by the defendant such that proceeding with a class action will provide an efficient means of determining the conduct’s legality or illegality as to all class members.

In reaching this decision, the majority did not confine its analysis to Title VII cases or even the commonality requirement in Rule 23(a). It stressed 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,” and emphasized that putative class members must be “prepared to prove” that all the elements the rule requires for certification are “in fact” satisfied. The majority also suggested (though it did not decide the issue) its support for the practice, openly acknowledged in the Third and Seventh Circuits and taking hold in the Second, of subjecting to Daubert scrutiny expert testimony proffered in support of class certification.

Finally, the majority’s analysis of Rule 23(a) contained some important headlines and lessons for Title VII and employment litigation. First, the Court announced that in Title VII cases proof of commonality necessarily overlaps with a plaintiffs’ merits contention that a defendant engaged in a pattern or practice of discrimination. Second, the Court emphasized that a company’s size and adoption of a written non-discrimination policy are relevant in determining whether plaintiffs have satisfied Rule 23(a)’s commonality requirement. Plaintiffs alleging unlawful discrimination in spite of such a policy must “bridge the gap” with “significant proof” that the company nonetheless “operated under a general policy of discrimination.” Third, the Court emphasized that such proof must be specific and substantive, and that the mere fact that a corporation delegates to individual managers the discretion to make individualized employment determinations (a practice the Supreme Court identified as “presumptively reasonable” and not sufficient to raise an “inference of discriminatory conduct”) was not, even when coupled with anecdotes of disparate treatment and a sociological study of corporate culture, sufficient to establish that the complaint arose from the kind of common discriminatory practices required for certification.

Rule 23(b) Relief. Writing for a unanimous Court, Justice Scalia declared that class actions may not be certified under Rule 23(b) (2) when the class seeks an award that will require individualized proof of damages. Although the Court rendered its decision in the context of rejecting the plaintiffs’ argument that an award of backpay was merely “incidental” to the injunctive relief sought, the Court did not confine its analysis to such claims. The Court declared that any claims for relief that are specific to individual class members, including individualized claims for equitable relief such as reinstatement, are generally inappropriate for certification under Rule 23(b)(2). As the Court went on to explain, such claims almost always require the procedural protections— particularly class action and opt-out notices to putative class members—that Rule 23(b)(3) provides and Rule 23(b)(2) does not. Although the Court’s opinion does not go so far as to say that monetary damages may never be pursued under Rule 23(b) (2) as “incidental” to class-wide injunctive or declaratory relief, it is safe to say that its opinion counsels (if not requires) virtually all class action plaintiffs seeking individualized relief to meet the procedural requirements of Rule 23(b)(3).

Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, concurred in part and dissented in part. The dissenting Justices agreed with the majority that individualized damages are not available under Rule 23(b)(2). However, the dissent affirmatively disagreed with the majority’s analysis of commonality under Rule 23(a), arguing that the decision conflated the threshold criterion of commonality with the more demanding criteria of Rule 23(b)(3), particularly in Title VII cases.

The upshot of the decision is that, although it contains some important lessons for employer-employee litigation, its analysis is not limited to such cases, and signals a more rigorous standard for certifying classes and class claims for relief than many federal courts have applied to date.

Click here to view the Supreme Court’s decision.