The decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) continues to have a profound impact on employment class actions across the country. The Ellis v. Costco decision, in the Ninth Circuit, gives greater focus to the impact of Dukes on employment discrimination classes. The Supreme Court confirms that Dukes impacts wage and hour cases, too, as the Court grants certiorari to vacate and remand the Ninth Circuit’s class certification decision in the Chinese Daily News case in light of the Dukes standards for class certification.

Ellis v. Costco—Gender Discrimination

The US Court of Appeals for the Ninth Circuit issued a decision construing the US Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) under facts bearing marked similarities to the Dukes case. In Ellis v. Costco Wholesale Corporation, No. 07-15838 (9th Cir. September 16, 2011), the Ninth Circuit reversed the district court’s order granting class certification of a Title VII claim and remanded for the district court to reevaluate certification in light of Dukes. Ellis is one of the first appellate decisions to apply the Supreme Court’s recent ruling.

In Ellis, plaintiffs alleged that Costco discriminated based on gender in its decisions to promote employees to managerial positions. The proposed class consisted of approximately 750 current and former female employees—a much smaller class than the almost 1.5 million proposed members in Dukes. The named plaintiffs sought an injunction against the allegedly discriminatory policies, as well as lost pay and compensatory and punitive damages.

Prior to the Supreme Court’s Dukes decision, the Northern District of California had ruled in the Ellis case that all of the requirements of Rule 23(a)—numerosity, commonality, typicality and adequacy—had been satisfied. Based on plaintiffs’ signed statements stating that their predominant intent in filing suit was to recover injunctive relief, the district court certified the class under Rule 23(b)(2). On appeal after Dukes, the Ninth Circuit held that the district court applied the wrong legal standard under Rule 23(b)(2) and in its analysis of commonality and typicality under Rule 23(a).

Notwithstanding the much smaller proposed class size in Ellis, the Ninth Circuit applied many of the principles from Dukes to the factual circumstances in the Ellis case. In establishing commonality, the Ninth Circuit held that the district court failed to conduct the required “rigorous analysis” to determine whether the Ellis plaintiffs had “a common question that will connect many individual promotional decisions to their claim for class relief.” Consistent with Dukes, the court stated that when conducting the rigorous analysis, the district court must consider the merits of class members’ substantive claims to the extent they overlap with the Rule 23(a) requirements.

The Ninth Circuit also made explicit what the Supreme Court implied in Dukes—that the evidentiary standard set forth in Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 597 (1993) should be applied to determine the admissibility of expert opinions offered in support of class certification, and that the commonality determination required the district court to go even further and weigh the persuasiveness of the expert evidence.

The Ellis court pointed to the conclusion by Costco’s expert that gender disparities existed in, at most, two out of eight regions, and stated that this was not meaningfully disputed by plaintiffs’ expert. The court explained that testimony that disparities did not exist nationwide made it questionable whether the class could meet the commonality requirement for a nationwide class. This reasoning is consistent with the Supreme Court’s holding in Dukes, which rejected plaintiffs’ statistical evidence about pay and promotion disparities because it was limited to regional and national data the Supreme Court deemed “insufficient to establish that [plaintiffs’] theory can be proved on a classwide basis.”

In assessing commonality, the Ninth Circuit also emphasized the importance of where the promotional decisions in question were made. Prior to Dukes, plaintiffs had tried to meet the commonality requirement of Rule 23(a) by showing that a defendant had a uniform practice of delegating discretion to local supervisors. Dukes and Ellis have challenged that approach. In Ellis, the parties disputed whether promotional decisions were made at the local warehouse level or were influenced by upper management at Costco headquarters. The Ninth Circuit suggested that if the decisions were made on a local basis, it would be challenging for plaintiffs to show the requirements for class treatment were met since plaintiffs would not be able to show that “all the employees’ Title VII claims will in fact depend on the answers to common questions.”

The Ninth Circuit also vacated the district court's findings as to typicality since the district court failed to consider the “effect that defenses unique to the named Plaintiffs’ claims” would have on the typicality question. While the court declined to express an opinion on whether Costco’s defenses to the named plaintiffs’ claims were typical of those that Costco could raise against other members, it is clear that the widely varying factual circumstances of the named plaintiffs would make class certification more difficult.

In its decision, the Ninth Circuit acknowledged that “predominance” was no longer the test for determining whether monetary damages may be included in a 23(b)(2) class action. Rather, “the relevant inquiry is what procedural safeguards are required by the Due Process Clause for the type of relief sought.” The Ninth Circuit did not discuss the Supreme Court’s suggestion in Dukes that Rule 23(b)(2) class certification may never be appropriate when pecuniary damages are sought. Rather, the court treated the “incidental monetary relief” exception as good law and stated that it is an open question whether punitive damages could be considered “incidental monetary relief” and thus justify certification under Rule 23(b)(2).

The Ninth Circuit also remanded for consideration whether the case could be certified under Rule 23(b)(3), and whether the case could be divided into two separate classes: one for current employees under Rule 23(b)(2) and one for former employees under Rule 23(b)(3). In analyzing certification of a class under Rule 23(b)(3), the district court would need to consider the additional question of whether issues that met the commonality test in Dukes predominated over those that did not.

Finally, the Ninth Circuit emphasized how important it is for the district court to consider and address specifically how the class action would be managed. In particular, the district court was directed to determine whether it could “accommodate the need for individualized determinations of compensatory damages by bifurcating the trial into different phases.” While the Ninth Circuit found it premature to address manageability at the appellate level, in light of its decision to vacate certification and remand to the district court, the court signaled that manageability could be an issue in a subsequent appeal.

In Ellis, the Ninth Circuit gave a clear indication of how it will interpret Dukes in employment discrimination cases, requiring class plaintiffs to clearly establish each of the requirements under Rule 23(a) and Rule 23(b). The court’s suggestion that claims for punitive damages may be consistent with seeking Rule 23(b)(2) certification is arguably not consistent with Supreme Court precedent and bears further watching for future developments.

Chinese Daily News, Inc. v. Wang—Wage and Hour

On October 3, 2011, the Supreme Court vacated a $7.7 million verdict in a wage and hour class action case in the wake of its June decision in Dukes. The wage and hour case, Chinese Daily News, Inc. v. Wang, No. 10-1202, presented a situation in which the district court had certified the plaintiffs’ state law claims for class treatment under both Federal Rule of Civil Procedure 23(b)(2) and 23(b)(3). Therefore, while the case will return to the Ninth Circuit for an evaluation of the Rule 23(b)(2) holding in light of Dukes, the plaintiffs may still rely on an alternative argument to support the district court’s verdict.

In Chinese Daily News, several newspaper reporters sued their employer alleging they were made to work overtime without proper compensation. They brought various state law claims, including a claim under California’s Unfair Competition Law (UCL), Cal. Bus. & Prof. Code § 17200. To maintain a class action with respect to the state law claims, the plaintiffs had to meet either the standard set forth in Rule 23(b)(2), which allows for certification of classes seeking injunctive or declaratory relief, or the standard set forth in Rule 23(b)(3), which allows for classes seeking money damages.

The district court certified the claims under Rule 23(b)(2) and, as an alternative, held that the claims met the Rule 23(b)(3) standard. On appeal, the Ninth Circuit affirmed the district court’s decision under Rule 23(b)(2), holding that certification was appropriate under that section because the claims for equitable relief stood on “equal footing” with the claims for money damages. Notably, the Ninth Circuit declined to reach the issue of whether the state claims were properly certified under Rule 23(b)(3).

Thereafter, the Supreme Court issued its opinion in Dukes, in which the Court reevaluated the use of Rule 23(b)(2) and held that claims for money damages could not be certified under that section where the claim was merely “incidental” to a request for injunctive relief (i.e., when the damages did not “flow directly from liability to the class as a whole, without the need for additional hearings”).

In light of Dukes, the employer in Chinese Daily News petitioned the Supreme Court to overturn the Ninth Circuit’s holding, arguing that the Ninth Circuit’s application of an “equal footing” standard was erroneous and failed to meet the Dukes standard. The Court granted certiorari and on October 3, 2011, vacated the Ninth Circuit’s opinion and remanded the case with specific instructions for the Ninth Circuit to make further considerations in light of Dukes. Presumably, on remand, the Ninth Circuit will reevaluate its finding that the state law claims were properly certified under Rule 23(b)(2). If it finds that the claims do not meet the Dukes standard, it will likely have to consider, for the first time, whether certification of the state law claims was proper under the alternative authority of Rule 23(b)(3).

Therefore, despite the Supreme Court remand, the Chinese Daily News litigation may be far from over. Yet the case illustrates the importance of Dukes for wage and hour class action cases, especially in cases where certification is sought under Rule 23(b)(2).