Sometimes large is too large. The concept of a class action in litigation is that many small claimants, each with a relatively modest claim, may band together and seek relief that redresses a violation of law or other claims that would be uneconomical or difficult to pursue individually. But, when the potential class size reaches the gargantuan and would involve potentially more than 70 percent of a large national employer’s workforce, it’s time to evaluate whether such a class is sustainable on the basis that all of the claimants are aggrieved based on the same policy or practice of the employer. That is the decision of the U.S. Supreme Court in Dukes v. Wal-Mart Stores, Inc. (June 20, 2011).
In its ruling, the Supreme Court has set out clear rules for the use of the class action provisions of Rule 23 of the Federal Rules of Civil Procedure. It has instructed the lower courts that the initial decision to certify a class requires a more rigorous analysis than previously thought to establish that there exists “common questions of law or fact.” This decision, the Court held, may require some analysis of the merits of the case. Furthermore, certification of a class based on the provisions of Rule 23 that address claims for declaratory or injunctive relief, may not be premised solely on the existence of claims for backpay, which though it is a form of equitable relief under the Title VII of the Civil Rights Act of 1964, nonetheless is monetary relief. Finally, the teachings of Dukes may well extend into the certification of “classes” of employees in “collective actions” authorized under the Fair Labor Standards Act of 1938.
Overview of the Facts of the case
The specific issue in Dukes was whether some 1.5 million female employees of the Wal-Mart, one of the largest employers in the world, were the victims of discrimination based on sex regarding pay and promotional opportunities. The plaintiffs claimed that Wal-Mart discriminated against them because male workers received disproportionately more favorable promotions and pay increases, thus having a disparate impact on them (discrimination resulting from a policy or practice and not from intentional discriminatory conduct). The plaintiffs also argued that Wal-Mart’s operating policy of delegating to local managers significant discretion in such personnel decisions operated as a form of disparate treatment (or intentional discrimination) against them.
The Requirements of Rule 23
Rule 23 of the Federal Rules of Civil Procedure sets out the basic requirements of proceeding in federal court as a class action. One requirement is that the plaintiffs show that there are “common questions of law or fact” that would apply to all class members and if resolved would end the case. This requirement, set out in Rule 23(a) is fundamental to any type of class action. Also, Rule 23(a) class actions require notice to all potential class members and an opportunity to opt out of the case. Another set of requirements in Rule 23(b) applies to class actions that seek injunctive or declaratory relief. These types of class actions do not require notice to potential class members or opportunity to opt out. Only “equitable” relief such as injunctive relief and declaratory judgments are authorized under this rule.
The plaintiffs contended that they satisfied the requirement of Rule 23(a) on the basis that Wal-Mart engaged in a pattern or practice of discrimination that touched all members of the putative class (presumed or requested class). Plaintiffs relied upon expert testimony from social scientists who said that Wal-Mart’s corporate culture made it vulnerable to gender bias.
The plaintiffs contended that a class could be properly certified under the provision of Rule 23 that authorizes a class action where the relief sought is injunctive or declaratory relief that would apply to the entire group of plaintiffs. In the plaintiff’s view, Rule 23(b)(2) was available to them because they sought backpay, a form of equitable relief, and not compensatory damages. Plaintiffs claimed that their claims for backpay did not predominate over their injunctive and declaratory relief requests.
The Lower Courts’ Rulings
A U.S. District Court in California granted the plaintiffs’ motion for class certification of a nationwide class of all female employees who were employed at any time since December 26, 1998. One difficulty for the plaintiffs was the acknowledged absence of a corporate policy against the advancement of women. Instead, they argued that Wal-Mart’s policy of delegating to local managers significant discretion over pay and promotions resulted in an unlawful disparate impact on all female employees of the company. The plaintiffs contended that a strong and uniform “corporate culture” allowed bias to infect, consciously or otherwise, the local managers’ decision-making and resulted in a discriminatory practice that adversely impacted everyone female employee of the company. A divided U.S. Court of Appeals for the Ninth Circuit affirmed the class certification decision of the District Court. The Supreme Court granted certiorari to review the decision of the Court of Appeals.
Supreme Court Rejects the Reasoning and Decision of the Plaintiffs and the Lower Courts
The Supreme Court dissected the arguments put forward by the plaintiffs and rejected each one. First, the high court addressed the central issue – commonality – that is, whether there were questions or law or fact common to the class. “Commonality,” wrote Justice Scalia for the majority, “requires the plaintiff to demonstrate that the class members ‘have suffered the same injury.’” To prove this, the plaintiffs were required to do more than merely show that they were employed by the same company or that they claimed that the same provision of the law had been violated.
In this case, the plaintiffs contended that thousands of Wal-Mart supervisors across the country, each vested with discretion to set pay and make promotional decisions, somehow made decisions that routinely and uniformly disfavored female employees. “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.”
Another issue that is of interest to lawyers and judges, but one that is quite important in class action litigation, is whether and the extent to which a court may consider the merits of the case when decision a class certification motion. Here the Supreme Court said that the “rigorous analysis” required under Rule 23 often would entail some overlap with the merits of the plaintiffs’ underlying claim and that it was not wrong for a lower court to engage in that analysis. In this case, the Court noted, “proof of commonality necessarily overlaps with respondents’ [the plaintiffs’] merits contention that Wal-Mart engages in a pattern or practice of discrimination.” The majority opinion tellingly stated: “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.”
Relying on its precedents, in particular its 1982 decision in General Telephone Co. of the Southwest v. Falcon, a case involving claims of race discrimination in promotions, the Court reminded us that “there is a wide gap” between an individual’s claim that he has been the victim of such discrimination and an otherwise unsupported claim that the employer has a policy of discrimination. According to the Court, this gap can be bridged, for example, through proof of a biased testing procedure that could have adversely affected every person subjected to it, or by “significant proof that an employer operated under a general policy of discrimination.”
The difficulty for the plaintiffs here, the Court noted, was that it was clear that Wal-Mart did not operate under a general policy of discrimination against women – in fact its stated policy, like that of most employers, makes discrimination on the basis of sex a violation of company policy. To bridge this gap, the plaintiffs obtained the opinion of a sociological expert, who testified that, based on a “social framework” analysis, Wal-Mart had a “strong corporate culture” that made it “vulnerable” to “gender bias.” However, the expert conceded that he could not state whether 0.5 percent or 95 percent of the managerial decisions at Wal-Mart might be determined by stereotyped thinking. The Supreme Court said that the expert’s testimony was “worlds away from ‘significant proof’ that Wal-Mart “operated under a general policy of discrimination.”
The Supreme Court also rejected the plaintiffs’ efforts at gap-filling on the basis that Wal-Mart, in effect, had a operated on a common policy of sex discrimination. Aside from the expert’s “social framework” analysis, the plaintiffs “have not identified a common mode of exercising discretion that pervades the entire company. . . . In 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,” wrote Justice Scalia for the majority.
Although the plaintiffs had filed some 120 affidavits reciting instances of discrimination – about 1 for every 12,500 class members – these reports of alleged discrimination were insufficient, the Court held, to establish that Wal-Mart operated under a general policy of discrimination, even if every single account were true. The Court noted that the affidavits were concentrated in a few states and that about half of the states had only one or two anecdotes of alleged discrimination and some states had none. Thus, because the plaintiffs had failed to provide “convincing proof of a companywide discriminatory pay and promotion policy, we have concluded that they have not established the existence of any common question,” the Court held.
The Backpay Issue – No “Trial by Formula”
The final point addressed by the Supreme Court concerns a provision of Rule 23 that permits a court to certify a class when the relief sought is injunctive or declaratory relief, not money damages. The plaintiffs had argued that Rule 23(b)(2) permitted their claims to be pursued in a class action because backpay under Title VII is an equitable remedy.
The Court acknowledged and reaffirmed its position that backpay under Title VII is an equitable remedy, but ruled that this point was irrelevant. Rule 23(b)(2) allows a class seeking injunctive or declaratory relief that applies to the class as a whole. Whether monetary claims can ever form the basis for a class under this provision of Rule 23 is not a matter that need be decided at this time, the majority wrote, because it is clear that a Rule 23(b)(2) class is not the appropriate mechanism when the relief sought is comprised of individualized claims for backpay.
The Supreme Court rejected the view of the lower courts that the claims of the plaintiffs could be aggregated or disposed of in a “trial by formula,” where a sampling of the claims would be tried and the result extended to the class as a whole. “Wal-Mart would is entitled to individualized determinations of each employee’s eligibility for backpay,” The Supreme Court majority said. The plaintiffs had argued that their claims for monetary relief were merely “incidental” to the injunctive relief that they sought, but the Supreme Court held that this was beside the point. Noting that Rule 23(b)(2) classes lack some of the procedural safeguards of other class actions – namely notice to the class and the opportunity to opt out – the Court deferred to another day the question whether such a class action could be certified under Rule 23(b)(2).
What Does this Mean for Employers and Class Actions in General?
First, although some commentators already have predicted that class action litigation no longer is viable, it is too soon to predict the demise of a litigation device that has been used with regularity for nearly 40 years. There is still room for class actions in appropriate cases. However, the Dukes decision will likely result in ever-increasing and searching scrutiny by the federal courts to ensure that classes that are too unwieldy or that do not provide the “glue” to connect all of the claims are not certified. Thus, it is too early to say that a large class can never be certified based on its size alone. Rather, the pertinent question is whether the relief sought will apply to each member of the class and end the matter.
Second, the Supreme Court’s decision in Dukes may be a harbinger of the Court’s future analysis in collective actions under the Fair Labor Standards Act (FLSA), the fastest-growing and perhaps largest single category of cases on the federal courts’ dockets during the past decade. Although a collective action under the FLSA is not governed by Rule 23, the threshold question is whether the plaintiffs’ are “similarly situated.” The federal courts have fashioned a variety of tests to determine whether a plaintiffs’ “class” meets that standard, and the Supreme Court’s analysis of the analogous issues of “commonality” under Rule 23 may well inform those decisions going forward. We should expect that when a FLSA collective action case eventually reaches the Supreme Court, reasoning similar to that which it applied to Rule 23 class actions in Dukes will be applied. For now, however, employers and defendants generally may breathe a bit easier in light of the Supreme Court’s decision to reign in large class actions.