On June 20, 2011, the Supreme Court handed down its decision in Wal-Mart Stores, Inc. v. Dukes,1 which is likely to have far-reaching effects on federal class actions.

In Wal-Mart, the Court unanimously reversed a Ninth Circuit ruling that had affirmed class certification for approximately 1.5 million female Wal-Mart employees who had alleged gender discrimination under Title VII of the Civil Rights Act of 1964. The Court, however, split on the basis for that reversal. While the Court unanimously held that the plaintiffs’ claims for back pay precluded certification under Rule 23(b)(2), a five-member majority also held, in an opinion written by Justice Scalia, that the plaintiffs did not satisfy “commonality” under Rule 23(a)(2) of the Federal Rules of Civil Procedure.2 In doing so, the Court established a more stringent interpretation of Rule 23(a)(2) than many courts have previously applied under that Rule.

The Wal-Mart plaintiffs based their Title VII claim on allegations that Wal-Mart’s human resources policies left significant discretion in the hands of local store managers, rather than establishing a single, overarching set of policies for nationwide compensation and promotion determinations. The thousands of individual store managers allegedly determined compensation and promotions “disproportionately in favor of men” due to a “corporate culture” that allegedly permitted bias against women.

Plaintiffs moved for certification under Rule 23(b)(2), seeking injunctive and declaratory relief and back pay. They did not seek compensatory damages, which would have required certification under Rule 23(b)(3).

The district court granted plaintiffs’ motion for certification. On appeal, the Ninth Circuit affirmed.

The Supreme Court reversed on multiple grounds. First, the Court unanimously held that plaintiffs’ claims for backpay could not properly be certified under Rule 23(b)(2) because they were not “incidental” to the requested injunctive relief. The Court found that Rule 23(b)(2) “does not authorize class certification when each class member would be entitled to an individualized award of monetary damages” because allowing such a class would amount to an end run on Rule 23(b)(3)’s requirements.

In doing so, the Court rejected the Ninth Circuit’s “Trial by Formula” approach to Rule 23(b)(2) class actions, in which a sample of class members’ backpay claims are tried on the merits and the results extrapolated to the claims of the entire class. The Court found this method to be contrary to due process and the Rules Enabling Act, since it would deprive the defendant the opportunity to litigate its defenses to each individual claim, as it would have the opportunity to do under Rule 23(b)(3).

Second, a 5-4 majority of the Court also held that plaintiffs did not show the existence of “questions of law or fact common to the class,” or “commonality,” under Rule 23(a)(2). To meet the requirements of Rule 23(a)(2), plaintiffs offered evidence including: (a) the expert opinion of a sociologist who concluded, based on a “social framework analysis,” that Wal-Mart’s “culture” was vulnerable to gender discrimination; (b) statistical evidence that women suffered a “disparate impact” in pay and promotions; and (c) anecdotal evidence comprised of 120 affidavits alleging gender discrimination in specific Wal-Mart stores. Plaintiffs also argued that a common legal issue was whether Wal-Mart violated Title VII as to all members of the proposed class.

The Court found that plaintiffs did not satisfy Rule 23(a)(2). Relying on its prior decision in Falcon,3 the Court interpreted Rule 23(a)(2) as requiring “plaintiffs to demonstrate that the class members have suffered the same injury,” not simply that they “suffered a violation of the same law.” Under this interpretation, the Court required plaintiffs to allege a “common contention” that, when determined, “will resolve an issue that is central to the validity of each one of the claims in one stroke.”

As the dissent observed, the majority’s interpretation of Rule 23(a)(2) upended previously settled law from the lower courts that had found commonality to be “easily satisfied” by evidence of a single question common to the class (for example, that all class members were employed by Wal-Mart) that would merely “advance the determination of the class members’ claims.” Under this new Rule 23(a)(2) regime, however, plaintiffs will likely have to satisfy a more precise test for commonality: that each member of the proposed class suffered a common injury caused by a common act.

Applying its commonality test to the alleged facts, the Court found that the plaintiffs provided insufficient proof to support class certification. The Court rejected plaintiffs’ anecdotal and statistical evidence as insufficient proof of any common mode of exercising managerial discretion. While plaintiffs offered expert testimony on an alleged “general policy of discrimination,” the Court disregarded the testimony because the expert could not answer the “essential question” on which plaintiffs’ theory of commonality depended: the extent to which Wal-Mart “operated under a general policy of discrimination.” In his deposition, the expert had conceded that “he could not calculate whether .5 or 95 percent of the employment decisions at Wal-Mart might have been determined by stereotyped thinking.”

While arising in the context of an employment discrimination case, the Wal-Mart decision substantially alters the landscape of federal class certification. By recognizing individualized conduct as a barrier to a finding of commonality, the Wal-Mart decision establishes a blueprint for class certification defenses in several other commonly litigated areas of law. For example, in an antitrust price-fixing case, defendants could plausibly challenge commonality on the basis that individual sales managers have authority to decide whether to implement an allegedly fixed list price or whether to keep prices at the pre-conspiracy levels for some or all customers (i.e., potential class plaintiffs), in spite of any alleged information sharing or agreements among higher-level managers.

Beyond its split decision on Rule 23(a)(2), the Court’s unanimous decision also brought needed clarity to the interplay between Rule 23(b)(2) claims for injunctive relief and Rule 23(b)(3) claims for monetary recovery. In recent years, the class action plaintiffs’ bar has increased its efforts to certify Rule 23(b)(2) classes when faced with hurdles to Rule 23(b)(3) certification particularly where they faced difficulty proving predominance and superiority. The Court’s rejection of this attempt in Wal-Mart will prove useful to defendants not only in labor and employment class actions, but also in consumer protection, consumer product and antitrust class actions.

A subsidiary element of the decision, but one that will also have a far-reaching effect, is the five-member majority’s implicit endorsement of the application of the Daubert test for admissibility of expert opinion at the class certification stage. While the Court did not expressly decide that Daubert applies at the class certification stage, it did express “doubts” about the district court’s determination that it did not apply. The inability of the expert to determine whether a very small or very large percentage of the employment decisions were affected by “stereotyped thinking” led the Court to conclude that his testimony “does not advance respondents’ case” and should have been disregarded by the district court.

The Court’s scrutiny of plaintiffs’ expert has implicitly endorsed (though it did not cite) a string of recent circuit court decisions taking a more stringent view of plaintiffs’ burden to prove their proposed class satisfies Rule 23 class certification requirements.4 If plaintiffs proffer expert testimony to do so, it is now likely they must satisfy the district court at the certification stage that the expert’s testimony is admissible and reliable. In our practice, district courts have shown themselves willing to strike experts at the class certification stage in reliance on these recent decisions. Without experts, class action plaintiffs have found certification difficult, if not impossible.

As with most “landmark” Supreme Court decisions, the full effects of Wal-Mart will not be known until questions like these are resolved by the lower courts, but plainly the landscape has changed.