On June 20, 2011, the United States Supreme Court sided with Wal-Mart in a long-awaited decision regarding standards that apply to class action cases. The new opinion makes it harder for plaintiffs to obtain class certification.

The case was brought by three female Wal-Mart employees (current and former) who claimed that the local supervisors of Wal-Mart stores — on a nationwide basis — exercised discretion over pay and promotion matters in a way that discriminated against women. The underlying question was whether the plaintiffs can represent a class of 1.5 million women around the country, namely, “all women employed at any Wal-Mart domestic retail store at any time since December 26, 1998 who have been or who may be subjected to Wal-Mart’s challenged pay and management track promotions policies and practices.”

In most cases, litigants represent themselves, but a class action is an exception to this rule. In a class action, class representatives litigate on behalf of the other class members. One easy illustration of this can be seen in the insurance industry. If a life insurance company allegedly uses a formula that cheats 10,000 people out of the full cash surrender value of their policy, it is easy to understand why courts and litigants would prefer to adjudicate the dispute with a single class action litigation (led by a handful of representatives) rather than hundreds or thousands of claims. Thus, class action procedure can be thought of as a tool to help make litigation administratively simpler for courts and litigants alike. The ultimate question in the Wal-Mart case was whether class action procedure applies to a nationwide class of 1.5 million women since December 1998.

Even though news outlets are describing the decision mainly in ideological or political terms, the decision itself reads more like a treatise on Rule 23, the procedural rule governing class action practice in federal courts. Before the question of class certification can be considered, there are four “prerequisites” a plaintiff must meet under Rule 23: (i) numerosity (plaintiff must represent enough people); (ii) commonality (all the class members must have enough in common with regard to how they were treated); (iii) typicality (the class representative / lead plaintiff must be factually “typical” of the other members of the putative class); and (iv) adequacy (the class members must have adequate resources and lawyers to be able to represent the class sought to be certified). If all four prerequisites are met, then the Court may go on to assess whether the class meets other requirements necessary to constitute a proper class type.

Wal-Mart focuses on the second prerequisite, commonality. What “common” policy or practice of Wal-Mart can account for unfavorable treatment toward women across the country? Plaintiffs focused on the “delegated discretion” exercised by Wal-Mart management to make pay decisions and promotional offers. Across the country, plaintiffs argued, the selection of employees for promotion to in-store management is fairly characterized as a “tap on the shoulder” process, in which managers have discretion about whose shoulders to tap. Vacancies are not regularly posted; from among those employees satisfying minimum qualifications, managers choose whom to promote on the basis of their own subjective impressions. Plaintiffs argued that result of “delegated discretion” can only be seen as discrimination:

Women fill 70 percent of the hourly jobs in the retailer’s stores but make up only “33 percent of management employees.” “[T]he higher one looks in the organization the lower the percentage of women.” The plaintiffs’ “largely uncontested descriptive statistics” also show that women working in the company’s stores “are paid less than men in every region” and “that the salary gap widens over time even for men and women hired into the same jobs at the same time.”

(Dissent at p. 4) The plaintiffs also had experts who concluded that the disproportionate numbers could only be explained by systematic culture that favors men over women.

The Supreme Court focused upon the second prerequisite (commonality) — concluding that the class members in the Wal-Mart case did not have enough in common to be treated as a class under Rule 23. By a vote of 5-4, the Supreme Court agreed with a lower court judge who (dissenting) concluded that the members of the class:

held a multitude of different jobs, at different levels of Wal-Mart’s hierarchy, for variable lengths of time, in 3,400 stores, sprinkled across 50 states, with a kaleidoscope of supervisors (male and female), subject to a variety of regional policies that all differed. . . . Some thrived while others did poorly. They have little in common but their sex and this lawsuit.

(Opinion at p. 19) Thus, the five more conservative justices concluded that the plaintiffs failed even at the preliminary stage of the analysis because they could not establish commonality.

Other than the bare existence of delegated discretion, respondents have identified no ‘specific employment practice’ — much less one that ties all their 1.5 million claims together. Merely showing that Wal-Mart’s policy of discretion has produced an overall sex-based disparity does not suffice.

In other words, demonstrating the invalidity of one manager’s use of discretion will do nothing to demonstrate the invalidity of another’s.

In part, the other four justices actually agreed with this result (i.e., the lower court erred when it certified a nationwide class), however, they disagreed with the reasoning of the majority. In her dissent, Justice Ginsburg argued that the commonality prerequisite is a fairly low standard and plaintiffs met it in this case, but the class had been certified as the wrong class type (should not have been certified as a Rule 23(b)(2)). Concluding that that the commonality prerequisite had been met, Justice Ginsburg and the other three more liberal justices would have remanded the case back to the lower courts for a finding on whether another class type might be appropriate (i.e., Rule 23(a)(b)(3)).

What does this mean for future litigation? The plaintiffs’ bar is likely to respond to this case in two ways. First, plaintiffs are likely to bring more of their class action claims in state court. (Wal-Mart governs only federal court procedure.) Because many states have rules that allow broader definitions of the appropriate class, it should not be surprising to see plaintiffs shift gears by switching to the more favorable state court venues. Second, for cases brought in federal court, plaintiffs are likely to bring smaller class actions in which class is defined by region or within a specific locality.

In the future, the effects of Wal-Mart may be felt most dramatically in the context of settlement discussions. The specter of a national class action was once a powerful bargaining tool for putative class-action plaintiffs. Thus, before Wal-Mart, many companies have overpaid for settlements of class actions based on the risk that a sweepingly large class might be certified. (If a billion dollars might be at stake, some companies might consider paying a million to take the issue off the table, even if the underlying claim is quite weak.) After Wal-Mart, the risk of expansive class litigation is substantially lower, and companies now have more leverage than ever to negotiate lower settlements.

Bottom line: Even though the three plaintiffs can still proceed with their individual claims, they no longer represent 1.5 million class members (one of the most expansive classes ever certified). Accordingly, the settlement value of their case drops from potentially billions of dollars to the value of a garden-variety discrimination case brought by three individual plaintiffs.