On June 20, 2011, the Supreme Court issued its decision in Wal-Mart Stores, Inc. v. Dukes, 564 US ___ (2011), a Title VII gender discrimination case against Wal-Mart, the nation’s largest private employer. The issues before the Court concerned the scope of class certification under Rule 23 of the Federal Rules of Civil Procedure. While the Court split over particular issues, it was unanimous in reversing the decision of the Ninth Circuit; it held that the District Court had improperly certified a proposed class of some 1.5 million female employees of Wal-Mart who all claimed gender discrimination.
The unanimous part of the Court’s decision held that most class actions seeking monetary compensation cannot be brought under the portion of Rule 23(b) which was designed for suits seeking injunctive or declaratory relief. This will have a significant impact on employment discrimination cases by precluding the use of Rule 23(b)(3) where plaintiffs seek backpay and other individualized damage claims. In a more far-reaching ruling, the Court also ruled 5-4 that in order for any class to be certified as presenting common questions of law or fact under Rule 23(a), the class claims must depend upon some common contention—the resolution of which is subject to classwide resolution which will resolve an issue central to the validity of one of the class claims. This latter ruling, which will apply to all potential class actions, may make it somewhat more difficult for plaintiffs to obtain broad class treatment of many claims.
Background and Facts
In 2001, seven named plaintiffs sued Wal-Mart in the Northern District of California; they sued on behalf of themselves and almost 1.5 million female employees. Plaintiffs alleged that Wal-Mart discriminated against women in pay and promotion decisions in violation of Title VII of the Civil Rights Act of 1964. The lawsuit sought an injunction against the Wal-Mart pay and promotion policies, and backpay that could have amounted to billions of dollars.
In June 2004, the District Court certified plaintiffs’ class. The court held that the proposed class met all the requirements of Rule 23(a), including that there were common questions of law or fact regarding the Wal-Mart employment practices. It also held that the class could proceed under Rule 23(b)(2) even though money damages (for backpay) were sought in addition to injunctive relief. Wal-Mart appealed to the US Court of Appeals for the Ninth Circuit, and in April 2010, a divided panel of the Ninth Circuit affirmed the lower court decision.
Federal Rule 23 and the Wal-Mart Case
Rule 23 sets out the requirements for plaintiffs seeking to certify a class action. Rule 23(a) ensures that the named plaintiffs properly represent the interests of the proposed class by requiring the plaintiffs to show that the proposed class meets four requirements: (i) numerosity; (ii) commonality; (iii) typicality; and (iv) adequacy of representation by the named plaintiffs and class counsel.
In addition to these four requirements, any potential class must then satisfy at least one of the three parts of Rule 23(b). For example, a potential class seeking money damages is generally required to comply with Rule 23(b)(3), which requires that common issues of law or fact predominate over the individual claims of the class plaintiffs and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. In contrast, classes under Rule 23(b)(1) (classes where individual adjudications would be impossible or unworkable because they would establish incompatible standards or conduct or be dispositive of interests of other class members not party to the litigation) or Rule 23(b)(2) (classes seeking injunctions or declarations of rights as to the entire class) need not meet the burdensome “predominance” requirement and do not allow class members to opt out.1
The Wal-Mart case highlighted a risk that Rule 23(b)(2) could be used as a potential loophole to allow plaintiffs to shoehorn damage actions (i.e., claims for backpay) into the more lenient Rule 23(b)(2) framework designed for injunctive actions. The Wal-Mart plaintiffs contended that by requesting some form of injunctive relief in addition to monetary damages they could avoid the standards of Rule 23(b)(3).
The Wal-Mart plaintiffs did not allege any top-down discriminatory policy by Wal-Mart which limited the prospects of female employees for promotion and increased salary. Rather, plaintiffs argued that Wal-Mart discriminated by leaving promotion and salary decisions within the broad discretion of individual store managers, which then resulted in systemic discrimination across the company. In support of class certification, plaintiffs provided (i) affidavits from 120 employees detailing individual examples of discrimination, (ii) statistical reports showing that women were underrepresented among Wal-Mart’s managers at a regional level, and (iii) testimony from social scientists that the Wal-Mart corporate structure is susceptible to discriminatory decision-making. This evidence was deemed sufficient by the District and Circuit Courts to satisfy Rule 23(a) as to commonality. Moreover, the Ninth Circuit ruled that ultimately the lower court could use a “trial by formula” to award backpay under Rule 23(b), which would involve picking a random group of claims for trial and then extrapolating the results of those sample trials over the entire class.
The Supreme Court’s Decision
The Supreme Court, in a decision delivered by Justice Scalia, reversed the decisions of the Ninth Circuit and the District Court. The Court ruled 5-4 that the proposed class could not satisfy the commonality requirement of Rule 23(a), and unanimously ruled that individualized claims for backpay could not be advanced by a class under Rule 23(b)(2). By its reasoning, the Court also provided guidance on the role of the lower courts at the class certification phase.
Commonality Under Rule 23(a)
A 5-4 majority held that the proposed Wal-Mart class could not satisfy the Rule 23(a) requirement that the class present “questions of law or fact common to the class.”2 The Court explained that commonality amongst class members does not merely mean that all plaintiffs have “suffered a violation of the same provision of law….Quite obviously, the mere claim by employees of the same company that they have suffered a Title VII injury…gives no cause to believe that all their claims can be productively litigated at once.”3
Rather, signaling that district courts should perform a more searching analysis of the Rule 23(a) inquiry, the Court explained that Rule 23(a) involves more than a plaintiff listing many potential common questions—the Rule is more than “a mere pleading standard.”4 Instead, the focus must be on the existence of common facts which would resolve the liability determination as to the class. Thus, “what matters” in this context is (i) a common contention (of law or fact); (ii) which “must be of such a nature that it is capable of classwide resolution”; and (iii) which resolution means that “determination of its truth or falsity will resolve an issue that is central to the validity of plaintiffs’ claims in one stroke.”5 The key is “the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. Dissimilarities within the proposed class are what have the potential to impede the generation of common answers.”6
The Court noted that the “rigorous analysis” of whether a named class plaintiff has satisfied Rule 23(a) will necessarily “entail some overlap with the merits of plaintiff’s underlying claim,” which “cannot be helped.”7 Where the class is seeking to sue for “millions of employment decisions at once,” there must be some “glue” holding the alleged reasons for all those decisions together in order to truly appreciate whether a common answer can be achieved.8 Accordingly, relying on its earlier decision in Gen. Tel. Co. v. Falcon, 457 US 142, 159 n. 15 (1982), the Court held that to bridge the “significant gap” between alleging claims of discrimination that are inherently individual while at the same time common to an alleged class, plaintiffs must demonstrate “significant proof” that Wal-Mart operated under a general policy of discrimination.9 The Court concluded that the Wal-Mart plaintiffs’ evidence fell well-short of meeting this burden.10 In so ruling, the Court disregarded evidence that the lower court had considered significant, noting also (without specifically reaching the issue) that the District Court should have examined the admissibility of plaintiffs’ expert testimony at the class certification phase.11
Individualized Relief Under Rule 23(b)(2)
A unanimous Court also ruled that the proposed class did not satisfy the requirements of Rule 23(b)(2). The Court explained that Rule 23(b)(2) could not be used where monetary relief was more than merely incidental to the injunctive relief sought.12 As such, the Court declined to state whether Rule 23(b)(2) applied only to claims for injunctive relief (i.e., whether monetary relief was ever available under Rule 23(b)(2)). However, the Court did rule that claims for individualized monetary relief, such as backpay, could not satisfy the prescriptions of Rule 23(b)(2):
Rule 23(b)(2) applies only when a single injunction or declaratory judgment would provide relief to each member of the class. It does not authorize class certification when each individual class member would be entitled to a different injunction or declaratory judgment against the defendant. Similarly, it does not authorize class certification when each member would be entitled to an individualized award of monetary damages.13
The Court also explained that claims for backpay, which under the terms of Title VII is individualized relief, must be brought under Rule 23(b)(3), with its accompanying procedural protections of predominance, superiority, notice and opt-out.14 Finally, the Court also commented that the lower courts’ attempts to streamline the case to accommodate the litigation of more than a million claims at once would have deprived litigants of needed statutory safeguards. Thus, the Court unanimously rejected the idea of “Trial by Formula,” and held that Wal-Mart was entitled to “individualized determinations of each employee’s eligibility for backpay.”15
The Court’s Role at the Class Certification Stage
The majority recognized that the district courts have a function to perform at the class certification stage to ensure that classes are comprised of plaintiffs who share the requisite degree of “commonality.” In this role, judges are required to make findings about disputed questions of fact, though existing case law suggests that such findings are limited to the class certification stage and do not become laws of the case.16 In addition, the majority suggested, in dicta, that judges at the class certification stage should make decisions about whether expert testimony is admissible.17 Finally, although not discussed by the Court, the majority conducted an independent assessment of the evidence on class certification and did not defer to the District Court’s analysis of the evidence presented.18
Implications of the Ruling
The Wal-Mart decision is sure to have a significant impact on class certification issues. By focusing on both Rule 23(a) and Rule 23(b)(2), the Court has attempted to inject some clarity into the sometimes murky waters of class certification by delineating the parameters for class certification and the theories under which certification can be obtained.
With respect to Rule 23(a), the Court has restated the standard to be applied in all class action cases. The focus of the commonality analysis is not whether common questions apply among proposed class members, but whether there is a common answer applicable to the claims of all of the members. Thus, even if all class members seek to have the same question resolved, if there is no common solution that would properly redress the issue for all plaintiffs, commonality is likely not satisfied. Effectively, Wal-Mart implies that a class necessarily must be limited to a specific harm, and any distinctions or discrepancies in the alleged harm could defeat commonality. While this ruling may not dramatically affect securities law claims where there is an efficient market, because plaintiffs generally purchase securities in reliance on some uniform set of alleged disclosures, other types of class action cases should now be more difficult to advance through class certification.
With respect to Rule 23(b)(2), a bright-line standard has been set: no claim that seeks individualized monetary relief, such as backpay, may proceed under Rule 23(b)(2). This is a ruling of broad significance; it is not confined to the employment discrimination context. While the Court did not rule per se that all money damage claims were inapplicable under Rule 23(b)(2), it did hold that any claim for money damages that could not be uniformly applied to all class members had to be brought under Rule 23(b)(3), with its required procedural protections.
Wal-Mart is likely to be seen as an impediment to plaintiffs pursuing class actions under Rule 23(b(1) or Rule 23(b)(2), at least where there are substantial individualized issues in the case. Indeed, those cases may be subject to the same basic standards as the predominance standard under Rule 23(b)(3). Future class action plaintiffs will be required to collect more “significant proof” of uniform behavior applicable to all class members in order to satisfy commonality, and will also be required to plead and prove that a common solution exists to remedy the problems complained of by all plaintiffs. Plaintiffs may also have to satisfy what may become the so-called “glue test”: where the alleged illegal behavior is caused by a wide variety of allegedly harmful activities (such as different potential employment decisions), plaintiffs must plead and prove that there is a common element, or “glue,” that binds these activities together, such as one uniform employment policy. After Wal-Mart, plaintiffs also are less likely to be able to proceed under the more lenient standards of Rule 23(b)(2) by seeking some injunctive relief in addition to money damages, because the money damages available under Rule 23(b)(2) are limited to those with classwide application.