On June 20, the Supreme Court issued its opinion in Wal-Mart Stores, Inc. v. Dukes , and as most everyone predicted, it is a resounding victory for employers. The decision's importance is magnified when read together with the Court's decision earlier this month in Eric P. John Fund, Inc. v. Halliburton Co .
To very briefly recap, at issue was the Ninth Circuit's en banc decision to affirm the certification of a class of over 1,500,000 women employed in approximately 3,400 Wal-Mart stores across the country. Within each store, the putative class worked in 170 different job classifications in as many as 53 different departments. Commonality was based not on policies or rules that are clearly discriminatory, but rather, according to the district court, on (a) the company's policies governing compensation and promotions, which "are similar across all stores and build in a common feature of excessive subjectivity which provides a conduit for gender bias that affects all class members in a similar fashion," and (b) "evidence that Wal-Mart cultivates and maintains a strong corporate culture which includes gender stereotyping." While Wal-Mart had anti-discrimination and diversity policies in place, plaintiffs' sociology expert contended that these policies had "identifiable weaknesses that limit their effectiveness for identifying and eliminating discriminatory barriers." Plaintiffs sought injunctive and declaratory relief, backpay and punitive damages. The case was certified under Rule 23(b)(2), not (b)(3), because in the Ninth Circuit's view, backpay did not predominate over the claims for injunctive and declaratory relief. (The Ninth Circuit reversed the certification of punitive damages, sending the question of whether such a punitive damages claim could be certified back to the district court for reconsideration.)
The Supreme Court reversed on two grounds: The Court was unanimous in holding that claims for backpay cannot be certified under (b)(2), and was sharply divided in holding that plaintiffs had failed to satisfy the common-question requirement of Rule 23(a)(2).
The Court was unanimous in reversing the Ninth Circuit's holding that claims for backpay can be resolved in a Rule 23 (b)(2) class. The Court left open the possibility, initially raised in Ticor Title Ins. Co. v. Brown , 511 U.S. 117, 121 (1994)(per curiam), that no monetary relief is ever available under (b)(2), but said it did not need to reach that question because at the very least, the "incidental damages" test announced by the Fifth Circuit in Allison v. Citgo Petroleum Corp. , 151 F.3d 402, 415 (5th Cir. 1998), is the appropriate standard, if damages are to be allowed at all, and plaintiffs fall woefully short of that standard. Under this test, "damages must flow directly from liability to the class as a whole on the claims forming the basis of injunctive or declaratory relief," and those damages must be capable of award without "additional hearings to resolve the disparate merits of each individual's case; it should neither introduce new substantial legal or factual issues, nor entail complex individualized determinations." Slip op. at 26. The Court held that backpay is a claim for " individualized relief," which does not satisfy the test. Slip op. at 20 (emphasis in original)(internal quotes and citations omitted). Therefore, any claim for backpay can proceed only if plaintiffs are able to establish the more demanding prerequisites of Rule 23(b)(3) - that common questions predominate over individual issues, that the case is manageable, and that class adjudication is a superior form of adjudication. The rest of the Court's opinion makes it clear that this will be a very difficult standard to meet in most cases.
This is good news for employers sued in the Second Circuit (and of course the Ninth), where plaintiffs have had a relatively easy time certifying discrimination cases because the Second Circuit took a view that was similar to the Ninth Circuit on the question of monetary relief in (b)(2) cases and held that backpay damages could be certified under (b)(2) where claims for injunctive relief "predominated." Robinson v. Metro-North Commuter R.R. Co. , 267 F.3d 147 (2d Cir. 2001). Consequently, courts in the Second Circuit used (b)(2) to certify class actions like Velez v. Novartis , 244 F.R.D. 243 (S.D.N.Y. 2007), involving claims for backpay and punitive damages without resolving whether common issues predominate over individual questions, whether the case is manageable and whether a class action is a superior form of adjudication.
As important as the holding that backpay claims cannot be certified under (b)(2) is the Court's very clear statement that a defendant is "entitled to individualized determinations of each employee's eligibility for backpay." Slip op. at 26. The Court reiterated that the Rules Enabling Act prohibits courts from using Rule 23 to modify substantive rights. Therefore, "a class cannot be certified on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims." Slip op. at 27. In this context, it endorsed the proposition, rejected by the Ninth Circuit, that a defendant has an absolute right to prove a mixed motive - that it would have taken the same action even in the absence of discrimination. Slip op. at 26. With this as the law, plaintiffs should find it very difficult to satisfy the predominance, manageability and superiority requirements of Rule 23(b)(3) in a class of any size.
The more challenging part of the case, which courts will be sorting out for years to come, is the Court's discussion of Rule 23(a)(2)'s common question requirement. The Court split 5-4 on this question.
The Court accepted the long-standing rule that only one common question of law or fact is required by 23(a)(2), but the Court required that the common question be "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." Slip op. at 9. Therefore, alleged excessive subjectivity and an allegedly strong culture infused with gender stereotypes is insufficient to establish a common question capable of being certified. The Court was explicit that the "crux" of a Title VII claim is "the reason for a particular employment decision," which the Court found was inconsistent with certifying a class where millions of employment decisions are challenged on the basis of subjective decision making. Slip op. at 11-12 (internal quotes and citations omitted). Therefore, plaintiffs failed to establish a common question under Rule 23(a)(2): "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 quesiton why was I disfavored. " Slip op. at 12 (emphasis in original).
The Court's elaboration of this point is telling: "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 productively be litigated at once. Their claims must depend upon a common contention - for example the assertion of discriminatory bias on the part of the same supervisor . That common contention, moreover, must be of such a nature that it is capable of classwide resolution - which means that the 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 ." Slip op. at 9 (emphasis added).
The Court also took a dim view of statistical evidence in cases like Wal-Mart : "Even if [plaintiffs' statistical evidence] established (as it does not) a pay or promotion pattern that differs from the nationwide figures or the regional figures in all of Wal-Mart's 3,400 stores, that would still not demonstrate that commonality of issue exists." Each manager will have a different reason for his or her decision and "almost all of them will claim to have been applying some sex-neutral, performance-based criteria - whose nature and effects will differ from store to store." Slip op. at 17 (emphasis in original).
Today, discrimination class actions, as in Wal-Mart , generally involve subjective decisions about pay and promotions cabined by race- and gender-neutral criteria, exclusions from networks or teams, and the failure to provide mentoring or good assignments. Rarely do class actions involve only one supervisor. The standard announced in Wal-Mart will make it very difficult to certify a class in most cases of this type. It remains to be seen how courts react where the statistics are stronger than they were in Wal-Mart and where plaintiffs are able to identify policies beyond subjective decision making. We can expect much of the future litigation to involve questions such as what are "policies" within the meaning of Wal-Mart and what kinds of statistics will be sufficient.
The Court's focus on the elements of an individual claim (the "crux" of a Title VII claim is "the reason for a particular employment decision") is a critical point in the opinion. Courts that certify large class actions involving multiple decisionmakers in multiple locations gloss over this issue, focusing instead on the classwide questions that must be addressed. Wal-Mart is powerful precedent for keeping the focus on the resolution of each individual's claim even in the class action context. As the Court made clear, the question that must be answered, even in a class action, is " why was I disfavored ." Slip op. at 12 (emphasis in original).
It is interesting to look at Wal-Mart in conjunction with the Court's Halliburton decision earlier this month. Halliburton involved alleged misrepresentations by a public company. At issue was whether "loss causation" must be established at class certification or whether the question was more appropriately decided in the merits phase. The Court rejected the notion that loss causation must be established on class certification, but the Court said quite clearly that in deciding whether common issues predominate over individual ones under Rule 23(b)(3), the analysis "begins, of course, with the elements of the underlying claim." Slip op. at 4. The Court then reviewed the elements of plaintiff's securities fraud claim and determined that predominance turned on the reliance element of plaintiff's claim, since all the other elements, including loss causation, would clearly be resolved on a common basis without regard to the individual circumstance of each class member. Therefore, plaintiff need only establish on class certification that the market for Halliburton's stock was "efficient," entitling the class to the presumption of reliance under the Court's decision in Basic, Inc. v. Levinson , 485 U.S. 224 (1988). As plaintiff conceded, if the market was not efficient and the class thus not entitled to the Basic presumption of reliance, then individual issues would predominate and certification would be improper. Therefore, the Court said, plaintiffs must establish an efficient market at class certification.
Halliburton is a clear endorsement of the Third Circuit's decision in In re Hydrogen Peroxide Antitrust Litig ., 552 F.3d 305, 311 (3rd Cir. 2008), which requires plaintiffs to identify the "nature of the evidence that will suffice to resolve [the] question[s]" at the heart of their claims and "how specific issues will play out at trial." "If proof of the essential elements of the cause of action require individual treatment, then class certification is unsuitable." Just as the Halliburton Court required plaintiffs to establish - not just allege - an efficient market in order to certify a class, the Hydrogen Peroxide court required plaintiffs to establish that antitrust impact could be proven at trial on a common basis such that each class member suffered antitrust injury to at least some degree, although the amount of damages might vary.
Plaintiffs in employment discrimination class actions try to avoid this inquiry by pushing to a later day the question of how they will establish that "excessive subjective decision making" actually caused an injury to each class member. Halliburton - and Wal-Mart - make it clear that plaintiffs must demonstrate at class certification that each element of a cause of action can be established through common proof, with the exception of the amount of damages for each member of the class. Causation (the link between the common wrongful act and each plaintiff's injury) must be susceptible to class-wide proof and plaintiff must establish that on the motion for class certification. Causation under Title VII should be treated like antitrust injury in a Sherman Act case and like reliance in Halliburton . Wal-Mart holds exactly that. This point should be one of the most powerful arrows in employers' quivers.
Allan Dinkoff has over 30 years of experience in handling complex commercial litigation and employment matters. Before joining Weil, Gotshal & Manges LLP in 2009, Mr. Dinkoff was a Managing Director at Merrill Lynch & Co., Inc. where he ran the firm's Employment Law Group.