June 21, 2011

Supreme Court Clarifies Standard for Certification of Class Actions

The U.S. Supreme Court issued an important decision yesterday (June 20, 2011) concerning the standard for the certification of class actions and the proof required to establish a pattern or practice of employment discrimination.  In Wal-Mart Stores v. Dukes, the Court reversed certification of a class in a nationwide employment discrimination case, and, in the course of doing so, clarified the standards on at least three important class certification issues that have vexed litigants, and divided lower courts, for years: the Court (i) reaffirmed the principle that district courts considering a class motion must perform a “rigorous analysis” of the facts and legal principles at stake in the entire case and how the case actually could be tried as a collective action, and not simply rely upon the contentions of the plaintiff or the plaintiff’s plan on how its case can be proven; (ii) articulated a particularized test for determining the presence of “common” issues under Rule 23(a)(2), which requires a showing that there are common issues whose determination will “resolve an issue that is central” to liability; and (iii) held that claims for individualized monetary relief (even those, such as back pay, that some courts have viewed as equitable) may not be certified under Rule 23(b)(2) but can be certified only under Rule 23(b)(3).

In Dukes, several female Wal-Mart employees filed suit alleging discrimination in employment decisions based upon gender.  The plaintiffs sought to certify a class of approximately 1.5 million women who have worked at Wal-Mart across the country since December 1998, on the theory that a centralized company policy gave local managers too much discretion in pay and promotion decisions, leaving the female employees of Wal-Mart adversely subject to gender stereotypes.

The district court certified the class, and the Ninth Circuit (sitting en banc) upheld that certification, holding that to satisfy the condition of commonality under Rule 23(a), it was sufficient for the plaintiffs to establish that there was a common question – namely, whether company-wide discrimination had occurred – based on statistical evidence, a “social frameworks” expert and anecdotes of discriminatory actions against certain employees.  The Ninth Circuit also affirmed certification of the claim for back pay under Rule 23(b)(2); the court based that holding on its view that monetary claims did not “predominate” from the perspective of an individual class member, that an award of back pay requires uncomplicated calculations and that back pay has been considered “equitable” in nature.

In a 5-4 decision, the Supreme Court reversed.  Justice Scalia, writing for the Court in the portion of the opinion on which the Court split, began by addressing the “commonality” requirement under Rule 23(a)(2).  The majority held that to meet the commonality requirement, class claims “must depend upon a common contention … 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.”  The Court found that the standard had not been met in the district court because the plaintiffs had not presented convincing proof of a companywide discriminatory pay and promotion policy.  It focused most particularly on two factors in this regard – first, that the alleged policy was to allow managers too much discretion, and so seemingly was a policy “against uniform practices”, and second,  the putative nationwide class was comprised of employees who held different jobs in different stores, under the supervision of different managers, and subject to different regional policies, and so there was “no common mode of exercising discretion” that would show that liability could be determined classwide.  The Court therefore concluded that plaintiffs had not demonstrated that there was a common question that would satisfy the requirement of Rule 23(a)(2).

The Court stated that the required commonality in an employment discrimination case could be shown in two ways:  (i) there could be proof of an across-the-board mechanism, such as a testing procedure, which produced disparate results; or (ii) there could be a general policy of discrimination.  The general policy of discrimination cannot be assumed simply from disparate effects; it must be shown to exist by “significant proof.”  The Court concluded that the evidence offered by the plaintiffs to show a pattern or practice or general operating policy of discrimination did not come close to satisfying the “significant proof” standard.  Justice Scalia rejected the plaintiffs’ attempt to show the existence of a “corporate culture” of discrimination through a sociological expert.  The plaintiffs’ expert had contended that Wal-Mart had a strong “corporate culture” that made it “vulnerable” to “gender bias,” but admitted that he could not calculate whether “stereotyped thinking” determined 0.5% or 95% of the employment decisions.  Justice Scalia stated that if the expert had “no answer to that question, we can safely disregard what he has to say.”  Justice Scalia also expressed skepticism about the district court’s conclusion that the expert testimony did not have to be screened at the class certification stage under the admissibility standards of Daubert v. Merritt Dow Pharmaceuticals, Inc., 509 U.S. 578 (1983). 

The plaintiffs also attempted to establish that there was evidence of a discriminatory policy based on statistics and anecdotes.  Justice Scalia was dismissive of the statistical regression analysis that was done on a regional basis and which the plaintiffs’ statisticians claimed showed statistically significant disparities that can only be explained by gender discrimination.  Because decision-making was implemented at individual stores, Justice Scalia concluded that it was inappropriate to aggregate statistics at a regional or national level.  More fundamentally, Justice Scalia was critical of the statistical analysis because it failed to identify the specific employment practice that produced the statistical disparity. 

Finally, Justice Scalia noted that anecdotal affidavits of gender discrimination from 120 employees were insufficient to create an inference that Wal-Mart engaged in a general operating practice of discrimination that reached 1.5 million employees.  While the purported breadth of the Wal-Mart class made it a highly unusual case, the evidence used by the plaintiffs to prove a pattern or practice of discrimination in the face of a written employer policy prohibiting discrimination was fairly typical.  The Supreme Court’s penetrating criticism of the proof offered by the plaintiffs in Dukes will therefore have significant implications for employment discrimination claims premised on an alleged pattern or practice of discrimination tied to allowing individual managers excessive discretion in making employment decisions. 

Resolving another area of debate, the Court stated that a trial court must undertake a “rigorous analysis” in deciding whether the requirements of Rule 23 are satisfied.  “Rule 23 does not set forth a mere pleading standard.  A party seeking class certification must affirmatively demonstrate his compliance with the Rule – that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc.”  The Court recognized that this rigorous analysis will often overlap with consideration of the merits of the underlying claims, but concluded, “[t]hat cannot be helped.”  The Court observed that it is not unusual for judges to consider the merits in resolving other preliminary matters, such as jurisdiction and venue.  In making these statements, the Court finally put to rest the contention that Rule 23 could be invoked to certify a case on the pleadings or based only on the plaintiff’s evidence and without consideration of the evidence the defendant would offer.

In a third significant ruling, which was joined in by all members of the Court, it also held that claims for monetary relief that require individual calculation – such as the Dukes plaintiffs’ claims for back pay – could not be certified under Rule 23(b)(2).  As the Court explained, “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 class member would be entitled to an individualized award of monetary damages.”  The Court noted, but declined to address, the issue of whether class claims for injunctive or declaratory relief that also seek “incidental” monetary relief could be certified under Rule 23(b)(2).

Finally, in discussing damages, the Dukes opinion expressly disapproves of the practice that had developed of resolving class members’ claims through sampling or other methods, which the majority labeled “Trial by Formula.”  In important language, in a portion of the opinion joined by all justices, the Court remarked that the Rules Enabling Act does not permit class certification to stand as an obstacle to Wal-Mart’s entitlement to fully present any defenses it has as to each individual’s claims for recovery.  This holding gives support for the argument that class certification is only ever proper if a classwide trial can accommodate every one of the defenses as to each class member that would have been raised had each class member’s claims been tried separately.

Justice Ginsburg, writing for herself and three other Justices, concurred in part and dissented in part.  As noted above, these four Justices agreed with the majority that it was improper for the lower courts to permit certification of back pay claims under Rule 23(b)(2).  They disagreed with the majority of the Court, however, on the issue of the proper interpretation of the “commonality” test of Rule 23(a)(2).  According to the dissenters, Rule 23(a) is a “preliminary requirement” that was intended to be easily satisfied, and they suggested that the Court’s emphasis on dissimilarity among class members would be more appropriately addressed under the “predominance” requirement of Rule 23(b)(3).  In this case, the dissenters stated that Rule 23(a)’s commonality requirement was satisfied by the common question of whether Wal-Mart’s pay and promotion policies gave rise to unlawful discrimination.  The dissent also pointed out that Rule 23(a) must be satisfied to all class actions, so the ruling is broad in effect.

Dukes is a significant opinion that not only provides guidance for Rule 23(b)(2) cases in the employment area, but also dictates the proper treatment and disposition of other types of class cases and other sections of the Rule.  In addition, since many state courts follow federal authority on class action procedural issues, Dukes will have an impact in state cases as well.  When coupled with AT&T Mobility LLC v. Concepcion, this term has been perhaps the most favorable one for class action defendants in recent memory.  Although much remains to be determined in how lower courts will interpret the standards set forth in these new cases, the holdings of Dukes, including the Court’s embrace of the “rigorous analysis” standard, the holdings as to the requirement for commonality and the rejection of claims for individualized monetary relief for classes brought under Rule 23(b)(2), will provide important directions for the resolution of  motions for class certification in many cases.