James W. "Jim" Michalski is a partner in our
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Todd D. Steenson is a partner in our
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In a sharply divided 6-5 en banc decision, the United States Court of Appeals for the Ninth Circuit approved the certification of the largest employment discrimination class in history. In Dukes v. Wal-Mart Stores, Inc., case Nos. 04-16688 and 04-16720 (April 26, 2010), the divided court affirmed a decision certifying a class alleging sex discrimination against female employees who worked at any of Wal-Mart's 3,400 stores at any time since December 26, 1998 – as many as nearly 1.5 million women. In doing so, the Ninth Circuit found that the plaintiffs had sufficiently demonstrated that members of the class were subject to a common company policy of gender discrimination such that their claims could be litigated together. This decision lowers the threshold plaintiffs must satisfy to bring a class action and threatens to create a wave of enormous class actions against employers, because if this case is not too big to handle as a class action, it is hard to imagine one that is. Also, the stakes are enormous. Estimates of the possible liability to Wal-Mart are in the billions or tens of billions of dollars.
How Does a Class Action Impact Employers?
A class action allows numerous individuals with similar claims against a defendant to have those claims litigated in one lawsuit. The class action is supposed to increase efficiency by trying the claims of a few individuals, or named plaintiffs, and having the result of that trial resolve the claims of others who are similarly situated. For that to work, however, the members of the class must have essentially similar claims, the claims of the named plaintiffs must be similar to those of the class as a whole, and the named plaintiffs must show that they will do a sufficient job in the litigation that their outcome can be applied to the whole class. But class actions cannot serve their purpose when there are too many differences between and among the class members and the claims they have against the defendant.
Under federal law, plaintiffs who want their claims litigated as a class must demonstrate that the group, or class, is too large to require all to litigate their claims individually; that there are questions of law or fact common to the class; that the claims of the named plaintiffs are "typical of" or sufficiently similar to those of the class; and that "the representative parties will fairly and adequately protect the interests of the class." Then the plaintiffs must show either that the defendant acted in essentially the same, unlawful manner to all members of the class, such that "final injunctive relief or declaratory relief is appropriate respecting the class as whole." In other words, that a finding of discrimination or an order that the employer stop discriminating against the whole class is appropriate (a Rule "23(b)(2) class action"); or that questions common to the class as a whole predominate over any questions affecting only individual members, and a class action is superior to other available methods to adjudicate the case (a "23(b)(3) class action").
Because class actions allow many employees to sue in one lawsuit, they are expensive to defend and create the risk of enormous liability. That liability risk causes many employers to settle if a class is certified.
Dukes v. Wal-Mart Background
In 2001, six plaintiffs sued Wal-Mart alleging sex discrimination in pay and promotions – but they did not merely assert their own claims. Rather, they alleged that Wal-Mart had a company-wide pattern and practice of gender discrimination: that women employees across the company received less pay and fewer promotions than men in comparable positions. They sought to represent a class consisting of every female employee who worked at any of Wal-Mart's more than 3,400 stores nationwide, on or after December 26, 1998.
The district court certified a Rule 23(b)(2) class that encompassed the claims of up to 1.5 million female employees seeking a finding that Wal-Mart had discriminated, an order prohibiting further discrimination, and back pay. The district court certified a separate class of the same employees seeking punitive damages. But the court refused to certify a class involving the claims of employees seeking back pay for unlawful failures to promote, finding that such claims involved too many individualized questions about damages. Wal-Mart appealed the certification of both classes. After a panel of the Ninth Circuit affirmed, the court granted en banc review.
Key Points and How They Will Affect Future Class Certification Issues
In sum, the en banc Ninth Circuit affirmed the district court's decision in part. It affirmed the certification of the claims of employees for injunctive and declaratory relief and back pay. But it required the district court to (1) reconsider whether the class claims for punitive damages may be certified under Rule 23(b)(2) or (b)(3); and (2) reassess the claims of former Wal-Mart employees (who could not benefit from an order that Wal-Mart stop discriminating) so that the district court could determine whether to certify additional classes or sub-classes under Rule 23(b)(3). Finally, the Ninth Circuit affirmed the district court's refusal to certify a class for claims of back pay relative to promotions allegedly withheld. In reaching these conclusions, the court set new, and sometimes unclear, standards that will encourage additional class actions.
First, the court set out new rules about when a plaintiff may use a 23(b)(2) class action as opposed to a 23(b)(3) class action. Again, Rule 23(b)(2) allows certification if the employer acted unlawfully in the same way to the whole class and either a finding of discrimination or an order to stop discriminating against the class as a whole is appropriate. But plaintiffs cannot use Rule 23(b)(2) if class members' claims for monetary relief predominate over claims for a finding of discrimination or an order to stop discriminating. Rather, certification must be sought under Rule 23(b)(3). Rule 23(b)(2) is easier to meet than Rule 23(b)(3).
The en banc Ninth Circuit set out a new standard for determining if the claims for monetary relief indeed predominate over claims for injunctive and declaratory relief so that the Rule 23 (b)(2) becomes unavailable. Specifically, "a class must seek only monetary damages that are not superior in strength, influence, or authority to injunctive and declaratory relief." Four factors are to be considered in this determination, which are whether the monetary relief sought (1) "determines the key procedures that will be used"; (2) "introduces new and significant legal and factual issues"; (3) "requires individualized hearings"; and (4) is of such "size and nature – as measured by recovery per class member – [as to] raise due process and manageability concerns." The court found, under this standard, that the plaintiffs' claims for billions in back pay damages did not predominate over their requests for injunctive and declaratory relief, and held that the back pay claims could be certified under Rule 23(b)(2). It then remanded the case for the district court to apply this new four-factor test to claims for punitive damages.
A second major conclusion concerned the extent to which the trial court is required to scrutinize expert testimony that the plaintiffs offer in support of their request for class certification. Usually, the Supreme Court's decision in Daubert v. Merrell Dow Pharmaceuticals, Inc., 506 U.S. 579 (1993) requires that the district court conclude that expert testimony is reliable before admitting and considering it. In Dukes, the plaintiffs offered the testimony of a sociologist that Wal-Mart's many store managers and other members of management were vulnerable to gender stereotyping in support of their claim for class certification – testimony to which Wal-Mart objected. But the district court refused to conduct a full Daubert hearing to determine that the sociologist's methodology was reliable before relying on the testimony to determine that that common questions existed among the class members and class certification was appropriate. On appeal, the Ninth Circuit concluded that the district court did not err in refusing to conduct the full Daubert analysis, writing that it was not convinced that a Daubert challenge had the same application at the class certification stage "as it does to expert testimony relevant at trial." The Ninth Circuit also noted that the question concerning expert testimony is not whether it shows discrimination, but whether it shows there is a common question about whether the employer discriminated. This decision makes it more likely that courts will rely on "junk science" to certify large classes.
Finally, the Ninth Circuit ruled that the back pay claims of hundreds of thousands of potential plaintiffs could be litigated in a way that was both fair to Wal-Mart and allowed Wal-Mart to assert its defenses and would be manageable for the court (the due process and manageability issues). It did so by adopting a "formulaic" approach to the determination of discrimination and back pay. The court ruled that the plaintiffs need only prove that Wal-Mart generally discriminated against women as a group for each member of the class to be entitled to possible back pay relief. It found that Wal-Mart's right to present individual defenses would be protected by having the district court "randomly select" and try a small number of sample cases. Then, the back pay award to the class members would be discounted by the "percentage of meritless cases in the sample." In essence, this decision means that if the statistics show discrimination against women as a group, all class members would be entitled to some award of damage – even if they individually were not subject to discrimination.
A Powerful Dissent
Five of the 11 judges on the court disagreed with the decision to allow the class to be certified. They noted that "[n]ever before has such a low bar been set for certifying such a gargantuan class." More specifically, they concluded that the variations among class members meant that a class action could not be both efficient and fair to Wal-Mart and to all class members. Responding to the majority's claim that the size of the class should not matter, Chief Judge Alex Kozinski made clear that the real issue was not the size of the class, but the vast array of differences among the class members. He wrote: "Maybe there'd be no difference between 500 employees and 500,000 employees if they all had similar jobs, worked at the same half billion square foot store and were supervised by the same managers. But the half million members of the majority's approved class held a multitude of 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 depending on each class member's job, location and period of employment. Some thrived while others did poorly. They have little in common but their sex and this lawsuit."
Implications of the Decision and Advice to Employers Going Forward
The Dukes decision makes class actions substantially more dangerous for employers, particularly in the Ninth Circuit, which governs California, Alaska, Arizona, Nevada, Oregon, Hawaii and Washington. The lowering of the standard for class certification, coupled with the employer's limited ability to challenge expert testimony offered in support of class certification, means that more class actions will be filed in the Ninth Circuit and more will be certified. We can expect plaintiffs' lawyers to file all class actions against national employers in the Ninth Circuit.
Second, the Dukes court's approach to back pay claims means that employers will be deprived of the opportunity to show that individual employees were not discriminated against and are not entitled to any back pay. Indeed, the dissent argued that the formula approach to back pay violated both Wal-Mart's rights and Title VII because it deprived Wal-Mart of its statutory right to raise individual defenses to each individual class member's request for back pay. For example, an employer might be able to demonstrate that a certain employee would have received the same level of pay even without any alleged discrimination, or that an employee failed to mitigate damages. Indeed, as the dissent recognized, the "formula" approach to back pay is unfair all the way around: employees with the strongest claims would be undercompensated while those with unmeritorious or weak claims likely would, as the majority even acknowledged, receive a "windfall."
Given the magnitude of potential liability for Wal-Mart, it is not surprising that on May 14, 2010, the company's counsel said they will file a petition for a writ of certiorari with the Supreme Court – a request that the Court review the Ninth Circuit's decision. That petition must be filed by July 26, 2010, with supporting briefs from "friends of the court" due 30 days thereafter. It remains to be seen whether the Court will grant Wal-Mart's petition and review the case, but unless it does, the analytical consequences of the Dukes opinion will remain a concern for all larger employers.
In the meantime, employers should (1) audit their employment practices – and particularly their pay and promotion practices – to limit the risk of class claims; and (2) continue to mount aggressive challenges to class certification.
In addition, employers should continue to challenge the issue of commonality among class members by submitting evidence of individual differences among potential class member claims (usually in the form of selected declarations from members of the potential class). Also, employers should continue to challenge the conclusions of experts testifying in support of class certification by challenging the methodology used by experts, the qualifications of experts and the conclusions made by experts. Dukes did not completely rule out such challenges but simply affirmed the district court's decision not to allow such challenges in this particular case.
Finally, employers should continue to challenge attempts to rely on sampling approaches to damages determinations and are well-advised to note that even in Dukes, the majority conceded that such approaches would likely result in a windfall to some employees (and, by logical inference, improper damage calculations for many others).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
