Supreme Court Will Shape Future of Class-Action Discrimination Claims

January 12, 2011

On December 6, 2010, the U.S. Supreme Court agreed to hear Wal-Mart Stores, Inc.’s appeal of the Ninth U.S. Circuit Court of Appeals’ decision certifying the largest class-action lawsuit in history. The class includes every woman employed by Wal-Mart across the country in the last decade. The Supreme Court’s decision will determine how and when large employment law class-action suits can be certified. It will also determine the types of defenses employers can assert in those cases. 

In 2001, a class-action lawsuit was filed against Wal-Mart on behalf of nearly 1.5 million past and present female employees from every Wal-Mart store in the country. The suit alleges that female employees at all levels in the company were subject to a pattern or practice of discrimination. The women claim that Wal-Mart’s corporate culture and decentralized system for making personnel decisions resulted in the systematic promotion of men and pay discrimination against female employees. The class seeks back pay, injunctive relief, and punitive damages.

The women asked the court to certify their proposed nationwide class under Rule 23(b)(2) of the Federal Rules of Civil Procedure. Rule 23 contains several methods for certifying class-action lawsuits, depending on the type of suit and the nature of the issues. As a whole, it is designed to provide a vehicle to adjudicate common questions of law or fact while balancing an employer’s right to present its defense.

With some exceptions, Rule 23(b)(2) is generally used when a class seeks injunctive relief to curtail existing employment discrimination. In contrast, most lawsuits seeking monetary damages are filed under Rule 23(b)(3). The differences in the two rule sections are significant. Employees who seek damages and proceed under Rule 23(b)(3) have a much higher burden to meet in that they must establish that common issues in the case “predominate” over individualized claims. In contrast, when seeking injunctive relief under Rule 23(b)(2), a putative class must show only “commonality” among claims. The rules differ in several other important aspects, including when employees may opt out of a class and the types of defenses available to the employer.

The district court allowed the 1.5-million-member class to be certified under Rule 23(b)(2). That’s important because the class is seeking compensatory and punitive damages. Additionally, the women claim that the lack of a companywide policy created an environment in which individual store managers discriminated against female employees.

Wal-Mart appealed on numerous grounds, arguing that because the class members’ claims were based on individual acts of discrimination by local store managers, class certification was inappropriate. It also argued that certification under Rule 23(b)(2) was inappropriate because the class seeks monetary relief and a majority of the class consists of ex-employees who can’t benefit from injunctive relief. Wal-Mart argued that by certifying the class under the more lenient procedure usually used to obtain injunctive relief, it would be deprived of its ability to show (1) there were legitimate reasons some individuals received lower pay and (2) there was no pattern of discrimination within its stores.

After numerous hearings, the Ninth Circuit certified the class, rejecting all of Wal-Mart’s arguments. The court of appeals held that the fact that the employees alleged a pattern or practice of decentralized decision making, which allowed individual store managers to discriminate, was sufficient to warrant class certification. The court held that certification under the more lenient Rule 23(b)(2) was proper because the class’ claims for damages weren’t “superior in strength” to its request for injunctive relief.

Finally, the court of appeals rejected Wal-Mart’s argument that certifying such a large and diverse class would effectively eliminate its right to present individualized defenses and show legitimate reasons for any pay or promotion disparities. Instead, the court ruled that the district court could employ a mathematical formula or use statistical regression analysis to estimate the number of valid claims and the amount of damages.

What’s At Stake
The first significant aspect of this case is the size of the class itself. Wal-Mart’s petition for certiorari (a request that the Supreme Court hear an appeal) noted that this is the largest class-action lawsuit in history and that the potential class is greater than all members of the armed services combined. It’s also notable that the class members don’t share a common job description, location of employment, or pay decisions. Indeed, one of the dissenting judges at the court of appeals explained that the complainants “have little in common but their sex and this lawsuit.”

Further, the Ninth Circuit’s decision conflicts with several other circuit courts and creates new rules for how and when large class-action lawsuits can be prosecuted. Most circuit courts don’t allow class actions to be certified based solely on the fact that class members allege a pattern or practice of decentralized decision making that merely allowed individual store managers to discriminate. Instead, most circuit courts require the class to establish a companywide practice or action by the employer that resulted in discrimination.

It’s also significant that the court allowed the class to use controversial social science studies and statistical modeling to show that (1) Wal-Mart had a corporate culture that allowed discrimination to occur and (2) by delegating discretion to store managers, it created an opportunity for gender bias and “facilitate[d] gender stereotyping.”

Wal-Mart presented extensive evidence showing there was no pattern of discrimination at the individual store level and that it maintains a very strong antidiscrimination policy. It attempted to show that the only way the class could demonstrate any sort of “pattern” of discrimination was to join thousands of different employees with nothing in common from different parts of the country. The court of appeals rejected the employer’s argument and accepted the complainants’ evidence at face value for purposes of class certification. Other (but not all) circuit courts require trial courts to conduct at least some assessment of the evidence presented by the class to prove “commonality.”

In addition, while the use of statistical modeling or mathematical formulas to calculate damages in class-action litigation is not unprecedented, it has never before been applied to such a large class with such a wide variety of job descriptions and pay and promotion determinations. Even in class-action lawsuits, employers have the right to present some form of individualized defense by showing that even if there was a general pattern of discrimination, individual pay and promotion determinations were justified based on each employee’s particular circumstances and job performance.

The Ninth Circuit’s decision essentially allows an extremely large group of diverse employees who share only one trait to file a class-action lawsuit alleging that as a group, they received less pay than other employees. The decision also prevents employers from being able to present individualized defenses and allows for “trial by statistical modeling,” which can expose a large employer to billions of dollars in damages. Dukes v. Wal-Mart Stores, Inc., United States Supreme Court, Appeal No. 10-277.

Bottom Line 
While on its face this case seems to involve mundane procedural issues, the stakes for employers are quite high, and the Supreme Court’s decision in this case will significantly affect when and how class-action lawsuits can be filled and the types of defenses available to employers. It’s too early to tell how the Court may rule on these issues. However, the fact that it agreed to hear the case demonstrates that at least some of the justices recognize the danger of the procedure adopted by the Ninth Circuit and the effect it may have on businesses. Whatever the result, this case will have a significant impact on class-action employment litigation.

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