• Class Action Litigation -- How Big Is Too Big?
  • June 1, 2007
  • Law Firm: Holland & Knight LLP - Tampa Office
  • In February 2007, the United States Court of Appeals for the Ninth Circuit affirmed certification of the largest employment class action suit in United States history. Dukes v. Wal-Mart Stores, Inc., 222 F.R.D. 137 (N.D.Cal. 2004), aff’d. 474 F.3d 1214 (9th Cir. 2007) The class certified consists of approximately 1.5 million women who are or were employed in both hourly and salaried positions at one or more of Wal-Mart’s 3,400 stores across the country, dating back to December 26, 1998. The women charge Wal-Mart with gender discrimination in promotions, pay and job assignments in violation of Title VII of the Civil Rights Act of 1964, and seek class-wide injunctive and declaratory relief, lost pay and punitive damages in the amount of $11.5 billion dollars.

    As important as the size of the class, however, is the arguments the Ninth Circuit accepted as sufficient to justify class treatment. After Dukes, if the plaintiffs can show that there are gender-based disparities in pay or promotions across your workforce, virtually any alleged common practice that could allegedly have caused those disparities may suffice to allow class treatment. Then, the plaintiffs will be allowed to seek class-wide punitive damages and perhaps back pay based on statistical formulas without showing that particular class members even suffered discrimination. In the wake of the Dukes decision, national employers can expect to face nationwide class actions filed in California, and those actions will carry much greater risks.

    A subsequent decision of the U.S. Supreme Court, Philip Morris v. Williams, 127 S.Ct. 1057 (2007), however, may provide employers with a strong counterargument to class actions such as Dukes. The Supreme Court ruled that before being held liable for punitive damages, a defendant must have “an opportunity to present every available defense.” This ruling may require individual hearings regarding each class member’s claims that will render class actions the size of Dukes unmanageable.

     

    A Brief Primer in Class Actions

    Understanding the implications of Dukes requires some background about the nature and purposes of class action lawsuits. The class action is intended to economically dispose of a large number of claims involving the same or substantially similar issues. This happens by trying the claims asserted by certain named plaintiffs and then applying the result to all the members of the class. The Supreme Court has stated, however, that use of the class action cannot change the substantive law. Given these rules, a class action can work only if all the members of the class have claims that share a common issue of fact or law, the claims of the named plaintiffs are typical of and substantially similar to the claims of all the class members, and the named plaintiffs will do an adequate job representing the class members who do not directly participate in the case. To take an extreme example, assume that an employer had a nationwide policy restricting certain positions only to males. Resolution of the claims of one female employee challenging that policy would effectively resolve the claim for the entire class.

     

    The Dukes Decision

    Facts

    The Dukes action started in 2000 when a 54-year-old woman, Betty Dukes, filed a sexual discrimination claim against Wal-Mart alleging that, despite receiving six years of excellent reviews, she was denied the training she needed to advance to a salaried position. Six other current and former female employees of Wal-Mart joined Dukes, and alleged not only that Wal-Mart had discriminated against them because of their gender in pay and promotion decisions, but also that Wal-Mart had similarly discriminated against more than 1.5 million female employees from across the country. They sought class action status on behalf of a nationwide class of women who claim they were also subjected to Wal-Mart’s allegedly discriminatory pay and promotions policies. On June 21, 2004, the United States District Court for the Northern District of California granted class certification on the equal pay claims and granted limited certification on the promotion claim, but denied the request with respect to back pay.

    Wal-Mart appealed the certification on three grounds: (1) the class did not meet the commonality and typicality requirements of Federal Rule of Civil Procedure 23; (2) the district court failed to recognize that the plaintiffs’ claims for monetary relief predominate over their claims for injunctive or declaratory relief; and (3) the certification effectively eliminated Wal-Mart’s ability to respond to individual plaintiff’s claims.

     

    The Court of Appeals Decision

    The Court of Appeals rejected each of these arguments and accepted justifications that rendered the class certification requirements virtually toothless. The Court found common issues to exist among the class based on evidence of “Wal-Mart’s centralized company culture and policies,” evidence that Wal-Mart allowed individual store managers to make subjective decisions concerning pay and promotion, statistical evidence allegedly demonstrating that women were paid less and promoted less throughout the company, and affidavits from 120 of the 1.5 million class members asserting that they suffered discrimination in pay and promotions. The Court seemed not to notice the irony of asserting that a practice of allowing 3,400 individual store managers to make subjective decisions created a company-wide common issue.

    Despite all the differences between the named plaintiffs and the class, the Court ruled that they satisfied the typicality requirement “because the discrimination they allegedly suffered occurred through an alleged common practice – e.g., excessively subjective decision-making in a corporate culture of uniformity and gender stereotyping” that allegedly also applied to the class.

    The next issue the Court addressed is whether the plaintiffs were principally seeking an injunction – an order directing Wal-Mart to stop discriminating – or money damages. This issue was crucial because if the plaintiffs mainly sought money damages, they had a much higher burden of proof they could not meet. Even though the class sought back pay and punitive damages, and included many individuals who no longer worked for Wal-Mart, the Court accepted the named plaintiffs’ bare assertion that they were primarily seeking an injunction and only secondarily seeking $11.5 billion in damages. It reasoned that former employees would be more interested in an injunction that did not apply to them than money damages because “[i]t is reasonable that plaintiffs who feel that their rights have been violated by an employer’s behavior would want that behavior, and the injustice it perpetrates, to end.”

    Finally, the Court rejected Wal-Mart’s argument that it was entitled to an individual hearing to contest whether each class member was actually subjected to pay or promotion discrimination before receiving an award of damages, stating that “the aggregate computation of class monetary relief is lawful and proper.”

    Judge Kleinfeld issued a powerful dissent. He first addressed the generalized problems caused by a class action of this size. The decision “poses a considerable risk of enriching undeserving class members and counsel,” he concluded. Lawyers for the class may seek a settlement that serves their interests but not the interests of the class, individuals who did not suffer discrimination may recover compensation, and defendants may be forced to settle unmeritorious claims because the potential loss is so great. On the other hand, women who had actually suffered discrimination risked sharing compensation with women who had not been harmed or not receiving compensation at all, because if the class loses, all lose.

    He then concluded that the class could not meet the commonality, typicality and adequacy of representation requirements. “This class lacks commonality,” Judge Kleinfeld stated, because “[t]he only common question Plaintiffs identify with any precision” is whether Wal-Mart’s promotion criteria are “excessively subjective,” which is “not a commonality with any clear relationship to sex discrimination in pay, promotions, or terminations.” Typicality was lacking because each of the seven named plaintiffs “worked at different stores and complain of different actions taken by different managers,” and some were not even currently employed. In short, “the various Plaintiffs’ claims and Wal-Mart’s defenses against them do not resemble one another.”

    Judge Kleinfeld also rejected the majority’s conclusion that the class predominantly sought an injunction rather than money damages. He disagreed that former employees have a legal interest in an injunction, stating that “the psychological consequence presumably produced by observation of conduct with which one disagrees” was not a real legal interest. And, he noted that “to most people billions of dollars would indeed ‘predominate.’”

    Finally, Judge Kleinfeld stated that the majority’s allowance of aggregate punitive damages violates the due process clause of the Constitution because there “will never be an adjudication” of whether “any individual woman was injured by sex discrimination”; women who did not suffer discrimination will recover compensation, and women who did suffer discrimination will have to share compensation with those who did not. The result, Judge Kleinfeld concluded, is not fair to either Wal-Mart or the class.

     

    Philip Morris v. Williams

    Shortly after the Dukes decision, however, the United States Supreme Court’s Williams decision offered Wal-Mart, and all employers, a defense against massive class actions.

    Philip Morris was sued by the widow of Williams, a heavy cigarette smoker, for negligence and deceit. The jury found that Philip Morris falsely led Williams to believe that smoking was safe and that this deceit led to Williams’ death, and awarded compensatory damages of $831,000 and punitive damages of $79.5 million.

    Philip Morris appealed. It argued that the jury instructions improperly allowed the jury to punish Philip Morris not just for its harm to Williams, but also for harm to other smokers who had not sued Philip Morris and proved that they had been misled and suffered harm. This, Philip Morris argued, violated the due process clause of the U.S. Constitution.

    The Supreme Court agreed with Philip Morris. Most importantly for employers faced with class action claims, the Supreme Court stated that the Constitution prohibits punitive damages unless the defendant has “an opportunity to present every available defense.” A defendant threatened with punishment for injuring a person who has not sued has no opportunity to defend against the charge, and a jury instruction allowing damages based on harms to such individuals violates the due process clause.

     

    What Does This Mean for Employers?

    Dukes appears to make the potential scope of class actions in the Ninth Circuit virtually limitless. If a “common practice” of store-by-store, individualized subjective decisions is sufficient to meet the commonality requirement, and the mere assertion that the employees are really seeking an injunction rather than billions in damages must be accepted, then virtually any case in which gender-based disparities can be alleged is a likely candidate for class treatment. Put another way, if the Ninth Circuit is willing to certify a class involving virtually all female employees of the country’s largest employer, it’s hard to imagine a class it wouldn’t certify. Nationwide employers have to assume that plaintiffs’ lawyers will be rushing to California to file class actions and making arguments similar to those accepted by the Dukes court.

    Williams, on the other hand, gives not only Wal-Mart, but all employers, a strong argument that class actions such as Dukes may not be certified. A class of 1.5 million individuals could not be managed if individual hearings were needed to decide whether each class member actually suffered discrimination. But that is what Williams seems to require by stating that a defendant must be given “an opportunity to present every available defense.” Awarding punitive damages on a class-wide basis without individual hearings risks awarding damages to and on behalf of individuals who have not suffered discrimination, which Williams says violates the due process clause.