Publications

28 Jun 2011

Wal-mart v. Dukes, Smith v. Bayer: Supreme Court rules in two significant class actions

Class Action Alert

Sara Z. Moghadam
Carter W. Ott
Vishali Singal
Stan Panikowski

The United States Supreme Court has handed down decisions in Wal-Mart Stores, Inc. v. Dukes, --- S.Ct. ---, No. 10-277 (June 20, 2011), and Smith v. Bayer Corp., --- S. Ct. ---, No. 09-1205 (June 16, 2011), thus rounding out a number of noteworthy class action cases before the Court this term.¹  

Of the two, the Court’s decision in Dukes is by far the most significant, as it addressed the standards for class certification under Federal Rule of Civil Procedure 23.  In it, the Court reversed the certification of the largest employment discrimination class action and “one of the most expansive actions ever.”  Dukes has far-reaching implications, not only for employment discrimination class actions but for all types of class actions. 

Dukes raised the bar for plaintiffs to obtain class certification.  Among other things, the Court clarified and tightened the standard for satisfying the threshold “commonality” requirement for class certification under Rule 23.  Commonality was previously treated as a relatively low hurdle, but in Dukes the Court made clear that commonality requires plaintiffs to establish the existence of a common contention that is capable of classwide resolution and is central to the validity of all class members’ claims.

The Court also utilized more rigorous limitations on the use of expert, statistical and anecdotal evidence in making class decisions.  And the Court made clear that class certification requires actual proof that Rule 23’s requirements are met – mere reliance on the pleadings is not enough and inquiry into the merits of the case not only is permissible, but may often be necessary.  In addition, the Court held that the plaintiffs’ claims for individualized monetary relief in the form of back pay could not be certified under Rule 23(b)(2), but rather must satisfy the more stringent requirements of Rule 23(b)(3). 

While the full impact of Dukes remains to be seen and may vary from case to case, it is a positive decision for defendants opposing class certification and should ensure that class certification motions will receive greater scrutiny in the future.

Decided only a few days earlier, the Court’s decision in Bayer was not particularly favorable to class action defendants, but its impact is far more limited.  The issue decided in that case was the scope of the Anti-Injunction Act’s “relitigation exception” and, specifically, whether a defendant who had successfully opposed class certification in federal court could obtain an injunction  enjoining a state court from considering a motion to certify the same class in a related case brought by a different plaintiff.  Describing such an injunction as “heavy artillery” to be used “only if preclusion is clear beyond peradventure,” the Court concluded that this standard was not satisfied in the case before it.  This was so, said the Court, because (1) the issue to be decided in state court was not the same as the issue decided by the federal court since the state’s legal standard for certification differed from the Rule 23 analysis applied by the federal court; and (2) the state court plaintiff was not a party to the federal litigation and did not fall within one of the limited exceptions to the general rule against nonparty preclusion.

Wal-Mart Stores, Inc. v. Dukes

In Dukes, three current and former Wal-Mart employees filed a federal lawsuit claiming sex discrimination under Title VII of the 1964 Civil Rights Act.  The plaintiffs claimed that Wal-Mart’s policy of giving local managers discretion over pay and promotions had an unlawful disparate impact on female employees.  The plaintiffs alleged that the local managers exercised their discretion disproportionately in favor of men and Wal-Mart knew this but refused to stop it.  The plaintiffs asked the district court to certify a class consisting of all female employees at Wal-Mart stores, consisting of approximately 1.5 million women, seeking injunctive and declaratory relief, punitive damages and back pay.

The district court certified the class with certain exceptions.  Wal-Mart appealed, and the Ninth Circuit Court of Appeals largely affirmed the district court’s decision.

The United States Supreme Court granted Wal-Mart’s petition to review the Ninth Circuit’s ruling on two issues.

The first issue concerned the meaning of Rule 23(a)(2)’s requirement that there be “questions of law or fact common to the class.”  This “commonality” requirement is one of Rule 23(a)’s four prerequisites for any federal class action, along with numerosity, typicality and adequacy of representation.  Before Dukes, many courts viewed commonality as a low threshold, and litigation over class certification often focused on other requirements of Rule 23.

The second issue concerned whether the plaintiffs’ back pay claims could be certified for class treatment under Rule 23(b)(2) in connection with their claims for an injunction.  If so, then plaintiffs could litigate their back pay claims on a classwide basis without having to satisfy the additional requirements of Rule 23(b)(3):  predominance of common questions over individual questions and superiority of a class action to other methods of resolving the claims.

The Court tightens the standard for proving commonality

On the first issue, the Court ruled by a 5-4 majority and held that merely reciting common questions is not enough to satisfy the commonality requirement.  Rather, “commonality requires the plaintiff to demonstrate that the class members ‘have suffered the same injury.’”  Thus, the Court explained, the claims at issue “must depend upon a common contention” and that contention “must be 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.” 

Applying that standard, the Court noted that the Dukes plaintiffs’ claims were premised on “the reason for a particular employment decision.”  But the Court explained:  “Without some glue holding together the alleged reasons for those decisions, it will be impossible to say that examination of all the class members’ claims will produce a common answer to the crucial discrimination question.”  The Court found that the plaintiffs had identified no specific employment practice or Wal-Mart policy that tied all class members’ claims together.

In deciding this issue, the Court also tightened the standards for expert, statistical and anecdotal evidence of commonality.  The Court gave no weight to expert testimony that does not answer “the essential question on which [the plaintiffs’] theory of commonality depends.”  The Court also rejected as insufficient statistical evidence about alleged disparities at the regional and national levels because it did not establish disparities at the store level, where employment decisions were made, much less raise an inference of a company-wide policy being implemented store-by-store.  Finally, the Court rejected anecdotal evidence consisting of only 120 affidavits relating to a small percentage of stores, the majority of which were concentrated in six states.  The Court ruled that this evidence was not enough to show “the entire company ‘operate[s] under a general policy of discrimination,’ which is what respondents must show to certify a companywide class.”  In that regard, the Court noted that “when the claim is that a company operates under a general policy of discrimination, a few anecdotes selected from literally millions of employment decisions prove nothing at all.”

The Supreme Court also made clear that Rule 23 is not merely a pleading standard, but rather requires actual proof that the requirements for class certification are met.  This ruling repudiated an oft-used argument based on an earlier Supreme Court case that class certification decisions must not involve any inquiry into the merits of the case.  The Court affirmed that the proof required for class certification will often be intertwined with the merits of the case.

Claims for back pay and other individualized monetary relief are now more difficult to certify for class treatment

The Supreme Court unanimously held that claims for monetary relief may not be certified under Rule 23(b)(2) “at least where (as here) the monetary relief is not incidental to the injunctive or declaratory relief” sought.  And “incidental” monetary relief is limited to “damages that flow directly from liability to the class as a whole on the claims forming the basis of the injunctive or declaratory relief.”  Thus, “claims for individualized relief . . . do not satisfy the Rule.”

Rule 23(b)(2) allows class treatment when “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.”  The Court explained that “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 individual class member would be entitled to a different injunction or declaratory judgment against the defendant.  Similarly, it does not authorize class certification when each class member would be entitled to an individualized award of monetary damages.”  Instead, the Court concluded that claims for monetary relief—including the plaintiffs’ claims for back pay in Dukes— could properly be afforded class treatment only under Rule 23(b)(3). This is so because a Rule 23(b)(3) class has a number of “procedural protections” – including the requirement that plaintiffs satisfy more stringent predominance and superiority standards, mandatory notice and the right to opt out – that are not provided for under Rule 23(b)(2). 

In a similar vein, the Supreme Court rejected the notion that class members’ entitlement to back pay could be decided without individualized determinations and instead by extrapolating from a small subset of claims that would actually be tried.  Specifically, the Court held that the defendant’s right to raise any affirmative defenses it may have to individual claims could not be replaced with the “Trial by Formula” that the Ninth Circuit endorsed.  Stated otherwise, the Court made clear that “a class cannot be certified on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims.”  This is because courts are forbidden from interpreting Rule 23 to “abridge, enlarge or modify any substantive right.”

Dukes has far-reaching implications for class action litigation

The much-anticipated Dukes decision will now be a focal point of many class action cases.  Its precise impact, of course, will depend on how lower courts interpret and apply it.  But some of its likely implications are already clear.

First, the Dukes decision will provide additional bases for opposing class certification under Rule 23(a)(2), the commonality requirement.  In the past, some courts interpreted this as a rather lenient requirement; the Dukes decision now corrects that impression.  And the Court’s analysis also makes clear that the commonality analysis should take into account not just pleadings, but evidentiary facts including “‘[d]issimilarities within the proposed class,’” which, as the Court noted, “‘have the potential to impede the generation of common answers.’”

Second, and relatedly, the decision will likely increase the extent to which courts make inquiries regarding the merits of the case in deciding class certification motions.  In that regard, the Dukes decision clearly put to rest any argument that such inquiries are improper to the extent the merits overlap with the class certification analysis and, as the Court noted, such overlap is common.  This development is important and overdue. 

Third, the decision will fuel challenges to evidence offered by expert witnesses, particularly statistical and sociological evidence, as well as anecdotal reports.  Class certification decisions often depend on this type of evidence and, at a minimum, the Dukes opinion should ensure that courts will view it with greater scrutiny.  Also of interest is the Court’s dicta weighing in on the debate over whether the standards for the admission of expert testimony under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 597 (1993), apply at the class certification stage and suggesting that question should be answered in the affirmative. 

Fourth, the Court’s statements regarding the application of Rule 23(b)(2) are also significant.  Prior to Dukes, there was no clear guidance on the extent and circumstances under which a class might seek monetary relief and still be certified as a Rule 23(b)(2) class.  In Dukes, the Court noted that one possible interpretation is that Rule 23(b)(2) “applies only to requests for [] injunctive or declaratory relief and does not authorize the class certification of monetary claims at all.”  The Court did not answer that question, but concluded that, “at a minimum,” claims for individualized monetary relief did not satisfy Rule 23(b)(2).   

Fifth, the Court’s statement that Rule 23 cannot amend defendants’ substantive right to raise affirmative defenses to class members’ claims may also significantly improve defendants’ ability to rely on unique defenses to challenge class certification.

Finally, the Dukes decision resolves an issue that was heavily contested during oral argument before the Supreme Court – whether the size of the class action affects the plaintiff’s ability to obtain certification.  The Court’s comments regarding the size of the class made it clear that it did play a large part in its decision.  There is little doubt that the difficulties in managing a large class and the difficulties in proof (including statistics) that naturally come into play may make certification of such a class more difficult.  As companies become larger and markets converge, this issue will likely play a larger role in opposing class certification.

Smith v. Bayer Corp.

In Bayer, the underlying facts involved two separate, contemporaneously filed lawsuits which both asserted claims against Bayer arising from its sale of the prescription drug Baycol.  The first case was filed by George McCollins (McCollins) and the second by Keith Smith and Shirley Sperlazza (collectively, Smith).  Both lawsuits were filed in 2001, in West Virginia state court and as putative class actions on behalf of Baycol purchasers residing in the state.  Bayer removed the McCollins case to federal court on the basis of diversity jurisdiction, but due to the presence of local defendants, the Smith suit lacked complete diversity and remained in state court.²

In 2008, the federal court in the McCollins case reached the issue of class certification first.  Pursuant to Federal Rule of Civil Procedure 23(b)(3), the federal court refused to certify the proposed class on the grounds that it failed to satisfy that provision’s requirement that issues common to the class predominate over individual ones.   When Smith subsequently moved to certify a virtually identical class in state court, Bayer moved the federal court to enjoin the state court from addressing class certification in the Smith case.  Although the Anti-Injunction Act (the “Act”), 28 U.S.C. § 2283, generally prohibits a federal court from granting an injunction to stay proceedings in state court, Bayer argued that its request was appropriate under the Act’s “relitigation exception” which expressly permits such injunctions where necessary “to protect or effectuate [the federal court’s] judgments.”  The district court agreed and granted the injunction; the appellate court affirmed. 

The Supreme Court reverses the injunction

To address a circuit split arising over the Act’s relitigation exception, the Supreme Court granted certiorari and reversed.   Justice Elena Kagan delivered the opinion in which all justices joined, except Justice Clarence Thomas, who joined only in part.   Explaining that the Anti-Injunction Act’s “core message is one of respect for state courts[,]” Judge Kagan wrote that its exceptions are narrow and any doubts as to the propriety of a federal injunction should be resolved in favor of allowing state courts to proceed.  With respect to the relitigation exception, the Court noted that “[d]eciding whether and how prior litigation has preclusive effect is usually the bailiwick of the second court” and, thus, an injunction was “heavy artillery” to be used only when “preclusion is clear beyond peradventure.” 

In Smith, the Court found that the case for preclusion was not made for two reasons.   First, the Court concluded that the issue before the West Virginia court was not identical to the issue decided by the federal court because, even if the claims and proposed class were similar, the legal standard to be applied to class certification in each case was not.  This was so, Judge Kagan wrote, because although the text of Federal Rule 23 and West Virginia’s corresponding class action rule were nearly identical, the West Virginia Supreme Court had adopted a different approach to the predominance analysis than that applied by the federal court in the McCollins case.  Where state courts had made it “crystal clear” that they would follow the approach taken by their federal counterparts, the Court indicated that the “same issue” requirement of the relitigation exception would be satisfied.  That was not, however, the case before it and the Court reiterated that any doubt on that issue must be resolved against the use of an injunction.

Second, the Supreme Court concluded that the injunction was not proper because Smith was neither a party to the McCollins suit nor in requisite privity with any party to that federal suit.  In particular, the Court noted that Smith could not have been bound as a member of the class proposed in the McCollins case because class certification was denied and “[n]either a proposed class action nor a rejected class action may bind nonparties.”  

The Court suggests that the risk of serial relitigation may be addressed by other means

In issuing its decision, the Court acknowledged that its decision gave rise to “policy concerns” relating to the potential for abuse of class action litigation.  In particular, Bayer had argued that, without the injunction, class counsel could simply engage in “serial relitigation” of the class certification issue, the costs of which would force defendants to settle in an effort to buy peace.  In response, the Court found that such relitigation was an inevitable byproduct of the rule against nonparty preclusion and may be mitigated by other means such as the principles of stare decisis and comity, the ability of federal courts to consolidate related litigation and provisions of the Class Action Fairness Act of 2005, which significantly expand a defendant’s ability to remove state class actions to federal court.  The Court also left open the possibility that future legislation or changes to the Federal Rules of Civil Procedure could be made to address these concerns. 

For more information about the impact of these Supreme Court decisions on your business please contact:

Luanne Sacks

Co-Chair, Class Action Practice

Keara Gordon

Co-Chair, Class Action Practice