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The Court began its analysis with class action Rule 23(a), which requires numerosity, commonality, typicality and adequate representation as a threshold for class certification. Although Wal-Mart argued that plaintiffs could not meet all but the numerosity requirements, the court stated that "the crux of this case is commonality." The court noted that it would be easy to craft a series of questions that appeared to present "common" issues. However, the court rejected that and reaffirmed that "commonality requires the plaintiff to demonstrate that the class members have suffered the same injury. Thus, the "claims must depend upon a common contention" that 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." Further, the court reaffirmed its prior holding that "certification is proper only if 'the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied.'"

Noting that "in this case, proof of commonality necessarily overlaps with [the employees'] merits contention that Wal-Mart engages in a pattern or practice of discrimination," the Court resolved a question that has been lingering since 1974: Whether in determining class action certification motions, the district courts can delve into the merits of the plaintiffs claims. On this issue, the Court recognized that rigorous analysis of the class action certification prerequisites will frequently "entail some overlap with the merits of the plaintiffs' underlying claim. That cannot be helped."

Conducting that analysis, the court held that for class certification there must be "significant proof" that Wal-Mart "operated under a general policy of discrimination," which it found "entirely absent." The Court thus rejected the sociologist's testimony since he admitted on deposition that he could not calculate whether the alleged biased "corporate culture" resulted in stereotyped decisions in 0.5 percent or 95 percent of the time. As to statistics, the Court stated that "merely showing that Wal-Mart's policy of discretion has produced an overall sex-based disparity does not suffice," but rather there must be a demonstration of a specific employment practice "other than the bare existence of delegated discretion." Finally, the Court also found the anecdotal evidence deficient, since there was only one affidavit for every 12,500 class members relating to only 235 out of Wal-Mart's 3,400 stores. Thus, the Court concluded that the evidence was "worlds apart" from that necessary for class certification under Rule 23(a).

In addition, the Court held that plaintiffs' request for monetary relief in the form of back pay for each class member removed the case from the category of class actions under Rule 23(b)(2) that primarily seek injunctive or corresponding declaratory relief. By alleging that their request for monetary relief was only "incidental," plaintiffs had sought to avoid the more onerous provisions of Rule 23(b)(3) and to bind the entire class without notice and an opportunity to opt out.
In a major clarification of the law, the Court held that "We think that, at a minimum, claims for individualized relief (like the back pay at issue here) do not satisfy the Rule." Instead, (b)(2) applies only when a single injunction or declaratory judgment would provide relief to each member of the class and "does not authorize class certification when each class member would be entitled to an individualized award of monetary damages." The Court also noted that in order to obtain a (b)(2) certification, the plaintiffs had eschewed compensatory damages (such as mental distress), which in the Court's view "creates perverse incentives for class representatives to place at risk potentially valid claims for monetary relief."

Further, and very importantly, the Court expressly recognized the employer's entitlement to individualized determinations of each class member's eligibility for back pay. First, Title VII itself, the Court stated, precludes the payment of back pay to an employee who suffered an adverse employment action "for any reason other than discrimination." Second, courts must usually conduct hearings to determine the scope of individual relief in the second (remedial) stage of class actions. And third, the proposal by the Ninth Circuit that the issues be resolved by a "Trial by Formula" is contrary to the Federal Rules Enabling Act which "forbids interpreting Rule 23 to 'abridge, enlarge or modify any substantive right,' 28 U.S.C. Section 2072(b)." In short, "a class cannot be certified on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims."

Although focused on the world's largest class action to date, the decision reaffirms and establishes important principles beneficial to all employers. Some courts had held that only a minimal showing of compliance with Rule 23(a) was necessary for certification. This decision rejects that position and holds that a "rigorous analysis" must be made at the certification stage. Some courts had held that they could not address the merits of the claims in determining whether the prerequisites for a class action, such as the "commonality" test, had been met. Again, this decision expressly rejects that position and holds that the "rigorous analysis" will often require consideration of the merits (as it did in that case). Some courts had held that class actions could be based on "excessive subjectivity" in decision making by managers. The Court rejects that generally, instead requiring a "specific employment practice" be identified, common to all class members (and recognizing that allowing discretion by local supervisors is "a very common and presumptively reasonable way of doing business"). Further, the Court rejected the statistical, anecdotal and sociological evidence often presented in other cases as well. And finally, the Court clearly and emphatically held that where individual monetary relief is sought, the class cannot be certified under (b)(2) generally speaking and that the employer is entitled to a hearing at which it can present its defenses and reasons "other than discrimination" for each employment action at issue.
 

Several Justices expressed strong skepticism of the merits of Plaintiff's charge of company-wide sex discrimination. After confirming that subjective decisionmaking is not necessarily illegal, Chief Justice Roberts asked how much discrimination needs to be shown to conclude that it was caused by corporate policy, rather than a few bad actors. He also pointed out that Wal-Mart's pay disparity is less than the national average. Justices Kennedy and Scalia challenged Plaintiff's counsel to describe the unlawful policy, asserting that it is inconsistent to argue both that Wal-Mart has a strong corporate culture and knows everything at its headquarters, and that individual managers have too much discretion. Justice Scalia grilled Plaintiff's counsel at length about what evidence established intentional discrimination based on sex, particularly given Wal-Mart's written anti-discrimination policy. Justice Kennedy questioned the Plaintiffs' ability to use statistics to establish that discrimination was at work, asking whether a company with X% disparity could be held liable if there was also the same X% disparity in the retail industry generally, and whether there was a need to also show deliberate indifference. Justice Alito similarly asked whether a company could be liable for sex discrimination if it had exactly the same statistical profile as every other American company. And Justice Scalia challenged the assumption that if a disparity exists, it must be due to sex discrimination.

The Court also appeared to be skeptical of Plaintiffs' ability to certify a class. Justices Breyer, Scalia and Kennedy all questioned how a policy could truly be common to all women employees. Justice Scalia pointed out that the class included women who were not underpaid, and Justice Kennedy observed that if the decisions were truly "standardless" then they could not be common. Justice Roberts asked whether a loss on the merits would bind class members and bar them from bringing individual actions. Justice Ginsburg said that "a very serious problem" is how to calculate backpay for each class member, given the impossibility of holding individual hearings. She also questioned the certification of a large damages class under Rule 23(b)(2), which does not provide class members with notice and an ability to opt out of the class.

The most skeptical questioning concerned a defendant's ability (or inability, in this case) to defend itself in such a large class action. Justices Ginsburg and Sotomayor both asked when and how a defendant could show that an individual class member was not entitled to back pay because she should have been fired or disciplined. Plaintiffs' answer – that Wal-Mart could defend itself by arguing what variables should be used in the statistical model determining backpay awards – did not appear to satisfy Justice Sotomayor. It also prompted Justice Scalia to observe that "it's more reliable to have a hearing with evidence on the particular promotion or dismissal of the individual … I don't care how admirable a statistical guess you make." When Plaintiff's counsel replied that individual hearings were not feasible because Wal-Mart had not kept the necessary records, Justice Scalia retorted: "We should use that in jury trials, too, for really old cases. We should just put a statistical model before the jury and say, you know, this stuff is too old; we'll do it on the basis of – is this really due process?"

To be sure, the argument was not completely one-sided. Some of the Court's questions suggested that it might be willing to certify a (b)(2) class solely for injunctive relief. And the Court did struggle with the issue of when a company could and should be held liable for allowing discrimination to go unchecked. As phrased by Justice Ginsburg: "Isn't there some responsibility on the company to say, is gender discrimination at work, and if it is, isn't there an obligation to stop it?" The tenor of the argument, however, strongly suggested that the Court is likely to reverse certification of the class and rule in favor of Wal-Mart.
 

After initially finding that the size of the putative class was sufficient to justify a class action, the Court, deleted multiple passages from its earlier decision in an apparent attempt to correct some of its more questionable portions relating to the commonality of the factual and legal issues raised by the potential class members.   In particular, the court retreated from its watered-down standard for expert testimony at the class certification stage and from its outright rejection of Wal-Mart’s statistical expert under that standard. Instead, the court simply stated that it need not consider whether the testimony of Wal-Mart’s statistical expert was more persuasive than that of Plaintiffs’ expert.

In another move that is particularly troubling for employers, the court maintained its position that commonality existed because of Wal-Mart’s use of subjective decision-making with regard to pay and promotion decisions. The court held that decentralized, subjective decision-making in and of itself can give rise to an inference of discrimination.

The court also reaffirmed its earlier holding that Plaintiffs could certify the class under the relaxed standards of Rule 23(b)(2) and need not satisfy the more demanding requirements of Rule 23(b)(3). Plaintiffs claimed they should be allowed to certify the proposed class as one seeking injunctive and declaratory relief under Rule 23(b)(2) even though they sought billions of dollars in back pay and punitive damages. The general rule is that, in order to pursue a 23(b)(2) class action, monetary damages must not be the predominant relief sought and must be merely secondary to claims for injunctive relief. Wal-Mart argued that Plaintiffs should be required to establish predominance and superiority under Rule 23(b)(3) because of the large damages sought by the class. The Court rejected this argument, holding that the large damages sought were merely a function of the size of Wal-Mart itself and did not mean that damages were the class’s primary goal in instituting the action. The court chose to credit Plaintiffs’ self-serving statements that the primary goal of the litigation was to obtain an injunction against future discrimination—not monetary relief – even though some of the class members were no longer employed and would not benefit from such an injunction. The court added new language to its opinion recognizing that Wal-Mart correctly argued that a request for back pay did “weigh against” class certification but nonetheless held that the district court did not abuse its discretion by certifying the class under Rule 23(b)(2) notwithstanding the request. In so doing, the court deleted language from its earlier opinion that flatly rejected Wal-Mart’s contention that former employees had no interest in injunctive or declaratory relief. Instead, the court added language agreeing with Wal-Mart’s argument and holding that class certification “may not be proper” for former employees. 

Finally, in its prior opinion, the court rejected Wal-Mart’s argument that the size of the class made a trial unmanageable because Wal-Mart would not be able to conduct individualized hearings on the merits of each claim and raise defenses unique to each individual class member without incurring prohibitive expense. Instead, the court held that Wal-Mart was not entitled to individualized hearings either under existing precedent or due process, a holding that appeared to contradict not only the Supreme Court’s decision in Int’l Bd. of Teamsters v. United States, 431 U.S. 324 (1977), but also Title VII and the Civil Rights Act of 1991, 42 U.S.C. § 2000e.  In so doing, the court endorsed Plaintiffs’ plan to use statistical methods to determine liability and award back pay and punitive damages for each class member. In its revised opinion, the court deleted the language describing these holdings and instead “express[ed] no opinion regarding Wal-Mart’s objections to the district court’s tentative trial plan.” 

Following issuance of the court’s revised opinion, Wal-Mart again requested an en banc review of the court’s decision on class certification. Wal-Mart’s petition for review argues that the class was improperly certified under Rule 23(b)(2) and that the proposed class “presents intractable manageability problems.” 

Employers should take note of this case as it makes its way through the court system. The case raises a number of critical legal issues including, among others: (1) whether courts can or should rigorously review expert testimony at the class certification stage; (2) whether decisions based on subjective criteria are susceptible to a finding of commonality under Rule 23; (3) whether defendants can offer individualized defenses as to whether particular class members were discriminated against; and (4) whether plaintiffs can sidestep the demanding Rule 23(b)(3) requirements of predominance and superiority by using Rule 23(b)(2) even in cases seeking massive damages. This case is also significant because of the size of the class and the potential damages involved. It could establish a new framework that would allow classes of employees nationwide to file lawsuits against their employers alleging that a uniform policy or corporate culture, combined with subjective decisions by individual managers, resulted in discrimination. For these reasons, employment lawyers and their clients are waiting and watching to see what happens next.

Thanks to Jamie LaPlante for her assistance with this post.