The ERISA Litigation Newsletter (November 2013)

Editor's Overview

This month we look at part one of our three part series on Class Actions. In part one, Robert Rachal, Page Griffin and Madeline Chimento Rea address Rule 23's requirement of commonality and review in-depth the developing body of case law post Wal-Mart and Comcast and how commonality may be applied to eliminate or cabin class actions. Look for part two addressing Rule 23(b) in our December Newsletter.

As always, be sure to review the Rulings, Filings, and Settlement of Interest where we discuss new DOL guidance on HRAs, FSAs and Employer Payment Plans, IRS guidance on electronic Self-Certification for hardship distributions and Post-Windsor guidance, and cases addressing FICA application to severance pay, excessive fees, PBGC administrative deference and the ACA.

Labor and Employment and ERISA Class Actions After Wal-Mart and Comcast — Practice Points for Defendants (Part I - Commonality)*

By Robert Rachal, Page Griffin and Madeline Chimento Rea

In Wal-Mart Stores, Inc. v. Dukes, the Supreme Court made clear that the class action rules apply with full force to employment discrimination cases.1Wal-Mart directs courts to conduct a "rigorous analysis" to determine whether employment discrimination plaintiffs have proven that they meet the requirements of Rule 23. Moreover, the decision breathes new life into the Federal Rules' commonality requirements and the limitations on "mandatory" classes embodied in Rule 23.

After Wal-Mart, the Supreme Court again altered the landscape of class action litigation when in Comcast Corp. v. Behrend 2 the Court applied what it called the "straightforward application of class certification principles" to issues of class damages. Though not a labor and employment case, the import of Comcast is clear: plaintiffs' damages theory must (i) match their class liability theory and (ii) be able to prove damages on a classwide basis, free from taint from individualized harms.3

This Bloomberg BNA Insights article addresses the impact of Wal-Mart, Comcast and the developing body of cases applying them. The article focuses on how they may be used to defend against labor and employment and ERISA class actions. The article also briefly addresses the potential impact of Wal-Mart and Comcast on FLSA and ADEA "collective actions." Some of the key conclusions are:

By adopting a dissimilarities analysis to determine whether common questions have common answers, Wal-Mart makes commonality a significant screen to eliminate or cabin many types of labor and employment and ERISA class actions. Wal-Mart's dissimilarities analysis is particularly important (i) to labor and employment class actions involving discretionary or complex multi-level or multi-source decision making, (ii) to ERISA investment cases in 401(k) and similar plans, and (iii) to ERISA (and labor and employment) class actions that depend on allegedly defective or misleading communications. Wal-Mart requires many, if not all, class actions seeking individualized monetary relief to meet Rule 23(b)(3)'s more stringent predominance and superiority requirements before any class can be certified. Comcast's making damages a central part of class analysis is a substantial change in the law, and should bar class actions unless plaintiffs can prove that the alleged class wrong caused a classwide harm. This change is already having a substantial impact in many wage-and-hour cases. Comcast and Wal-Mart both illustrate the importance of expert testimony in class certification, and apply strict standards to that testimony. This Bloomberg BNA Insight article addresses the impact of Wal-Mart and Comcast in three parts. Part I discusses the Wal-Mart and Comcast rulings, and how commonality may be applied to eliminate or cabin class actions after Wal-Mart. Part I also discusses adequacy and typicality, and how these requirements may be heightened after Wal-Mart and Comcast. Part II addresses the Rule 23(b) principles in Wal-Mart, including defenses to plaintiff's attempts to circumvent Wal-Mart through "issue" or "hybrid" certifications. Part II also addresses the use of trial plans and subclasses as means to limit or defeat class actions, and ends with a brief discussion on using Wal-Mart and Comcast to limit or defeat "collective actions" under FLSA and ADEA. Finally, Part III addresses experts in class actions, and how defendants may use expert analysis to defeat or limit class certification.

The Class and the Substantive Aspects of the Wal-Mart Ruling

Wal-Mart Stores v. Dukes arose out of the largest labor and employment class action ever filed.4 In Wal-Mart, plaintiffs challenged pay and promotion practices on behalf of a proposed class of one and one-half million current and former female employees of Wal-Mart. Plaintiffs claimed that Wal-Mart's supervisors and local managers exercised their discretion on pay and promotions in a way that discriminated against females. Pay was set within bounded ranges, while promotions included both objective and subjective criteria.5 Plaintiffs sought to prove their claim through three forms of proof: (i) a "social framework" analysis that purported to show Wal-Mart had a corporate culture that made it susceptible to gender bias; (ii) a statistical analysis that showed disparities in pay and promotions; and (iii) anecdotal statements claiming discriminatory actions.6

The Wal-Mart Court began its analysis by focusing on the standards applicable to class actions. The Court begin by noting that class actions are exceptions to the rule that litigation is conducted by and on behalf of only individual named parties, and thus plaintiffs bear the burden of proving, not merely pleading, that they satisfied all of Rule 23's requirements. The Court confirmed that lower courts must consider both the merits and the evidence—including the quality of any expert evidence—to determine whether a plaintiff met the requirements of Rule 23.7

Applying these standards, the Court first held that Plaintiffs failed to meet the commonality requirement of Rule 23(a)(2). Quoting a now famous article by Professor Nagareda, the Court framed the commonality inquiry as follows:

What matters to class certification ... is not the raising of common 'questions'— even in droves—but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. Dissimilarities within the proposed class are what have the potential to impede the generation of common answers.8 The Court thus framed the central question as "why was I disfavored." In so doing, the Court held the evidence set forth by plaintiffs failed to provide the "glue" needed to supply a common answer to that question. First, the Court found plaintiffs' expert's social framework analysis useless for class purposes, since it could not answer whether 0.5% or 95% of the employment decisions at Wal-Mart were determined by stereotyped thinking on gender. The corporate policy granting discretion to local supervisors was the precise opposite of an employment practice that would generate a common answer to the "why was I disfavored" question.9 Tellingly, the Court noted that this granting of discretion "is also a very common and presumptively reasonable way of doing business—one that we have said 'should itself raise no inference of discriminatory conduct.'"10 Recognizing that discretion can be used in a fashion that causes disparities is not the same thing as proving it was exercised in the same common and discriminatory fashion. Rather, it was more plausible to assume managers would follow a company's nondiscrimination policies, and that, in any event, "demonstrating the invalidity of one manager's use of discretion will do nothing to demonstrate the invalidity of another's."11

The Court also found plaintiffs' statistical evidence deficient. The Court noted that the presence of disparities at the national or regional level does not establish the existence of disparities—or discrimination—at the store level where the challenged decisions were made. The statistics' more fundamental flaw was that it failed to address possible sex-neutral reasons, including the relative availability of qualified and interested women at the store level, that would rebut any bottom-line disparities. Proof of bottom-line disparities does not answer the common question. Rather, the plaintiff must identify the particular employment practice causing the disparity and show that it caused the disparity through a common mode of acting.12 Finally, the Court held that the anecdotal evidence, which did not include 90% of the stores and represented only 1 out of every 12,500 proposed class members, failed to show that the entire company operated under a general policy of discrimination.13

The Court also rejected Rule 23(b)(2) certification for plaintiffs' back pay claims. Although a fair reading of Rule 23(b)(2) would preclude its application to a class seeking any form of monetary relief, the Court noted it did not need to reach that issue since Rule 23(b)(2) did not include claims for individualized monetary relief. Rule 23(b)(2) is limited to one final, indivisible injunction for the class as a whole, and precluded claims for individualized monetary relief.14 The history and structure of Rule 23 compelled this holding as it provides for mandatory classes (classes with no notice or opt-out rights) under Rules 23(b)(1) and (b)(2) precisely because these classes have the rule-prescribed characteristics that make them unitary and cohesive.15 The Court thus held claims for individualized monetary relief belong in Rule 23(b)(3), where the procedural protections of predominance, superiority, notice, and opt-out apply.16

The Court then rejected the argument that monetary relief in a Rule 23(b)(2) class action is permitted if the injunctive...