Class action law has changed.  Nearly every brief and decision on class certification will now cite the Supreme Court’s opinion in Wal-Mart Stores, Inc. v. Dukes, the Court’s most important decision on class actions in decades.  It substantially raises the bar for plaintiffs to obtain class certification in all types of class actions, and it solidifies the law in several areas where lower courts were not consistent.  Plaintiffs’ class action lawyers won’t hang up their cleats, but only the major leaguers will be able to play ball effectively in federal courts.  And the scope of Class Action Fairness Act jurisdiction becomes even more important because the gap between federal law on class certification and state law in states that eschew the federal standards is now even wider.

I won’t discuss the background of the case in much detail here because most readers know it by now and good summaries are abundant elsewhere, including the Employment Class Action Blog.  Suffice it to say that plaintiffs sought certification of a class of every current and former female employee of Wal-Mart (over 1.5 million people), claiming gender discrimination in pay and promotion.  The claim was that the broad discretion that Wal-Mart gave to store managers in making pay and promotion decisions had an unlawful disparate impact on women.  Plaintiffs tried to prove this through statistical evidence about disparities between men and women in pay and promotion; anecdotal reports of discrimination against women; and testimony of a sociologist that Wal-Mart’s culture makes it “vulnerable” to gender discrimination.

The Supreme Court ruled that class certification was improper because: (1) plaintiffs did not satisfy the commonality requirement of Rule 23(a) (this was 5-4, along conservative/liberal lines); and (2) plaintiffs’ claims for individualized monetary relief (back pay) could not be certified under Rule 23(b)(2) (this was unanimous).

The Court hit all the points I hoped it would in my prior post after the oral argument.  Here is where I see the Court’s opinion having the most impact outside of the employment context:

(1) There are now two big hurdles to class certification in most cases:  both commonality and predominance.  Gone are the days when federal district courts would brush over commonality on the theory that merely identifying one common question that appeared relevant was enough.  Commonality now has real teeth to it:

Commonality requires the plaintiff to demonstrate that the class members “have suffered the same injury.”  This does not mean merely that they have all suffered a violation of the same provision of law.  . . . [Putative class members’] claims must depend upon a common contention — for example, the assertion of discriminatory bias on the part of the same supervisor.  That common contention, moreoever, 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.  (Slip op. at 9 (citation omitted).)

Plaintiffs will now have to demonstrate at least one common question that meets this standard and, where 23(b)(3) applies, also that the common question(s) that meet this standard predominate over individual questions.  That is a tall order. 

(2) A rigorous analysis of the merits is now clearly required where merits issues overlap with class issues.  Some circuits had been saying this, especially the Second and Third Circuits, but the Supreme Court has now made it clear.   The plaintiffs must “establish that [their] theory can be proved on a classwide basis.”  (Slip op. at 16.)  The Court holds that “[b]ecause respondents provide no convincing proof of a companywide discriminatory pay and promotion policy, we have concluded that they have not established the existence of any common question.”  (Id. at 19.)  That certainly seems to decide a merits issue.  The Court analogizes to jurisdictional decisions where the judge has the power to decide factual issues on a preliminary motion.  (Id. at 11.)  The Court says that where class certification overlaps with the merits, the issue must be decided twice — once by the judge at class certification and a second time by the fact-finder at trial (as footnote 6 explains).   In the Wal-Mart case, the issue that overlapped with the merits was whether Wal-Mart had a discriminatory practice — a central issue in the case, which the trial judge had the power to decide on class certification.  (Id.) Not only the quality but also the quantity of proof is now fair game at class certification — the Court analyzes the number of affidavits describing anecdotal instances of discrimination, finding them insufficient in quantity given the huge size of the proposed class.  (Id. at 18.)  The Court also eliminates any suggestion that its decision in Eisen bars a ruling on the merits in deciding class certification (see footnote 6).  The merits of the case are now clearly in play on class certification, and in a big way.

This means defendants should almost always demand a jury trial because if they lose on class certification and the judge is the factfinder at trial, they will have the difficult task of changing the judge’s mind on merits issues that overlap with class certificaiton issues.  Plaintiffs might be better off not demanding a jury because if they win on class certification they will have proven at least major portions of their case to the same trial judge who will be the factfinder at trial.

(3) Expert testimony must be scrutinized at class certification.  In addressing the district court’s conclusion that Daubert does not apply at the class certification stage, the Supreme Court says “We doubt that is so,” but it does not have to reach that question because the sociologist’s testimony was not sufficient to demonstrate commonality — “[i]t is worlds away from ‘significant proof’ that Wal-Mart ‘operated under a general policy of discrimination.'”  (Slip op. at 14.)  Again, this was an area where the merits overlapped with class certification and the Court decided a “merits” issue of whether there was adequate proof of a policy of discrimination.

(4) Where the class is seeking monetary relief, Rule 23(b)(2) does not apply, at least where “the monetary relief is not incidental to the injunctive or declaratory relief.”  (Slip op. at 20.)  “Rule 23(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.”  (Id. at 20-21.)  This is not a major change, most circuits had reached this result already.  Russell Jackson’s blog post discusses this aspect of Wal-Mart in much greater detail than I have – you should read it if you are looking for further detail on this.

(5) Trial of a sample set of individual cases cannot be used to establish class damages.   Plaintiffs proposed that in Wal-Mart as a means of proving class wide backpay.  The Court unanimously “disapprove[d] that novel project,” making 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.”  (Slip op. at 27.)

(6) Has the standard of review been raised?  Justice Scalia’s majority opinion says nothing about an abuse of discretion standard of review.  Justice Ginsburg’s opinion suggests that the majority is going beyond the proper role of an appellate court on abuse-of-discretion review.  Is the majority saying indirectly that there is a higher standard?  At a minimum it performs a very rigorous abuse-of-discertion review.

Wal-Mart is certainly not a panacea for all problems defendants face with class actions.  The problem of re-litigation of class certification in state court (particularly in states that don’t follow federal standards) remains a major problem — it was alluded to but not decided in Smith v. Bayer Corp., see my post on that.  There are also critical issues under CAFA that will have to be decided in defendants’ favor to keep plaintiffs from framing their cases to stay in state court, see my post about that.

So what are the downsides?  Class actions might become more costly if they survive a challenge on the pleadings.  I’d expect plaintiffs’ attorneys to argue they need more discovery because of their heightened burden, and they will continue to try to challenge bifurcation of discovery between class certification issues and other merits discovery.  Motions to strike class allegations will become more important, as will district courts’ willingness to grant those motions without hearing evidence.   If a class is certified in federal court (and certification affirmed on appeal or Rule 23(f) review denied), the stakes become significantly higher.  If the plaintiffs can demonstrate on their motion for class certification that they truly can prove their case in a classwide way, that likely will increase their chances of winning at trial.  The class certification decision becomes even more important.  Weak cases should not pass muster but cases that are certified likely will be stronger.  This may not really change much since as things currently stand few class actions that are certified in federal court are tried because the high exposure often leads to settlement.  Another potential downside is that plaintiffs’ lawyers will have a stronger incentive to try to find end runs around CAFA jurisdiction in states that don’t (or might not) follow Wal-Mart.  That will become an even bigger battleground.

What does this mean for insurance cases in particular?  Wal-Mart should be quite helpful to insurers (subject to the possible downsides outlined above).  Many insurance class actions involve individualized discretionary determinations by adjusters or underwriters, often guided by broad guidelines from senior management, not strict rules.  These discretionary decisions are quite similar to the discretion Wal-Mart managers have on pay and promotion.  As long as insurers continue to give front-line personnel substantial discretion, many class actions should not meet this new standard.  The battleground will continue in cases where there is less individual discretion and more bright-line rules, or where plaintiffs claim that computers rather than human beings are making decisions.  Insurers also now should be able to effectively defeat attempts to bring cases that are really seeking monetary relief under 23(b)(2), such as class actions seeking declaratory relief with respect to insurance policy interpretation or the appropriateness of a particular company practice (see my post on the 7th Circuit’s Kartman decision as an example of this).

What is the media saying?  The New York Times has an editorial railing against the decision, suggesting that the standard for class certification has been “low” for 45 years and is now higher.  I’m not sure that’s accurate, the standard in most circuits was fairly high and the Supreme Court largely reaffirmed that.  The Times also says that the average amount of backpay potentially recoverable ($1,100 per year) was too low to merit individual litigation.  I’m not that familiar with the full scope of relief that might be available to individuals under employment law but on insurance claims the vast majority of individual plaintiffs have more than adequate remedies available to warrant the thousands of individual suits that are filed after any catastrophe.

An article by Steven Greenhouse in the Times predicts that:

The ruling will push plaintiffs’ lawyers into filing fewer huge class actions and more cases on behalf of individuals or smaller groups, lawyers said. That will raise costs and give lawyers less incentive to take on class actions and other complex litigation.

That may well be true – plaintiffs’ lawyers will have to be more selective about bringing class actions and they will need to work up their cases better for class certification.  But is that a bad thing for our legal system?  Many individuals who have a real gripe about employment discrimination (or their insurance claim) want a court (or at least a mediator) to hear their own story and decide their own case based on its own facts, not lump their situation together with thousands of others that are really different.  See my recent post about the problems with mass litigation of insurance claims.