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The Effects of Wal-Mart v. Dukes on Class Certification

By Robert H. Bell and Thomas G. Haskins Jr. – January 31, 2012


One of the most anticipated decisions of the U.S. Supreme Court’s 2010 term was Wal-Mart Stores, Inc. v. Dukes, which had the potential to be a landmark case—one of the world’s largest private employers faced with what could have been the largest class action in U.S. history, raising questions of alleged systemic gender discrimination. And though the case itself was an employment-discrimination class action, the Court’s decision, authored by Justice Antonin Scalia, will likely affect class-certification decisions in other contexts as well, although the full extent to which it will do so remains an open question. In this article, we will take a look at three distinct ways in which district and circuit courts have applied the Wal-Mart decision in class-certification decisions in securities-fraud class actions.


The Wal-Mart Decision

In Wal-Mart Stores, Inc. v. Dukes, the U.S. Supreme Court reversed a grant of class certification to one of the “most expansive class[es] ever,” which consisted of approximately 1.5 million women alleging discrimination by their supervisors at Wal-Mart over pay and promotion matters, in violation of Title VII. 131 S. Ct. 2541, 2547 (2011). The plaintiffs’ theory was that Wal-Mart’s strong corporate culture allowed bias against female employees, infecting the decision-making of local supervisors (who, according to Wal-Mart, had ample discretion in hiring and promotion decisions) and making all women at the company victim to discriminatory practices. Id. at 2548.


The district court certified the proposed class, which was then affirmed by a divided en banc Court of Appeals for the Ninth Circuit. Although the plaintiffs were also seeking backpay, the Ninth Circuit held that those claims could be part of a Rule 23(b)(2) class because they did not predominate over the requests for injunctive and declaratory relief. Id. at 2550.


In reversing the Ninth Circuit, the Supreme Court unanimously held that the claims for backpay were improperly certified under Rule 23(b)(2) because claims for monetary relief that are not incidental to the injunctive or declaratory relief cannot be certified under that provision (and should be part of a Rule 23(b)(3) class instead). Id. at 2557. This portion of the Wal-Mart Court’s analysis is less readily applicable to securities-fraud class actions, which seek monetary relief and certification under Rule 23(b)(3).


The Court split 5–4, however, with respect to its analysis of the commonality requirement under Rule 23(a)(2). Justice Scalia, writing for the majority, observed that what matters for class certification under Rule 23(a)(2) is not common “questions,” but rather common “answers.” Id. at 2551. 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.” Id. at 2545. It is not enough that members of the class “all suffered a violation of the same provision of law.” Id. at 2551.


The Court found that “significant proof” was absent in the Wal-Mart case, as Wal-Mart had a policy explicitly forbidding sexual discrimination, and local supervisors had discretion over employment matters. The Court also disregarded the expert report put forth by the plaintiffs, which sought to demonstrate that Wal-Mart’s corporate culture made it vulnerable to bias, as well as the plaintiffs’ statistical and anecdotal evidence. Id. at 2553–56. As a result, the majority concluded that there was not a “common answer to the crucial question of why I was disfavored.” Id. at 2552 (emphasis in original).


Justice Scalia also reaffirmed that Rule 23 is not a “mere pleading standard,” but instead that a party seeking class certification must “affirmatively demonstrate his compliance with the Rule—that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc.” Id. Justice Scalia acknowledged that this “rigorous analysis” will often necessarily overlap with the merits of the underlying claims. In a footnote, the Court noted that the “most common example” of overlap with a merits question during class certification is in the context of a securities-fraud class action—namely the predominance analysis under Rule 23(b)(3) and the applicability of the fraud-on-the-market presumption. Id. at 2552 n.6. This potentially critical footnote is discussed further below.


District and Circuit Court Decisions in the Securities-Fraud Context

Since it was issued, the Wal-Mart decision has been cited by hundreds of lower-court decisions, mostly in passing, to establish the baseline class-certification standards. And while the number of class-certification decisions in the securities-fraud context issued post-Wal-Mart remains relatively small, district and circuit courts appear to be incorporating the Wal-Mart decision in three distinct ways: (1) that Wal-Mart is an employment-discrimination case with unique factual issues that are not necessarily relevant to securities-fraud class-action litigation; (2) as a directive from the U.S. Supreme Court to tighten the analysis required at the class-certification stage, including with respect to issues of commonality; and (3) as ammunition for circuit courts who have held that materiality is not an element that must be shown to benefit from the fraud-on-the-market presumption at class certification, an open question for which there is currently a circuit split.


Wal-Mart Distinguished

It is likely that Wal-Mart will ultimately have the greatest impact on employment-discrimination class actions, and many of the decisions citing Wal-Mart are in that context. For example, relying extensively on Wal-Mart, a New Jersey district court recently denied class certification in an employment-discrimination class-action suit claiming that Lockheed Martin Corp.’s policies and practices had a disparate impact on female employees’ compensation and advancement. Bell v. Lockheed Martin Corp., No. 08-6292 (RBK/AMD), 2011 WL 6256978, at *8–9 (D. N.J. Dec. 14, 2011). The district court based its decision on the individualized nature of the claims, similar to those made by the Wal-Mart plaintiffs.


In the securities-fraud context, however, courts have found that securities-fraud lawsuits are “especially amenable to class action resolution.” E.g., Pub. Emps.’ Ret. Sys. of Miss. v. Merrill Lynch & Co., No. 08 Civ. 10841, 2011 WL 3652477, at *1 (S.D.N.Y. Aug. 22, 2011). As a result, the rationales underlying the Wal-Mart decision may have less relevance. For example, Judge Rakoff in the Southern District of New York, in granting class certification related to the sale of mortgage pass-through certificates, found that the facts in Wal-Mart were “entirely distinguishable” from that particular securities class action and had “little to no bearing on the issues before the Court.” Id.at *7.


In addition, a California district court observed that while the Wal-Mart Court’s analysis on commonality had “theoretical bearing” on the question of predominance under Rule 23(b)(3), there were “myriad factual differences” between an employment-discrimination class-action case and the issues arising from a dispute over a third-party beneficiary contract claim (in connection with a broader securities case relating to an alleged Ponzi scheme). In re Medical Capital Sec. Litig., No. SAML 10-2145, 2011 WL 5067208, at *3 n.1 (C.D. Cal. July 26, 2011). The Wal-Mart decision was further distinguishable because the defendants in Medical Capital had conceded commonality. Id.


Commonality: A Heightened Standard or Clarifying Language?

Justice Scalia took the clear view that the “rigorous analysis” required at the class-certification stage may necessarily require “some overlap with the merits of the plaintiff’s underlying claim.” Wal-Mart, 131 S. Ct. at 2551. For commonality, the Wal-Mart majority recognized that most class-action complaints will raise various common questions, but commonality requires more than that: The pertinent question for class certification is whether the proceedings will arrive at common answers. Id. This concept—that commonality requires a “common contention” whose “truth or falsity” will resolve an issue central to each class member’s claim, i.e., an answer common to the class—will likely receive the lion’s share of focus from lower courts, although it is as of yet unclear whether the majority’s opinion sets forth a heightened standard, or whether it is simply a clarification on existing standards.


Justice Ginsburg, writing on behalf of the four dissenting justices on the portion of the ruling related to commonality, argued that the majority’s analysis “disqualifies the class at the starting gate, holding that the plaintiffs cannot cross the ‘commonality’ line set by Rule 23(a)(2). In so ruling, the Court imports into the Rule 23(a) determination concerns properly addressed in a Rule 23(b)(3) assessment.” 131 S. Ct. at 2562 (Ginsburg, J., dissenting). In the Public Employees decision referred to above, Judge Rakoff also noted that the dissenting justices read the Wal-Mart decision as heightening the commonality standard under Rule 23(a)(2). 2011 WL 3652477, at *6. However, this “clarifying language” regarding the standard for commonality from the Wal-Mart opinion, as Judge Rakoff referred to it, did not affect his determination in that case because the “common questions presented by this case—essentially, whether the Offering Documents were false or misleading in one or more respects—are clearly susceptible to common answers” and so Rule 23(a)(2) was satisfied. 2011 WL 3652477, at *7.


In light of the other language in the Wal-Mart decision regarding a plaintiff’s duty to affirmatively” demonstrate his compliance with the Rule,” Wal-Mart, 131 S. Ct. at 2551, parties are likely to argue that Wal-Mart does in fact require district courts to take a harder look at the evidence put forward to demonstrate commonality at the class-certification stage. Along those lines, it is interesting to note that the majority suggested, but did not hold, that expert testimony at the class-certification stage should meet the standards for admission of expert testimony under Rule 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). 131 S. Ct. at 2553–54. This implication would suggest that courts are to look at commonality with a more discerning eye, including with respect to any expert evidence proffered in support of class certification.


Tipping the Scales?

Perhaps the most interesting way in which Wal-Mart has been cited in the securities-fraud context has to do with Justice Scalia’s footnote regarding the fraud-on-the-market presumption. Together with the footnote from the Supreme Court’s decision in Basic Inc. v. Levinson, this battle of footnotes may well find itself at center stage in a future decision resolving the ongoing circuit split over whether materiality is required to be proven at the class-certification stage for a plaintiff to benefit from the fraud-on-the-market presumption.


Reliance on the alleged misrepresentation or omission is a key element of a private right of action under Rule 10b-5, adopted pursuant to section 10(b) of the Securities Exchange Act of 1934. Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2184 (2011). The Supreme Court has recognized that “‘requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would’ prevent such plaintiffs ‘from proceeding with a class action, since individual issues’ would ‘overwhelm the common ones.’” Halliburton, 131 S. Ct. at 2185 (citing Basic, 485 U.S. at 242). To combat this, the fraud-on-the-market presumption allows plaintiffs to show reliance by proving the existence of certain elements, at least two of which are 1) that the securities they purchased were purchased on an efficient market; and 2) that the allegedly misleading statements were made publicly.


There is disagreement among the circuit courts, however, as to whether a third element—materiality of the allegedly misleading statements—must be proven at the class-certification stage. In Halliburton, the Court may have made an implicit recognition of this division when it acknowledged that securities-fraud plaintiffs “must prove certain things” to invoke the rebuttable presumption of reliance, and that there was “common ground” that plaintiffs “must demonstrate that the alleged misrepresentations were publicly known . . . , that the stock traded in an efficient market, and that the relevant transaction took place ‘between the time the misrepresentations were made and the time the truth was revealed.’” Halliburton, 131 S. Ct. at 2185 (citation omitted). The Court held that plaintiffs were not required to prove loss causation at the class-certification stage, but also declined to “address any other question about Basic, its presumption, or how and when it may be rebutted.” Id. at 2187.


Currently, the First, Second, and Fifth Circuits require plaintiffs to prove materiality. These courts support their position by relying on a footnote in Basic Inc. v. Levinson, which states: “The Court of Appeals held that in order to invoke the presumption, a plaintiff must allege and prove . . . that the misrepresentations were material.” 485 U.S. 224, 248 n.27 (1988); see, e.g., In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 481 (2d Cir. 2008).


The Ninth Circuit recently joined the Third and Seventh Circuits in holding that plaintiffs need not prove materiality at the class-certification stage. See Conn. Ret. Plans & Trust Funds v. Amgen Inc., 660 F.3d 1170, 1176 (9th Cir. 2011). These courts have held that the Basic footnote simply notes that the appellate court “deemed materiality essential,” but “the Justices did not adopt it as a precondition to class certification.” Id. (citation omitted).


In reaching its conclusion, the Ninth Circuit cited not only the formulation set forth above from Halliburton, but also Justice Scalia’s formulation of the presumption in the Wal-Mart footnote, both of which “do not mention materiality as a requirement.” Id. at 1176 (citing Wal-Mart, 131 S. Ct. at 2552 n.6). Of course, in the same opinion, the Ninth Circuit apparently contradicted itself by distinguishing Wal-Mart­ because it was not a securities-fraud case, and by observing that the Supreme Court there did not have “occasion to decide whether a securities-fraud plaintiff must prove materiality to avail herself of the fraud-on-the-market presumption of reliance.” Amgen, 660 F.3d at 1174. The full effect of this ruling may also be limited because the Ninth Circuit did not need to address how a plaintiff is to prove the elements of the presumption, as in that case the defendants did not contest those issues. Id. at 1177.


While the Ninth Circuit apparently finds support for its position on materiality from the Wal-Mart footnote, whether the Wal-Mart decision signals a tipping of the scales in this circuit split remains an open question for the Supreme Court to address in the future.


Conclusion

The Wal-Mart decision will continue to affect class-certification decisions, particularly in employment-discrimination class actions. Whether it has a significant effect in the securities context remains to be seen, although it will likely continue to serve as a reminder that a rigorous analysis is required for commonality. The more significant effect is if the Wal-Mart decision, and in particular Justice Scalia’s footnote, adds more fuel to the ongoing circuit split over whether materiality must be proven as part of the fraud-on-the-market presumption for class certification.


Keywords: securities litigation, securities fraud, employment discrimination, Supreme Court


Robert H. Bell and Thomas G. Haskins are litigation attorneys at Linklaters LLP in New York, New York. The authors wish to thank their colleague Ruth Harlow at Linklaters LLP for her advice and suggestions regarding the drafting of this article.


 
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