So, Monday the Supreme Court issued its decision in Wal-Mart Stores, Inc. v. Dukes, an employment class action case. The majority decision was certainly a big win for Wal-Mart, and may be a big win for large-scale employers, but is it a win for securities issuers?
In Wal-Mart, Justice Scalia wrote for the majority, which held that the 1.5 million current and former female employees could not sue as a class because they failed to satisfy the "commonality" prong of Rule 23. (I'm not civ pro expert, but here's Sergio Campos and Lyle Denniston giving more detailed explanations.) The plaintiffs would have to have at least one common question of law or fact, and Scalia reasoned that they did not. The plaintiffs were alleging gender discrimination, which had a disparate impact and resulted in nationwide lower pay and promotion offers for women. As in other large employment discrimination cases, the plaintiffs had an expert armed with regressions to show that these disparities cannot be explained by other variables. However, Wal-Mart has no nationwide policy for hiring, pay or promotion decisions for local, nonmanagment jobs. Discretion, within limits, is given to local managers. The plaintiffs argued that the "nonpolicy" was a policy, so the common question was whether the nonpolicy policy resulted in discrimination. Scalia did not frame the inquiry in that way and so said that the questions would relate to local policies, so no one common question would be had by all claimants. So, no class action. (All the justices agreed that teh case suffered under another, correctable procedural error.) The four-justice dissent disagreed and argued that the reasoning unpermissibly went to the merits (whether there was any evidence that the nationwide nonpolicy affected the local policies).
So, I keep reading news items with throwaway sentences like "this decision will have impact in other class action areas, such as products liability and securities fraud." I'm intrigued by this. The opinion on its face seems to be about commonality. Securities fraud cases seem to be pretty strong in the commonality area. What am I missing? In the WSJ Law Blog, Skadden attorney Charles Smith is quoted as saying Scalia's opinion used "muscular language about the obligation of district courts as gatekeepers to apply rigorously the requirements for class certification, which can be a helpful tool for defendants to limit the scope and costs of these expensive cases." Smith is also cited for the proposition that the case will have an impact in securities fraud cases. Yes, the case seems to be part of a legislative and judicial trend of restricting the use of class actions. However, I have yet to see any examples of how the four requirements of Rule 23 (numerosity, typicality, commonality and adequacy) have been loosely applied in the securities law area, making it an easy target post-Wal-Mart.
Now, if you believe, like Justice Ginsburg, that the majority was looking into the merits at the class certification stage and that this new analysis will be the legacy of Wal-Mart, then you might reasonably look to other areas of class action litigation and say now plaintiffs will have to argue merits at class certification. However, we've already had this fight in securities law, and the plaintiffs won in a unanimous ruling: Erica P. John Fund v. Halliburton.
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