By Gerald L. Maatman, Jr. and David Ross

Dukes issues – stemming from the U.S. Supreme Court’s seminal ruling this past spring in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011)  – are twisting, turning, and morphing into all types of class actions. We anticipate that 2012 will be the year that litigants and courts alike increasing confront “second generation” issues left open by Dukes.

The Dukes litigation is undoubtedly well-known to our readers, as its meaning and implications have been the focus of intense scrutiny. In the SCOTUS case, the district court certified a class in 2004, which was seeking both injunctive relief and back pay, under Rule 23(b)(2). After a series of rulings in the Ninth Circuit, the Supreme Court accepted certiorari, and subsequently held – in a unanimous ruling – that individualized monetary relief claims such as back pay cannot be certified under Rule 23(b)(2). In the 5-4 portion of the opinion, the Supreme Court held that plaintiffs failed to satisfy the Rule 23(a) commonality requirement, which requires that plaintiffs present significant proof that an employer operated under a general policy of discrimination. The Supreme Court’s majority reasoned that plaintiffs’ statistical evidence was insufficient to establish that plaintiffs’ theory could be proved on a class-wide basis. Plaintiffs had provided regional and national data showing pay disparities, but the majority determined that the regional disparities might be attributable to only a small set of stores, and could not by itself establish the uniform, store-by-store disparity upon which plaintiffs’ theory of commonality depended.

Additional chapters in the class action playbook stemming from the Dukes litigation are now being written. One of the prime areas of development is the use of Dukes to attack the architecture of the class theories in a complaint. After all, class action litigation is expensive and participation in class litigation often entails a significant investment of management time. The sooner an employer can exit from a class action the better if the architecture of the complaint is legally defective.

In a ruling on January 13, 2012 – in Scott, et al. v. Family Dollar Stores, Inc., Case No. 08-CV-540 (W.D.N.C. Jan. 13, 2012) – Judge Max Cogburn of the U.S. District Court for the Western District of North Carolina issued a decision of significant importance in employment discrimination class action litigation. On a defense motion per Rule 12(b)(6), Judge Cogburn dismissed plaintiffs’ class claims under Title VII of the Civil Rights Act of 1964 for pay discrimination, their collective action claims for unequal pay under the Equal Pay Act, and denied plaintiffs leave to amend their class theories to assert new pay discrimination class claims. In essence, the Court held that the architecture of plaintiffs’ proposed class complaint was inherently defective.

Key Facts At Issue In Scott

Plaintiffs in Scott asserted nearly identical class claims as in the Dukes litigation. Plaintiffs in Scott followed the standard blueprint that the plaintiffs’ class action bar has pursued over the past decade in litigating large scale, nationwide employment discrimination cases.

In Scott, 51 named plaintiffs brought suit in 2008 alleging that the company paid female store managers less than male store managers. According to plaintiffs, this discrimination was caused by subjective decision-making, which manifested itself in salary disparities between male and female store managers. Plaintiffs brought class claims under Rule 23 for equitable relief, back pay, and punitive damages under Title VII, as well as collective action claims under the Equal Pay Act (“EPA”) per 29 U.S.C. § 216(b). In seeking punitive damages, plaintiffs sought class certification under either Rule 23(b)(2) as part of the relief available at Stage 1 of a bifurcated trial of their pattern or practice claim for injunctive relief, or via hybrid certification under both Rule 23(b)(2) or Rule 23(b)(3). The Court denied previous motions to dismiss and for summary judgment, and the parties subsequently engaged in substantial discovery.

Defense Motion Post-Dukes

After the SCOTUS ruling in Dukes, the defense brought a motion to dismiss and/or strike under Rule 12(b)(6). The motion attacked the architecture of plaintiffs’ class theories under both Title VII and the Equal Pay Act. The defense argued that plaintiffs’ class theory – that the employer’s use of subjective decision-making created salary disparities between male and female store managers – should be dismissed or stricken from the complaint based on the SCOTUS decision in Dukes. Plaintiffs countered that Dukes concerned the issue of class certification based on an evidentiary record at an adversarial hearing under Rule 23, and not the dismissal of a complaint under Rule 12(b)(6).

The Court sided with the defense, granted the employer’s motion, and dismissed all of the class claims under Rule 23 and all of the collective action claims under § 216(b).

Key Components Of The Court’s Ruling

The Court reasoned that plaintiffs class architecture theories in Scott were identical to those in Dukes. This had four consequences, including:

(1). Plaintiffs claims for relief – seeking back pay, punitive damages (under Title VII), and liquidated damages (under the EPA) under any combination of the procedural mechanisms available under Rule 23(b)(2) – were barred due to the SCOTUS opinion in Dukes.

(2). Plaintiffs’ class claims under Title VII – on their face – could never meet the commonality requirement of Rule 23(a)(4).

(3). Plaintiffs’ collective action claims under the EPA – on their face – could never meet the “similarly-situated” requirement of 29 U.S.C. § 216(b).

(4). Plaintiffs’ class claims could not satisfy the predominance requirement of Rule 23(b)(3).

Id. at 7-8. In so ruling, the Court allowed the individual plaintiffs to continue litigating their individual claims. Id. at 9.

Disposition Of Plaintiffs’ Motion For Leave To Amend

During the briefing on the defense motion, plaintiffs also asked for leave to “re-boot” their class theories by seeking leave to file an amended complaint. Plaintiffs claimed to have discovered “new facts” about the employer’s compensation system and the setting of store manager pay. They asserted that the system was both “more centralized” and “non-subjective” than may have been alleged in their original complaint, and hence not foreclosed by Dukes. Plaintiffs also asserted that the proposed amendment was not late, since it was made before the completion of class certification discovery and the deadline for filing a motion for class certification.

The Court rejected plaintiffs’ 11th hour request on the grounds that it was futile “because plaintiffs’ theory for class certification is simply foreclosed by Dukes.” Id. at 8. The Court reasoned that the supposed “new facts” were long since known to plaintiffs’ counsel, the proposed amendment was simply a recasting of the class theories to avoid dismissal under Dukes, and the core of plaintiffs’ class theories remained “subjective, individualized decisions” as opposed to “any uniform company-wide policy that discriminates” against class members. Id. at 11. The Court also concluded that allowance of the proposed amendment would prejudice defendant due to the additional discovery it would impose. Id. at 12.

The Court’s Rationale On The Insufficiency Of The “Re-Booted” Dukes Theory

The Court reasoned that the proposed amended complaint advanced class theories that feel into three distinct buckets. The Court found each insufficient. The three theories included:

(A). The new proposed allegations described how the employer’s retail policies and store manager duties were similar for all class members. The Court explained that this showed nothing, for all employers impose budgetary restraints and uniform business controls, and such “have no bearing on gender discrimination.” Id. at 12.

(B). The new proposed allegations recited statistical disparities in pay between female and male store managers. The Court also rejected this pleading strategy, as “alleged statistical disparities between men and women . . . is, standing alone, insufficient to support a Title VII claim.” Id.

(C). The new proposed allegations also advanced a theory that the employer used “corporate-imposed policies and practices” as a work-around Dukes. The Court also determined this was insufficient, since the policies merely confirmed gender neutrality in making pay decisions (such as uniform parameters for pay ranges) plus use of discretion by regional managers and division vice presidents in placing store managers within the established pay ranges or by granting out-of-range exceptions, and “that this exercise of discretion results in disparities in pay based on gender.” Id. at 13. (emphasis in original).

In sum, the Court opined that plaintiffs’ proposed amended complaint did not assert facts that could establish that the employer had a “policy that discriminated on the basis of gender in a common manner across the proposed class.” Id. at 12.

Implication For Employers

The ruling is Scott is the first in the post-Dukes era to determine that dismissal is appropriate when the architecture of the class claims cannot pass muster under the standards established in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011). The Scott opinion based its analysis on the notion that “[a]ctive judicial supervision may be required to achieve the most effective balance that expedites an informed certification determination without forcing an artificial and ultimately wasteful division between ‘certification discovery’ and ‘merits discovery.'” Id. at 9. As such, it takes Dukes to the next level. It allows an employer to attack the architecture of plaintiffs’ class theories immediately out of the box via a Rule 12(b)(6) motion. It avoids months – and perhaps years – of wasteful class discovery and focuses the spotlight on an up front examination of the class claims to determine if they can pass muster under Rule 23.