By Gerald L. Maatman Jr. and Howard M. Wexler

In a well-reasoned and very important decision for all class action practitioners, the U.S. Court of Appeals for the Third Circuit recently ruled in Rodriguez, et al. v. National City Bank No. 11-8079 (3d Cir.  Aug. 12, 2013), that a District Court did not abuse its discretion in refusing to approve a settlement class based on the U.S. Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, et al, 131 S. Ct. 2541 (2011) (“Dukes”). The District Court’s decision, which the Third Circuit upheld, is believed to be the first to apply the commodity standards established in Dukes in refusing to approve a class action settlement.

In Rodriguez, plaintiffs brought a class action alleging that Defendants’ pricing policy authorized a subjective surcharge of additional points, fees, and credit costs to an otherwise objective risk-based financing rate, which resulted in a widespread discriminatory disparate impact on minority applicants for home mortgage loans. Id. at 5. Plaintiffs’ theory, in substance, mimicked the theories in Dukes in the mortgage lending context. The District Court preliminarily approved the parties’ class action settlement. Id. at 7. While final approval of the settlement and certification of a settlement class was pending, the Supreme Court issued its opinion in Dukes. Id. In light of Dukes, the District Court denied plaintiffs’ motion for final approval of settlement and certification of a settlement class. Id. at 8. The District Court found that the proposed class of approximately 25,000 African-American and Hispanic persons failed to meet the commonality and typicality requirements as prescribed in DukesId. The District Court pointed out that plaintiffs did not satisfy the commonality requirement because the dispositive legal issue of whether Defendants’ discretionary pricing policy constituted a common practice that affected class members in a discriminatory manner was not the same for each member of the class. Id. at 5. The District Court concluded that despite the regression analysis that plaintiffs offered showing an overall disparate impact, the fact that each loan officer would likely offer different reasoning for how he or she applied their discretion to loan applications further supported the conclusion that the issues involved in the case would differ based on the loan officers from which the class members received a loan. Id.

On appeal, the Third Circuit upheld the District Court’s decision and reasoned that “whether class action representatives are seeking certification for the purpose of settlement or with the intent to litigated, the members of the proposed class must meet the threshold requirements of Rule 23(a), and our policy preference for voluntary settlement cannot and does not alter that demand.” Id. at 15. As such, the Third Circuit affirmed that the role of a Judge in approving a Rule 23 settlement class, while limited, “is more than a rubber stamp, and thus it will sometime result in the undoing of a settlement.” Id. at 16 & 22. 

In assessing the proposed settlement class, the Third Circuit held that, “Here, as in Dukes, the exercise of broad discretion by an untold number of unique decision makers in the making of thousands upon thousands of individual decisions undermines the attempt to claim, on the basis of statistics alone, that the decisions are bound together by a common discriminatory mode.” Id. at 30. Accordingly, fatal for the proposed settlement class was the fact that while Defendants’ pricing policy may have “opened the door to biases that individual loan officers could have harbored,” as plaintiffs failed to establish (as was the case in Dukes) that “there was a common and unlawful mode by which the officers exercised their discretion.” Id. at 27.

Implications For Employers

As we have previously reported several times, most recently here, here, and here, the Supreme Court’s decision in Dukes has had a huge impact on large, nationwide class actions as federal courts and litigants alike are confronting novel Rule 23 issues. Rodriguez is particularly noteworthy as it makes clear that “Rule 23(a) requirements are not mere pleading rules” and that the role of courts, whether at the initial certification stage or during approval of class settlement, are required “by the Supreme Court, and by the Federal Rules of Civil Procedure” to ensure compliance with Rule 23 at all stages of litigation. Id. at 22.