How to Keep Your Company From Being a Target of Employment Class Actions

By Nancy Ebe, Texas Lawyer
Law.com


Lessons to be learned from cases against big-box employers

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April 4, 2007

General counsel of Texas-based companies who have had a rotten day or a rotten couple of months can take heart. Their situations cannot under any circumstances be as dire as that experienced in January and February by the GCs of Wal-Mart Inc. and Costco Wholesale Corp.

On Feb. 6 in Dukes, et al. v. Wal-Mart Inc., the 9th U.S. Circuit Court of Appeals by a 2-1 vote affirmed the certification of a nationwide class of roughly 1.6 million current and former female employees of Wal-Mart who claim sex discrimination in promotion and compensation at Wal-Mart's 3,400 U.S. stores. The suit exposes Wal-Mart to billions of dollars in potential damages.

Costco is not far behind. On Jan. 11 in Ellis, et al. v. Costco Wholesale Corp., Judge Marilyn H. Patel of the U.S. District Court for the Northern District of California certified a nationwide class of all current and former female Costco employees who were denied promotions to general manager, assistant manager or senior staff positions since Jan. 3, 2002.

GCs should click on www.walmartclass.com or www.genderclassactionagainstcostco.com and thank whatever higher powers they worship that no Web site is soliciting employees to join a nationwide class action against their companies. Now, how does the prudent general counsel keep it that way? Are there lessons to be learned from the Wal-Mart and Costco quagmires? What can a GC do to prevent his or her company from being a target of an employment class action?

The legal landscape prior to Wal-Mart and the Dukes decision are the starting point in evaluating those questions. It generally has been difficult for plaintiffs-side employment class action lawyers to establish the two most critical requirements for class certification under Federal Rule of Civil Procedure 23: commonality and typicality of class members' claims. Many courts have refused to certify such classes because, for example, how can a supervisor's employment decision at one individual store be typical or common to a wholly separate and independent decision made by another supervisor at another store?

But the never-bashful 9th Circuit leapt in and found that the Wal-Mart plaintiffs had easily met the requirements of commonality and typicality. How?

According to the 9th Circuit majority, the plaintiffs met this commonality burden by relying on: (1) significant evidence of companywide corporate practices and policies, which included excessive subjectivity in personnel decisions, gender stereotyping and maintenance of a strong corporate culture; (2) statistical evidence of gender disparities caused by discrimination; and (3) anecdotal evidence of gender bias.

As inconsistent as it sounds, the court punished Wal-Mart for having a strong centralized organization and permitting subjective decision-making in the trenches. The court particularly was rankled by local managers' ability to make subjective employment decisions. The 9th Circuit majority concluded that such subjective decision-making is a "mechanism for discrimination" that the courts should carefully scrutinize.

The 9th Circuit found the plaintiffs satisfied the typicality requirement of Rule 23(a). Most noteworthy, the court observed that "the lack of a class representative for each management category does not undermine Plaintiffs' certification goal because all female employees faced the same discrimination."

An entertaining and vigorous dissent by Judge Andrew J. Kleinfeld found the 9th Circuit's conclusions downright appalling. His opinion is well worth the read. In response to the court's observation that this class certification was historic, Kleinfeld described it as unprecedented. "In the law," he observed, "the absence of precedent is no recommendation."

He noted that the only evidence of sex discrimination was that two-thirds of Wal-Mart employees were female, but only about one-third of its managers were female. But, he added, leaping to a conclusion of discrimination was inappropriate: "Not everybody wants to be a Wal-Mart manager."

According to the dissent, the plaintiffs did not meet the typicality requirement, because the plaintiffs' claims and Wal-Mart's defenses simply do not resemble one another. Some plaintiffs work at Wal-Mart; some don't. Some were promoted; some were not. Some claim sex discrimination; some claimed race discrimination, retaliation or unfairness but not discrimination. Some pleaded a prima facie case; some did not.

Throughout his dissent, Kleinfeld identified the problems with such far-reaching class certifications. He observed, "They [class actions] are designed largely to solve an attorneys' fees problem." He noted that, "This case poses a considerable risk of enriching undeserving class members and counsel. ... "

These are sentiments many employers share. They may take some comfort in the knowledge that the 9th Circuit does not have the last word and that the defendants undoubtedly will take these class certification issues to the U.S. Supreme Court for resolution.

LESSONS LEARNED

In the meantime, however, what lessons can GCs glean from the cases involving Wal-Mart and Costco?

Lesson one: Subjective employment decisions are problematic. At the risk of broaching a philosophic debate, let us recall Danish philosopher and theologian Soren Kierkegaard's observation that "truth is subjectivity." Applied to this analysis, a truthful, well-reasoned employment decision by a manager in a GC's company might be a court's subjective decision.

GCs should ensure that the human resources department has objective decision-making processes in place. More importantly, make certain that managers follow those procedures. But keep in mind that Wal-Mart could not win for losing on the all-important subjectivity issue. The 9th Circuit criticized Wal-Mart for having a highly centralized company (that was presumably objective) while simultaneously incubating subjective decision-makers in the trenches.

Lesson two: Diversity awards are no shield against litigation. At the U.S. District Court level in Dukes, Judge Martin J. Jenkins was decidedly unimpressed with Wal-Mart's system of diversity awards, goals, training, handbook commitments and executive discussions. Once more, subjectivity reared its ugly head. Diversity goals should not be subjective and set by individual local managers.

Lesson three: Look before plaintiffs leap. GCs should examine their companies' equal-employment statistics, policies, job postings, barriers and appeals processes that are used in making employment decisions. Is the company vulnerable to a disparate-impact claim of employment discrimination? Take the time now to consult counsel and examine all of these areas under the umbrella of the attorney-client privilege. Address the problems in a privileged environment before the company finds itself in the cross hairs.

Lesson four: Consider an ombudsman's office. Many companies have benefited from creating an internal office of ombudsman, which often can resolve employees' complaints before they escalate to administrative charges and litigation. Setting up such an office can prove well worth the cost.

Lesson five: Thank your lucky stars that Texas is in the 5th U.S. Circuit Court of Appeals and not the 9th Circuit. If a GC's company has facilities in California, Oregon, Washington, Idaho, Arizona, Montana, Nevada, Alaska or Hawaii, he has my condolences. Hopefully, the U.S. Supreme Court will slap down this 9th Circuit decision with alacrity. However, until that day, should a GC find his company in federal court defending an employment discrimination class action, I wish for him a judge with the wisdom of the 9th Circuit's Kleinfeld, who concluded his dissent in Dukes with the crucial question that perplexes many large employers: "Since when were the district courts converted into administrative agencies and empowered to ignore individual justice?"


Nancy Ebe is the managing partner of Ebe & Associates in Austin and represents Fortune 500 companies and smaller entities in all aspects of employment law and litigation. She is board certified in labor and employment law by the Texas Board of Legal Specialization. She began her legal career at Morrison & Foerster in San Francisco and remains licensed to practice law in California. Her e-mail address is nancy@ebeassoc.com.

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