300px-US-CourtOfAppeals-7thCircuit-Seal.pngBy Gerald L. Maatman, Jr. and Jennifer Riley

As we have noted in multiple posts (here and here) the plaintiffs’ class action bar has been increasingly focused on re-booting their class action stratagems in the wake of Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011). One of these retooled theories played out in the recent ruling of the Seventh Circuit in McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 11-3639 (7th Cir. Feb. 24, 2012). We wrote on the implications of this case previously when the district court rejected the plaintiffs’ attempts to certify their claims per Wal-Mart Stores, Inc. v. Dukes.

In a new decision authored by Judge Richard Posner, a three-judge panel of the Seventh Circuit reversed the district court’s decision to deny certification of a race discrimination class claim challenging the impact of two Merrill Lynch policies — one that allowed brokers to decide to work in “teams” and one that suggested success-based criteria for distribution of departing brokers’ accounts — even though managers had discretion regarding implementation of both policies. 

In permitting such a class certification theory, the Seventh Circuit drew a fine distinction between the situation that gave rise to the Supreme Court’s decision in Wal-Mart and the one before the Seventh Circuit. According to Judge Posner, the only “company-wide” policies at issue in Wal-Mart forbade discrimination and delegated employment decisions to local managers. Here, by contrast, the Seventh Circuit reasoned that “company-wide” policies permitted individuals to exercise discretion in a certain way — a way that, according to plaintiffs, caused the alleged disparate impact on African-American employees.

Factual Background 

Plaintiffs filed a class action suit on behalf of 700 African-American brokers. Plaintiffs alleged that Merrill Lynch engaged in certain practices that had a disparate impact on the class members and therefore violated Title VII. Plaintiffs sought class certification for purposes of determining disparate impact and for purposes of awarding injunctive relief.    

Merrill Lynch employs 15,000 brokers, in 600 branch offices, supervised by 135 Complex Directors. The company permits brokers in each office to operate autonomously including, for instance, to decide for themselves whether to work individually or in teams, and if they decide to work in teams, it allows them to choose the brokers with whom they work. The company also establishes criteria for transfer of customer accounts when a broker leaves the company, which includes success factors like revenue generated and the number and investments of clients retained. The company, however, allows Complex Directors discretion to veto teams and to supplement the criteria for transfer or distribution of accounts.

The district court initially denied Plaintiffs’ motion for class certification in August 2010. In July 2011, following the Supreme Court’s decision in Wal-Mart, Plaintiffs filed an amended motion for class certification. The district court again denied their motion – McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 U.S. Dist. LEXIS 115431 (N.D. Ill. Sept. 19, 2011) – and Plaintiffs appealed under Federal Rule of Civil Procedure 23(f). 

The Seventh Circuit’s Ruling

The Seventh Circuit initially noted that, under Wal-Mart, “if employment discrimination is practiced by the employing company’s local managers, exercising discretion granted them by top management . . . , rather than implementing a uniform policy established by top management to govern the local managers, a class action by more than a million current and former employees is unmanageable.” Id. at 12. The Seventh Circuit held that, to the extent that Complex Directors exercise discretion regarding the compensation of the brokers who they supervise, the case “is indeed like Wal-Mart.” Id. at 14. But, unlike Wal-Mart, the exercise of discretion is influenced by the two company-wide policies noted above — authorization to brokers, rather than managers, to form and staff teams and basing account distributions on the past success of brokers who are competing for the transfers. Id.

According to Judge Posner, “permitting brokers to form their own teams and prescribing criteria for account distributions that favor the already successful . . . are practices of Merrill Lynch, rather than practices that local managers can choose or not at their whim.” Id. at 17. The Seventh Circuit concluded that the “incremental causal effect” of those company-wide policies could be most efficiently determined on a class-wide basis. Id.

The Seventh Circuit opined that certification of a class with respect to the lawfulness of the challenged practices under Rule 23(c)(4) would be proper. It found, however, that while a single proceeding might result in an injunction, it could not resolve the class members’ claims. The Seventh Circuit acknowledged that, as a result, hundreds of separate trials might be necessary to determine which class members were actually adversely affected by one or both of the practices and, if so, what loss he or she sustained. Id. at 18. 

Nonetheless, Judge Posner noted that, whereas the “astronomical damages potential of many class action suits” places enormous pressure on the defendant to settle even if the suit has little merit, here, Merrill Lynch “is in no danger of being destroyed by a binding class-wide determination that it has committed disparate impact discrimination against 700 brokers.” Id. at 20. Whereas the next stage of the litigation might be hundreds of separate suits for damages, the stakes in each are great enough to make individual suits feasible and preclude class certification. 

Impact Of The Decision

Plaintiffs had alleged that the two corporate policies caused a disparate impact against African-American brokers that is not justified by a business need. They did not accuse Merrill Lynch of intentional discrimination but rather claimed that the policies have the consequence of excluding African-Americans in greater proportions than whites from teams and account distributions. The Seventh Circuit determined that the existence of the corporate-wide policies distinguished plaintiffs’ class certification theories from Wal-Mart, even if damage issues are individualized.

As a result of the Seventh Circuit’s decision, more plaintiffs’ class action lawyers likely will add this re-tooled theory to their arsenal. Employers, therefore, can expect to see more plaintiffs attempting to repackage claims that attack discretionary decision-making as claims that attack a company-wide policy that allows managers and employees to exercise discretion in a certain, allegedly discriminatory, way. If plaintiffs can isolate a policy that arguably is illegal and involves only a “measure” of managerial discretion, they now may be able to certify a class affected by that policy under Rule 23(b)(2) in the Seventh Circuit, even if there are individualized issues on damages. Those individualized issues may now be decided in later, separate proceedings for each and every class member if and when class liability is found to exist.