Class Actions, Employment Litigation, Fourth Circuit

Two Principles “Readily Derived” from Wal-Mart v. Dukes that Drive Class Certification in Employment Discrimination Actions: The Fourth Circuit View in Scott v. Family Dollar

            The Fourth Circuit Court of Appeals identified two principles driving the potential certification of a class in employment discrimination cases in Scott, et. al. v. Family Dollar Stores, Inc., No. 12-1610 (4th Cir. Oct., 16, 2013) that it believes are “readily derived” from Wal-Mart Stores v. Dukes, 131 S. Ct. 2541 (2011), but were misunderstood by the District Court when it denied plaintiffs an opportunity to amend their complaint to provide additional detail regarding allegations that Family Dollar exercised “centralized control of compensation for store managers at the corporate level.”  On November 14, 2013, the Fourth Circuit denied the petition for rehearing en banc filed by Family Dollar, memorializing its interpretation of Wal-Mart, which reopened the door to the possibility of class certification in the gender-based employment discrimination action after Family Dollar had already prevailed on a motion to dismiss.  While the Fourth Circuit majority found that the “denial of leave to amend the complaint was based on an erroneous interpretation of Wal-Mart,” Judge Wilkinson dissented from the Fourth Circuit’s majority opinion and denial of panel rehearing, admonishing that the majority opinion is “so contrary to the Court’s Wal-Mart decision as to whittle it down to near meaninglessness” and “the evisceration of Wal-Mart marks no more than the beginning of the problems in class action litigation generated by the majority’s decision.”  The Fourth Circuit did not go so far as to resolve the class certification issue, but rather remanded the case to the district court “to consider whether, based on our interpretation of Wal-Mart, the proposed amended complaint satisfies the class certification requirements of Federal Rule of Civil Procedure 23.”  We discuss the two key principles underpinning the Fourth Circuit’s view of Wal-Mart below.

The Original Complaint  

            Family Dollar’s operations and management structure are described as including more than 7,000 stores in 40+ states, 95 operational regions that each are run by a vice president, and districts within each region that each are run by one of the company’s nearly 400 district managers. The fifty-one named plaintiffs and putative class are comprised of current or former female store managers who allege that they received less pay than their male counterparts for performing the same job, in violation of Title VII and the Equal Pay Act.  Plaintiffs seek back pay, injunctive and equitable relief, and punitive damages, as well as attorneys’ fees and costs.  In the original complaint filed in 2008, plaintiffs made allegations that “Defendant engages in centralized control of compensation for store managers at the corporate level of its operations,” and “Defendant’s pay decisions and/or system includes subjectivity and gender stereotyping that causes disparate impact to compensation paid to female store managers.”

The Proposed Amended Complaint Post-Wal-Mart 

            In September 2011, the case was reassigned to a different judge and Family Dollar filed a motion to dismiss and/or strike the class allegations arguing that Wal-Mart (decided in June 2011) foreclosed the plaintiffs’ class allegations.  Plaintiffs filed a motion for leave to amend the complaint for the first time, seeking to add detail regarding allegations that Family Dollar exercised “centralized control of compensation for store managers at the corporate level,” including the following four company-wide policies:

  • A mandatory salary range for store managers set annually by the corporate headquarters, from which only corporate Vice Presidents can grant exceptions and they grant exceptions disproportionally in favor of men.
  • An annual pay raise percentage set by corporate headquarters that corresponds to performance ratings, from which Regional Managers and Divisional Vice Presidents can grant exceptions and they grant “significantly greater” exceptions above the range to men.
  • “Built-in headwinds” – a corporate-imposed compensation criteria for store managers based on prior experience, pay, rankings and other criteria which have a disparate impact.
  • A dual-system of compensation under which persons promoted to store managers are paid less than to persons hired from outside the company to the same position, and women are disproportionately promoted while men are disproportionately hired into the position.

The district court granted Family Dollar’s motion to dismiss and denied plaintiffs’ motion for leave to amend, reasoning that as a matter of law plaintiffs cannot satisfy the Rule 23(a) commonality requirement because the alleged gender discrimination was a result of “subjective decisions made at the local store levels.”

The Fourth Circuit’s Interpretation of Wal-Mart

            The plaintiffs appealed the district court’s grant of Family Dollar’s motion to dismiss and/or strike class claims and denial of plaintiffs’ motion to amend the complaint. Family Dollar contested the Fourth Circuit’s jurisdiction to consider the decision to deny leave to amend the complaint.  However, the Fourth Circuit found that it had jurisdiction to review the grant of Family Dollar’s motion to dismiss or strike class allegations because it “is the functional equivalent of denying a motion to certify the case as a class action,” and it had jurisdiction under pendent appellate jurisdiction jurisprudence to review the denial of the motion for leave to amend.  The Fourth Circuit affirmed the district court’s dismissal of the original complaint because the original claims made conclusory allegations that Family Dollar exercised centralized control of store manager compensation at the corporate level, without identifying decision makers or alleging that the “subjectivity and sterotyping” were exercised in a common manner with common direction. However, the Fourth Circuit found that “[t]he district court’s denial of leave to amend the complaint on grounds that it was foreclosed by Wal-Mart is erroneous and based on a misapprehension of the applicable law.”

            The Fourth Circuit identified and explained the following two principles from Wal-Mart which “reveal the district court’s error.”

1.     Wal-Mart did not set out a per se rule against class certification where subjective decision-making or discretion is alleged. Rather, the court went on to explain:

  • “Where subjective discretion is involved, Wal-Mart directs courts to examine whether all managers exercise discretion in a common way with some common direction.”
  • “To satisfy commonality, a plaintiff must demonstrate that the exercise of discretion is tied to a specific employment practice, and that the subjective practice at issue affected the class in a uniform manner.”
  • “[E]ven where company-wide subjective decision-making or discretion is alleged in the employment discrimination context, Wal-Mart indicates that if another company-wide policy is also alleged, courts must also consider it.”
  • “[E]ven in cases where the complaint alleges discretion, if there is also an allegation of a company-wide policy of discrimination, the putative class may still satisfy the commonality requirement for certification.”

2.     Wal-Mart is limited to the exercise of discretion by lower-level employees, as opposed to upper-level, top-management personnel.

  • “The qualitative distinction is critical because typically, in exercising discretion, lower-level employees do not set policies for the entire company; whereas, when high-level personnel exercise discretion, resulting decisions affect a much larger group, and depending on their rank in the corporate hierarchy, all the employees in the company.”
  • “Consequently, discretionary authority exercised by high-level corporate decision-makers, which is applicable to a broad segment of the corporation’s employees, is more likely to satisfy the commonality requirement than the discretion exercised by low-level managers in Wal-Mart.”

The court held that the proposed amended complaint “clearly specifies” four company-wide practices that were allegedly discriminatory and allegations of high-level decision-making authority by regional managers and vice presidents at corporate headquarters which are distinct from the allegations of nearly absolute discretion exercised by local supervisors in Wal-Mart.  The court ruled that “[g]iven these substantial distinctions, Wal-Mart does not preclude as a matter of law a class certification based on the amplified allegations of the proposed amended complaint.”

            The distinctions drawn by the majority do not hold up in the dissent’s view: “[t]o have the centralized delegation of discretion to 500 middle managers across the country expose a company to a nationwide class action seems to me so contrary to the Court’s Wal-Mart decision as to whittle it down to near meaninglessness.”  But, the Fourth Circuit is not alone – the court referenced cases from the Seventh Circuit to illustrate the distinctions it drew between Wal-Mart and Family Dollar, arguing that the circumstances of Family Dollar resemble McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 672 F.3d 482, 489 (7th Cir. 2012) cert. denied, 133 S. Ct. 338 (U.S. 2012), in which the Seventh Circuit upheld certification of a national class based on allegations of a national policy that was adopted by top management and applied to all offices throughout the country.

            The Fourth Circuit’s opinion does not guarantee that a class will be certified against Family Dollar.  The concurrence pointed out that “the majority has rendered a straightforward and limited decision: that the plaintiffs should be permitted to amend their original complaint after a dramatic shift in the law regarding class action certification….if the allegations included in the amended complaint ultimately are not substantiated, the class simply will not be certified, and the plaintiffs’ case will fail.”  In 2012, the Supreme Court denied certiorari in the Seventh Circuit McReynolds case.  It remains to be seen whether the High Court will have (and take) the opportunity to review the Fourth Circuit’s interpretation of Wal-Mart.

Tony Lathrop

About Tony Lathrop

Tony Lathrop brings experience and a high level of analytical ability, professional credibility and creativity to handling litigation matters. He rigorously represents his clients' interests in a diverse range of claims and actions. A certified mediator, Mr. Lathrop has extensive experience representing business clients in mediation. His service to the legal profession in North Carolina has allowed him to develop relationships across the state that benefit the firm's clients.

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