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|  | JUNE 23, 2004
By Wendy Zellner Wal-Mart's Oversized Suit A judge's decision that a sex-discrimination class action can proceed could prove costly, especially in terms of adverse publicity In a case that could cost Wal-Mart Stores (WMT ) billions of dollars and further hurt its already bruised public image, a federal judge ruled on June 21 that a sex-discrimination lawsuit against the retail behemoth can proceed as a class action. The long-awaited decision means Wal-Mart faces the largest employment-discrimination action ever, covering up to 1.6 million current and former female workers. Wal-Mart says it will appeal the decision and notes that the ruling "has absolutely nothing to do with the merits of the case." But the news was an unwelcome blow as the company continues to confront questions about how it treats workers. Besides the sex-discrimination suit, initially filed in June, 2001, the company also faces dozens of lawsuits -- mostly filed in state courts -- alleging that it unlawfully failed to pay workers overtime, accusations of illegally blocking unionizing activities, and an investigation into whether it knowingly hired cleaning companies that employed illegal immigrants. NEW DIVERSITY GOALS. With the publicity surrounding the ruling, the discrimination case "has the potential to influence the perception of thousands of consumers," says Richard D. Hastings, retail analyst at Bernard Sands in New York. More worrisome is what he calls the "Inglewood Effect," or the move by some urban areas, such as Inglewood, Calif., to keep Wal-Mart out, in part because of negative beliefs about how it treats employees. The criticism has clearly stung. The stock closed down nearly 2%, to just over $54 on June 22, and it has fallen 6% since June 14. At the June 4 annual shareholders meeting in the Bud Walton Arena near the company's Bentonville (Ark.), headquarters, company executives -- who are usually preoccupied with pushing low prices and nifty merchandise -- mostly pounded away at the message that Wal-Mart is good for workers and communities. Even as Wal-Mart has denied that it discriminates against women in pay and promotions, it has moved to change some employment practices. A new pay system, created with the help of outside consultants, is supposed to "ensure internal equity," Wal-Mart says. It also created an "office of diversity" and has begun tying management bonuses to meeting diversity goals. The question is whether the discrimination class action will force even more far-reaching changes in how Wal-Mart operates, not to mention a potentially costly payout. Analyst Emme Kozloff of Sanford C. Bernstein & Co. figures that back pay and punitive damages if Wal-Mart loses or settles could reach billions of dollars, with each billion translating into 15 cents per share of earnings. She estimates Wal-Mart's earnings per share this year will total $2.38 compared to earnings per share of $2.03 in its last fiscal year. Wal-Mart generated $8 billion in free cash flow last year. "NO EXCEPTION." No trial has been scheduled and given the size of the case, one could be a year or two away. "The odds are this will someday settle," says Joseph Sellers of Cohen, Milstein, Hausfeld & Toll, one of the lawyers representing the plaintiffs. "It would be in Wal-Mart's interest to try to resolve this sooner than later. But we got into this case ready to go the distance." He says there's been "nothing significant" in the way of settlement talks with Wal-Mart. The lawsuit, filed in California and originally started with seven female plaintiffs, charged that women were discriminated against in pay and promotions across the company. Even after factoring in seniority and store locations, women earned from 5% to 15% less than men, the plaintiffs' studies found. And while two-thirds of Wal-Mart's hourly workers were women, only a third of its managers were female. Wal-Mart had argued that the class action would be unmanageable and that company decisions about pay and promotions are too decentralized to create questions common to the class. But U.S. District Judge Martin J. Jenkins found otherwise. Title VII of the 1964 Civil Rights Act, under which the suit was filed, "contains no special exception for large employers," he wrote. ABSENCE OF DATA. He also noted that in a year that marks the 50th anniversary of the Supreme Court's decision in Brown vs. Board of Education, a landmark desegregation case, the event "serves as a reminder of the importance of the courts in addressing the denial of equal treatment under the law whenever and by whomever it occurs." The decision did include one setback for the plaintiffs. Because Wal-Mart first began systematically posting management positions in 2003, it's difficult to calculate how many women were interested in such promotions in the past. With no applicant data available, it would be difficult to identify the class members eligible for such back pay, the judge found. That means the plaintiffs won't be able to seek back pay for promotions they didn't get to jobs that weren't posted, says Sellers. "It rewards employers that use the weakest and loosest forms of personnel practices," he adds. Still, that would seem a small loss in a historic case that may already be changing the way Wal-Mart regards its female workers.  Zellner is Dallas bureau chief for BusinessWeek Edited by Beth Belton
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