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MARCH 21, 2005
Wal-Mart vs. Class Actions The retail giant's novel defense in a massive suit could rewrite the playbook Corporate America could find it a whole lot easier to fight off employment class actions if Wal-Mart Stores Inc. (WMT ) prevails in a sex discrimination case to be heard soon by the U.S. Ninth Circuit Court of Appeals. Indeed, a Wal-Mart victory could tilt the playing field for virtually all of these kinds of suits, which have plagued Boeing (BA ), Coca-Cola (KO ), and dozens of other large employers over the years. Wal-Mart's ambitious legal strategy strikes at the heart of what it means to file a class action. The company maintains that its constitutional rights would be violated if the court allows a suit to go forward involving up to 1.5 million of the retailing giant's current and former female employees. Because such a case would deprive the company of its rights to defend itself against each woman's claim, it argues, the courts should allow suits only on a store-by-store basis. If the Ninth Circuit agrees and strikes down the multistate action certified by a lower court, it would likely kill the largest employment class action in U.S. history. More broadly, it would open wide the door for all large companies to make similar arguments. "A victory for Wal-Mart might mean that plaintiffs can't bring nationwide class actions anymore and that they might have to do them locally or regionally," says Mark S. Dichter, a management-side employment lawyer at Morgan, Lewis & Bockius LLP. Wal-Mart's case is no slam dunk. A few companies have tried similar arguments in bits and pieces and gotten nowhere. But Wal-Mart is the first to tackle the constitutional issues head-on, say Dichter and other experts. Certainly, it faces tough odds at the Ninth Circuit, one of the nation's more liberal federal appeals courts. Instead, it's probably aiming for the more conservative U.S. Supreme Court, say experts. At the same time, Wal-Mart has been hedging its bets by engaging in settlement talks with the plaintiffs for several months, say lawyers involved. COURT-CLOGGER? Still, the question is whether Wal-Mart's suggested store-by-store alternative makes sense. After all, the most extreme outcome -- thousands of mini class actions -- would clog the U.S. courts for years. Even the company's own prediction that plaintiffs could have grounds to bring discrimination claims at no more than 10% of its 3,400 U.S. stores would qualify as a lawyer's full-employment act. Of course, Wal-Mart may simply believe that few store-level cases would be filed in the end, although Wal-Mart's lawyers deny that. Still, "if even 100 suits were brought, it would be a mess for Wal-Mart," warns Joseph M. Sellers, a partner at Cohen, Milstein, Hausfeld & Toll who represents the plaintiffs. The case began in 2001, when a group of female Wal-Mart employees sued, claiming that the world's largest retailer systematically paid women less than men in the same jobs and promoted men ahead of similarly talented women. Last June a Northern California District Court judge granted the plaintiffs class status, allowing them to sue on behalf of all women who had worked at Wal-Mart's U.S. stores since December, 1998. Wal-Mart quickly appealed the class certification to the Ninth Circuit, which is due to set the hearing date any day. The thrust of Wal-Mart's appeal is that the district judge ran roughshod over the company's constitutional rights to due process and to a jury trial. Despite the company's reputation for micromanaging down to the penny, it argued that pay and promotion decisions are made almost entirely by local store managers. So the judge should have ignored the plaintiffs' statistics showing large nationwide disparities in the way female employees are paid and promoted. Instead, it should hear only store-level suits. Doing otherwise, the company says, would leave it unable to prove that an individual was paid correctly or properly passed over for promotion. So it could be forced to pay for something it didn't do. That would be a clear violation of the Fifth Amendment's requirement that "no person shall be...deprived of life, liberty, or property without due process of law." Says Theodore J. Boutrous Jr., a Wal-Mart lawyer at Gibson, Dunn & Crutcher LLP: "When you're talking about taking money from one citizen and giving it to another, you can't just rely on aggregate statistics, which don't tell you who is actually discriminated against." The problem, of course, is that this logic undercuts the very concept of class actions. The point of grouping many employees together into one lawsuit is to deal with complaints that they hold in common. In employment discrimination cases, the problems usually involve disparate policies or practices by the corporation. Indeed, the plaintiffs' response is that broad workforce data are actually more reliable than individual hearings in such cases. They point out, for example, that the retailer promoted hourly workers using a "tap-on-the-shoulder" method, in which employees couldn't apply for a position and store managers singled out promising candidates when vacancies occurred. So it would be impossible to tell now which individual women would have qualified for a promotion even if there had been no discrimination. "In these circumstances, the use of workforce data to compute aggregate monetary relief 'has more basis in reality...than an individual-by-individual approach,"' the plaintiffs say, citing a prominent 1974 class action. The two sides disagree just as strongly about which approach would be fairer to the individual women involved. If the court uses aggregate company statistics, as is typical in such cases, then women who never had any desire to become managers could get back pay or damages they're not entitled to, points out John Beisner, a class action attorney at O'Melveny & Myers LLP who filed an amicus brief supporting Wal-Mart on behalf of the U.S. Chamber of Commerce. Or those who suffered egregious discrimination at one store would get nothing if Wal-Mart wins. "That's the Hobson's choice you get when you hand juries these giant cases," he says. The plaintiffs argue that rough justice is better than no justice at all. They say that in the nationwide class approach, Wal-Mart's total liability would be set by looking at how all female employees fared across the company. If some of that money went to women who didn't actually suffer, then women who did experience discrimination might get less than they should have. But Wal-Mart itself would be no worse off. Wal-Mart's sheer size puts it in a category all its own. If it succeeds in cutting class actions down to bite-size pieces, large -- and not so large -- employers could end up benefiting.  By Aaron Bernstein in Washington
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